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CPIM Exam – Basics of Supply Chain Management Practice Study Sheet
Chapter Thirteen – Physical Distribution
• Physical distribution is the movement of materials from the producer to the consumer. It is the responsibility of the distribution department. Objective is to design and operate a system that meets customer service needs at a minimum cost
• Physical supply is the movement and storage of goods from suppliers to manufacturing
• Physical distribution is the movement and storage of finished goods from the end of production to the consumer
• Transaction channel is concerned with the transfer of ownership (negotiate, sell and contract)
• Distribution channel is concerned with the transfer or delivery of goods and services
• Specific way a firm moves materials depends on 1) channel of distribution in use (retailer to consumer or producer to wholesaler) 2) types of markets served (dispersion, # of customers, size of orders) 3) characteristics of the product (weight, density, fragility) 4) type of transportation available (planes, trains or trucks)
• Six inter-related activities of physical distribution:
1. Transportation – moving goods outside the firm’s buildings – about 30%-60% of distribution costs – adds “place value” to the product
2. Distribution inventory – all finished goods at any point in the distribution system. Accounts for 25% - 30% of total distribution costs – add “time value” to the product
3. Warehouses (distribution centers) – used to store inventory
4. Materials handling – movement and storage of goods inside the distribution center. Trade off between capital (costly) and operating (efficiency) costs
5. Protective packaging – must be protected and identified, and fit into storage and vehicles
6. Order processing and communication – an important part to communicate among intermediaries
• Objective of distribution management is to minimize the least total system cost, not just transportation or distribution inventory, while meeting the service level required. In general, increasing customer service results in an increase in costs
• Marketing is responsible for transferring ownership through selling, promotions, etc… and physical distribution gets the customer the goods. Physical distribution also helps create demand through prompt delivery and product availability
• Physical supply of materials into production must be reliable with a high service level because the cost of interrupted production may be huge
• Location of factory is often decided based on access to supply (plants near coal or trains, steel plants near water, etc.)
• Costs of carriage are ways, terminals and vehicles
1. ways – paths over which the carrier operates (roads, tracks) can be self provided or by gov’t
2. terminals – areas where carriers load and unload goods to and from vehicles and make connections between local and long haul
3. vehicles are used except in the case of pipelines
• Railways provide their own ways, terminals and vehicles (large capital investment). Speed is good, and prices are cheap, best over long distances
• Roads – do not provide their own ways but do provide vehicles. Most costs are operating in nature. Requires extensive road net – best for small volume goods to a dispersed market
• Air – requires an air system – gov’t provides terminals but you must provide own planes. Best advantage is time, disadvantage is cost
• Water – no cost for using waterway, costs are low but time is long
• Pipelines – have high capital costs and low operating costs
• For Hire – carrier may carry goods for the public as a common carrier or under contract to a shipper
• Common carriers – standing offer to serve the public. They can only carry the goods they are authorized to carry
• Contract carriers haul only for those with a contract, not the general public.
• Private carriers own or lease their equipment and operate it themselves. Companies normally only do this when they have sufficient internal volume
• Transportation cost elements 1) line haul 2) pickup and delivery 3) terminal handling 4) billing and collecting
• Line-haul costs – the carrier has costs to move the truck and they vary directly with distance (not weight). There is a cost per mile and a distance move. Lin-haul cost per hundred weight varies with the cost per mile, the distance moved, and the weight moved. The limitations are the weight and cubic volume of the vehicle. If shippers want to reduce transportation costs, they should 1) increase the weight shipped 2) maximize density
• Pickup and delivery costs – similar to line-haul costs except cost depends on time spent (charge for each pickup) – less expensive if load is consolidated
• Terminal handling costs depend on the # of times a shipment must be loaded, handled and unloaded. If full truckloads are shipped, they can go straight to their destination
• Billing and collecting costs can be reduced by consolidating shipments and reducing the pickup frequency
• To decrease transportation costs 1) decrease line haul costs by increase weight shipped 2) decrease pick up and delivery by reducing the # of pickups (consolidate) 3) decrease terminal handling costs by consolidating shipments 4) decrease billing costs by consolidating shipping
• Rate charged by carrier will vary by 1) value (increase their liability) 2) density (carry more weight is good) 3) perishability (requires special handling) 4) packaging (risk of damage). Rate structures are TL (truck load) or LTL (less than truckload). LTL can be up to 100% higher than TL rates
• General warehouse is where goods are stored for a long time and goal is to protect goods until needed (document depository, furniture)
• Distribution warehouse receives goods in large lots, stores briefly, and then breaks them down into smaller orders. Emphasis on movement and handling rather than storage. Measured by throughput, not volume of storage
• Warehouses fill three needs 1) transportation consolidation 2) product mixing 3) service
• Product mixing deals with grouping of different items into an order and the economies that warehouses can provide in doing this (receive TL, ship LTL). Service improves by placing goods near customers
• Shipping cost / service depends on 1) number of customers 2) geographic distribution of the customers 3) customer order size 4) number and location of plants and distribution centers (have control over this item)
• Laid-down cost (LDC) is the delivered cost of a product to a particular geographic point. Includes all costs of moving the goods. LDC = product cost + (transportation costs per mile * distance)
• Market boundary is the line between two or more supply sources where the laid-down cost is the same
• As more distribution centers are added to the system 1) cost of TL shipments IN to distribution centers increases 2) cost of LTL shipments to customers decreases 3) total cost of transportation to decrease
• Role of packaging is to carry the goods safely through a distribution system to a customer 1) identify the product 2) contain and protect the product 3) contribute to physical distribution efficiency
• Unitization is the consolidation of several units into large units, or unit loads, so that there is less handling
• Pallet is a platform measuring 48 by 40 by 4 and designed so it can be lifted by a forklift. Loaded with packages, it forms a cube that is a unit load.
• Materials handling is the short-distance movement in a plant or distribution center. Unloading and loading of transportation vehicles and dispatch and recall of goods from storage. Objectives include:
1. increase cube utilization by using height of building and making aisles as small as possible
2. reduce handling
3. increase speed
• Three types of materials handling equipment. Conveyors move material between 2 fixed points (expensive). Industrial trucks are not gas powered (more flexible than conveyors). Cranes and hoists can move materials vertically or horizontally within their area of operation (make good use of vertical space)
• As distribution centers are added, distribution costs decrease, and inventory-carrying costs increase. With a constant sales volume, as the number of distribution centers increases, the demand on each decreases. This causes an increase in total safety stock in all distribution centers . Operating costs increase because they move with # of handles, not sales.
given period. It increases quickly as first and second distribution centers are built (in
the top 1-2 markets) but then decline.