Physical Distribution

Physical Distribution Principles of Marketing Distribution—Chapter 27

Example Jeans manufacturers use a large quantity of denim fabric A combination of ship, train, and truck bring the denim from factory in India to the U.S. Trucks carry the finished jeans to the retail stores

Activities of Physical Distribution Definition: The physical movement of goods in the distribution channel Needed to move raw materials to factories Finished goods from factories to warehouses Finished goods from warehouses to retail stores Examples: Pepsi truck, Frito-Lay truck Aka Logistics—a general term for the handling of details of any complex activity

Physical Distribution Steps Order processing* Transporting goods* Storing goods in warehouses* Stock handling Inventory control *Covered in this slide show

Components of Physical Distribution • 1—Products to be shipped • Raw materials • Manufactured goods used to make other manufactured goods • Finished goods from warehouses to retailer • Freight, cargo, items, and goods describe all types of products • Merchandise refers to finished consumer goods • A group of products may be shipped to fill an order or shipment

Components of Physical Distribution • 2—Channel Members • The businesses that need to distribute their products • Usually own the products they distribute • Aka suppliers because they supply products to the next step in the supply chain • Aka vendors because they vend(sell) products to the next step in the supply chain • Suppliers are responsible for making sure that their products are shipped in the most efficient, economical way; they may have their own transportation vehicles; others hire transportation

Transportation Companies • Transportation is the process of physically moving products from buyer to seller • Trucks • Trains • Planes • Ships • The process of transporting products is often referred to as shipping, even when ships are not involved • Own the vehicles and provide the service of transportation • Aka carriers

Warehouses Definition: a building for storing large quantities of products Products in a warehouse are said to be in inventory; often called inventory Usually the products are waiting to be moved to the right PLACE at the right time Transported from warehouse to the next segment of the supply chain

Modes of Transportation Trucks Planes • Advantages • Can deliver door to door • Flexible to deliver at a specific place and time • Can be modified to carry a specific type of cargo • Disadvantages • Traffic may cause delays • Bad weather • Maintenance problems • Advantages • Speed • Often used for high-value, low-weight items • Perishable goods • Saves on inventory costs • Disadvantages • Most expensive mode • Bad weather may cause delays • Usually requires another mode of transportation from the airport

Ships • Advantages • Large quantities of goods can be moved great distances at a low per item cost • The U.S. has huge ports where imports arrive • Can be modified to suit cargo (i.e. tankers) • Barges can towed or pushed • Disadvantages • Ship delivery is very slow • Delivered to a port and then transported by another mode • Security programs are used to eliminate import fraud and terrorism • Aka freighters haul large containers (8 ft X 8 ft X 40 ft) of products which is easier than many small boxes

Pipelines Carry large amounts of liquid or gas products to their destinations through tubes Products move slowly but continuously Safe from damage or theft Not subject to delivery delays Limited number of products that can be carried Building a pipeline is expensive, but costs to operate are small Leaks do not often occur; but can cause great environmental damage

Distribution of Services and Ideas • Services • “Transported” by individuals, through their performance of the service • Ideas • Carried by media to their target market • Radio stations, television channels. Internet Web sites, newspapers, magazines, outdoor billboards, and other types of communication • Target market is aka audience

The Distribution Process • Buyer contacts supplier • The two will negotiate the terms of sale • Definition: the conditions governing the sale • Includes: discounts, transportation arrangements, date of delivery, who pays for the transportation costs, when payment is due and other specific conditions of the sale • Purchase Order (PO)—a document authorizing the purchase and delivery of certain goods at specific prices and times

The Distribution Process, con’t. • The PO has a number that identifies the order • PO becomes a sales contract between the buyer and seller • Contract is a legal written agreement • Both the seller and the buyer sign the contract and both keep a copy • When a supplier receives the PO, they sign to validate the contract • The supplier sends confirmation back to the ordering company that the order has been received and will be filled • The buyer agrees by means of the PO to pay the agreed-upon price for the goods

Order Processing • Definition: receiving and filling orders • Once the PO is received, pick tickets are created • Pick ticket—a list of the items requested for one order • Includes a description of the item, its location in the warehouse, and the bar code • Orders are picked by the warehouse staff • Bar codes are scanned on each item into the computer for inventory control • Picked items are moved to the packing area • Forklifts or conveyor belts move the items • Finished orders are packed for shipping, sealed, and labeled with the shipping address • When the products are received at the buyers location, receiving employees scan the bar codes to verify the contents of cartons • Inventories are automatically updated, and the needed goods can be immediately unpacked and used

Computerized Order Processing Computer linkages enable automated order processing with a regular supplier Buyer’s computer keeps track of the number of goods in inventory When inventory goes below a certain number, the computer sends a message to the supplying company’s computer Supplier’s computer notifies the warehouse to pick, pack, and send the goods

Distribution Plans • Physical distribution is the third largest expense for most businesses involved with goods (only materials and labor are larger) • Definition: a plan for moving goods in the best way • Considers costs, timing, delivery details, and other factors like types of transportation • Warehousing and transportation specialists know the best ways to maximize the flow of goods • They are good at negotiating with transportation • Calculations of shipping costs are made with the ton-mile • Definition: the movement of one ton of goods one mile • This must be balanced with the speed of receiving the goods

International Distribution • Increasing for several reasons • Fewer global trade barriers such as tariffs and quotas • Internet makes worldwide business easier to transact • Parts for many products are made in other countries • Makes planning more complicated • U.S. and foreign import and export laws must be followed • Regulations may differ in each country • Language barriers must be overcome • Negotiations may be delicate in different cultures • Distances are must larger • Foreign destinations may have limited transportation options • Many parts of the world have no refrigeration, and dirt roads

Streamlining Distribution • Managers are looking to make distribution more cost-effective • Definition: the benefits outweigh the expense • Combine modes of transportation economically • Rail, air and highway used based on the locations of the beginning and end of the channel • Fill Transportation Vehicles • Economies of scale—reductions in the cost per item as a result of producing or transporting large numbers of items at one time • Producing and shipping large numbers of items in a load, lowers the cost of shipping each item • Combine shipments by consolidated shipping • Putting the orders of two or more companies in a truckload, train car, or shipping container • Each company lowers its transportation costs

Streamlining Distribution, con’t. • Keep track of shipments • Satellite shipment tracking—dispatchers at the shipping office know exactly where the trucks are at all times. • Receiving companies know exactly when their shipments will arrive • Warehouse employees stay busy with other tasks until a truck is pulling into the unloading dock • Hire outside experts • Outsourcing—hiring an outside company to do specific work • Outside experts can save a company money as they can get deliveries faster and more accurate • The company can have fewer workers and no transportation vehicles

Streamlining Distribution, con’t. • Keep warehouses efficient • Computerized tracking equipment can mean smaller warehouses and more efficient inventory • Bar codes, advanced scanners and specialized computer systems, promotes almost full automation • Received goods can be electronically identified, sorted, routed, and shipped in an uninterrupted flow

Channel Management and Physical Distribution • Choose the right shipping mode considering cost, perishability of goods, transportation time, and security • Warehouse storage—build or lease • Inventory Control—limit large quantities of inventory in storage to increase profits and save money • Includes: identifying purchase amounts, tracking inventory, handling damaged inventory, and using inventory control systems • Risk—redesign the supply chain, understand foreign trade issues, implement computerized inventory control systems

Ethical Considerations in Channel Management Channel member relationships should not restrict competition among companies at the same supply-chain level Makers of a certain product should not unite to set wholesale prices for the product because it restricts competition Retailers of a certain product cannot unite to sell the product for the same price The Federal Trade Commission Web site has more information about legal and ethical issues

Physical Distribution