Physical distribution (P.D) is an important marketing function describing the marketing activities relating to the flow of raw materials from the suppliers to the factory and the movement of finished goods from the end of production line to the final consumer or user.
Physical distribution is the science of Business Logistics where by the proper amount of the right kind of product is made available at the place where demand for its exists. Viewed in this light, physical distribution is key link between manufacturing and demand creation.
1. Introduction to Physical Distribution 2. Meaning of Physical Distribution 3. Definition 4. Steps 5. Importance
6. Factors 7. Components 8. Functions 9. Subsystems 10. Organisational Responsibilities 11. Advantages.
Physical Distribution: Meaning, Steps, Importance, Factors, Components, Functions, Responsibilities and Other Details
Physical Distribution – Introduction
Physical distribution (P.D) is the set of activities concerned with efficient movement of finished goods from the end of the production operation to the consumer. Physical distribution takes place within numerous wholesaling and retailing distribution channels, and includes such important decision areas as customer service, inventory control, materials handling, protective packaging, order procession, transportation, warehouse site selection, and warehousing. Physical distribution is part of a larger process called “distribution,” which includes wholesale and retail marketing, as well the physical movement of products.
Logistics is coordinating the flow of goods, services, and information among members of the supply chain. A major focus of logistics is physical distribution or marketing logistics, the tasks involved in planning, implementing, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit.
Ideally, value is added to goods along each step of the supply chain through activities like superior product design, quality manufacturing, customer service, and efficient delivery. If managed effectively, physical distribution can increase customer satisfaction by ensuring reliable, cost-efficient movement of goods through the supply chain.
Physical distribution involves the handling and moving of raw materials and finished products from producer to consumer often via an intermediary. It is sometimes used synonymously with logistics (the branch of military science concerned with procuring, maintaining and transporting equipment and facilities etc.).
It has been defined as a term employed in manufacturing and commerce to describe the broad range of activities concerned with efficient movement of finished products from the end of production line to the consumer. In short physical distribution refers to the physical flow of the product from producer to consumers. Physical distribution management consists of the design and administration of systems to control the flow of products.
Physical distribution creates ‘time’ and ‘place’ utility, which maximises the value of products “by delivering them to the right customer at the right time and right place.”
There are two dimensions to physical distribution process, the flow of information from the individual customer or organizer to the producer and the flow of materials from the producer to the consumer or the user.
A channel is a passageway that allows the happening of certain processes. Marketing is understood to be an exchange process. Marketing channels help this exchange process to take place. A marketing channel can be defined as a group of exchange relationships, which create customer value in acquiring, consuming and disposing of products and services.
The distribution channel is the movement of goods and services between the point of production and the point of consumption through organization that performs a variety of marketing activities. The major participants in the distribution channel are; producers, intermediaries and consumers.
Physical Distribution – Meaning
Physical distribution is an important marketing function describing the marketing activities relating to the flow of raw materials from the suppliers to the factory and the movement of finished goods from the end of production line to the final consumer or user. Marketing agencies such as dealers, merchants and mercantile agents manage the flow of goods and perform the function of physical supply—right up to the consumer’s homes and stores.
Physical distribution function is responsible for completing the marketing transaction once the function of exchange is completed, i.e., buyer and seller come to terms and enter into a contract of sale. It should be noted that before the sale can be completed, the product must be available at the place the buyer wants it, at the time he wants it, and in the quantity he wants. In general, the function of physical supply attempts to accomplish the delivery of goods at the right place, at the right time and in the right quantity.
According to Philip Kotler, physical distribution “involves planning, implementing and controlling the physical flows of materials and final goods from place of production to the place of end use to satisfy buyers’ needs.”
Physical distribution is all about moving and storing the products and finally making them available to the consumers. Distribution is the process of making the products/services available to the consumer. It involves movement of the products/services from the manufacturers to the end user.
Physical distribution requires a distribution infrastructure that includes transportation, warehousing, material handling, inventory control, processing, customer services, which facilitate the movement of goods. Physical distribution includes both the marketing channels and these facilitators.
Physical distribution is purported to delivery of goods in right quantity, time and at right place. The scholars have defined the physical distribution as related to material handling, transportation, store, keeping, packaging, inventory control etc.
Physical Distribution – Definition
Some important definitions of physical distribution are as under:
According to Wendell M. Smith – “Physical distribution is the science of Business Logistics where by the proper amount of the right kind of product is made available at the place where demand for its exists. Viewed in this light, physical distribution is key link between manufacturing and demand creation.”
According to W.J. Stanton – “Physical distribution involves the management of the physical flow of products and the establishment and operation of flow system.”
According to Cundiff and Still – “Physical distribution involves the actual movement and storage of goods after they are produced and before they are consumed”.
According to Mc Carthy – “Physical distribution is the actual handling and moving of goods within individual firms and along channel system.”
It is concluded from the definitions that:
(i) Physical distribution is science of logistics.
(ii) Physical distribution is the main mid-look between manufactual and creation of demand.
(iii) Physical distribution is a management of flow of commodity and flow arrangement simultaneous to distribution channel of the commodities of company and inside the firm/company.
(iv) Physical distribution is related to the receipt of proposed and manufactured commodities, collection, and material handling storage, transportation, packaging and inventory control etc., functions.
Physical Distribution – Major Steps in Physical Distribution System Process
The design and management of physical distribution systems involve a number of business functions in addition to marketing including raw materials management, inventory control, manufacturing, transportation and warehouse and plant location.
The major steps in designing the PDS are:
1. Establish PDS Objectives:
Customer service as it relates to the physical distribution function consists of providing products at the time and location corresponding to the customers’ needs. The customer service levels that be provided may range from very good to very poor. A 100% level of satisfaction would indicate that all customers are completely satisfied with product availability.
The ideal solution to the problem of P.D.S. design is to develop minimum cost systems for a range of acceptable levels of customer service and then to select the service level that markets the greatest contribution of sales less physical distribution costs. One major difficulty in this approach to PDS Design is estimating the sales response to different levels of customer service.
Customer would be 100% satisfied if a wide range of products were available at the right place and time in sufficient quantities to meet the needs and wants of all who were willing and able to buy. Clearly this condition rarely occurs, since the cost would be prohibitive. However, it is possible to achieve high level of customers satisfaction with properly designed distribution systems.
“Customer service is a complex collection if demand related factors under the control of the firm, but whose importance in determining supplier patronage is ultimately evaluated by the customer receiving the service”. Five major factors affect customer service, time, dependability, communication, availability and convenience. The importance of these factors will vary by product and customer category.
A minimum cost physical distribution system is the system with the lowest cost that can provide a specified level of customer service. As customer approaches 100% sales level off and distribution costs sliding upward. The curves in the exhibit probably resemble those that exist in as wide variety of firms.
The physical distribution design task is clear. Within the range of customer service lends that considers necessary to achieve the firm’s marketing objectives, (90 to 100%), the service level and system design that yield the highest contribution of sales minus physical distribution costs must be identified.
The principle problem in doing this is the difficulty of measuring customer service and estimating and sales response service level.
The choice of an appropriate measure or measures is situation specific and is based on the service factor for most closely linked to customer satisfaction. The pre-transaction elements use measures that designate service capability before it is provided. A target delivery date indicates the planned time of delivery.
The transaction elements gauge service performance for various components of buyer seller transactions. The post transaction elements measure customer service based on results or outcomes. An important factor in customer’s service is establishing communications between buyers and sellers.
2. Examining Cost Trade Offs:
The cost tradeoffs for physical distribution components must be evaluated to determine how and to what extent each component will be utilised in the P.D.S.
The interrelationships of various PDS component are shown as below:
The arrows indicate the tradeoffs between activities that must be evaluated in:
(i) Estimating customer service levels.
(ii) Developing purchasing policies.
(iii) Selecting transportation policies.
(iv) Making warehousing decisions.
(v) Setting inventory levels.
Analysing the costs of alternative combinations of PDS components is essential to guide the design of the system.
3. Identify and Select Design Alternatives:
A key issue in designing the PPS is how to incorporate the customer service objective into the design process. Management judgement and experience will often dictate a range of customer satisfaction levels that are acceptable to the firm.
In many cases, these levels may be expressed not as percentage, but rather in terms of lost orders, delays, stock outs, and other proxy measures.
To illustrate alternative ways of handling the customer service objectives, we consider three possible approaches in designing the P.D.S.
(i) Estimates Sales Response to Customer Service:
This approach requires information such as that shown below:
Logistics system design costs as function of various customer service levels.
a. Minimum Cost design to produce the stated customer service level.
b. Percentage of customers receiving goods within one day.
If it is possible to determining the relationship between sales and customers service, then a minimum cost PDS can be designed for the service level that fields the highest profit contribution. The difficult part of this approach is estimating the relationship sales response to service level. What change in sales will occur if customer satisfaction is increased from 94% to 97%? Possible methods for estimating the relationship include management judgement and experience, analysis of historical sales and service data, customer research and testing under controlled conditions.
Due to the difficulty of obtaining response information or the costs involved in estimating the response relationship, this approach may be unfeasible for many firms. The approach would be particularly difficult to apply in situations where customer patronage depends on several aspects of service.
Developing a composite sales response function incorporating the effects of product substitutions, delivery delays, and inventory availability on sales response would be demanding analytic task. However, the data available on customer service and buyer response should make the approach applicable to catalog mail order distribution.
The system designs must determine a minimum cost design for each customer service level analysed. In the six alternatives considered, the service level (e.g. the sales increase that would be obtained by moving from alternative 3 to alternative 4) and then select the alternative that offers the greatest contribution over costs.
(ii) Minimise Total PDS Costs:
With the second PDS design approach, management must estimate the total cost of customer service. This approach requires estimating costs of lost sales instead of sales response to customer service. Management might specify a 95% service level that would mean 5% customer dissatisfaction. The cost of lost sales is estimated and included with other distribution costs.
Minimise Total PDS costs = Transportation costs + Inventory costs + Warehousing costs + Order processing cost + Cost of lost sales.
The objective is to minimise the total cost of physical distribution.
(iii) Reduce PDS Costs:
The third approach to the design task involves analyzing the tradeoffs between PDS components with the objective of improving physical distribution over the present level. This may mean increasing the customer service level at no additional costs or reducing total distribution costs with no loss of customer service.
This approach is often the most feasible of the three, due to the inherent difficulty of estimating the relationships of sales response or cost to level of service. Although not an optional solution, it represents a potential starting point for most firms.
Physical Distribution – Importance
Planned and integrated management of all physical distribution activities (particularly transport, storage, inventory control and order processing) has assumed unique importance in the process of marketing since 1960. It can offer a feasible solution striking an optimum balance between physical distribution costs (costs of transport, storage, inventory and order processing) and the customer service level that will be satisfactory to the buyer and also profitable to the seller.
Marketers now feel that physical distribution costs can be minimised without adversely affecting the level of customer service and satisfaction. The marketing functions of warehousing, inventory control, transportation, physical handling, order processing, etc. are now managed as an integrated whole. All these activities are coordinated properly and an effective physical distribution package is evolved to give customers the service they expect and insist and at the same time to assure the marketer profitable sales.
Marketers have realised that there is a definite connection between merchandising programme and physical distribution services e.g., delivery service and order processing service. Customers often give more importance to physical distribution rather than price and promotion services. They consider physical distribution second in importance to product quality as a reason for buying from a certain firm. Better physical distribution services give higher overall customer satisfaction.
The main objective of physical distribution is better customer services—an important selling point. For instance, promises such as – “Third morning rail or truck delivery anywhere in the state of Karnataka/Tamil Nadu,” “Prompt availability of installation, repair services and parts from the supplier,” and so on can generate accelerated sales and profits. In short, effective physical distribution services give customers the service they expect, i.e., putting the products within an arm’s length of customer demand or desire.
Physical Distribution – Factors Affecting
Every producer has to find a way to distribute his products to their final users. To distribute, various channels are available in today’s economy. How does a producer select one or more channels of distribution to ensure smooth functioning and minimized cost?
This is understood by studying the factors that influence the choice of distribution channels, which are described below:
1. Product Factors/Considerations:
The first and most important factor that influences on the choice of the channel of distribution is the nature of goods. Perishable goods like cakes and breads that are required to be sold quickly, are sold directly by the manufacturers to the consumers through retail outlets. Goods that last longer can be handled by more intermediaries to insure a larger market.
i. Physical and Technical Nature:
Products which are of low unit value and have common use amongst consumers are generally sold through middle men; whereas, the sale of expensive and elite consumer goods and industrial products is conducted directly by the producer himself.
Products that are perishable, i.e., products which are subjected to frequent changes in fashion or style or trend, as well as those products which are heavy and bulky, go through relatively shorter routes and, are often distributed directly in order to minimize costs and damage.
Industrial products that need demonstration, installation and after sale-services are often sold directly to the consumers; while, retailers generally sell consumer products which are of technical nature.
Certain technical or complex products need installation and advice of product use including demonstration, service visits, etc. For this, having exclusive trained personnel is essential. Some companies prefer exclusive dealership in such cases.
In case of an entrepreneur who produces a large number of products, he may find it economical to set up his own retail outlets and sell his products directly to the consumers. At the same time, companies which have a narrow range of products may make their sale through wholesalers and retailers.
A new product needs greater promotional effort in the initial stages and, hence, few middlemen or intermediaries may be required.
ii. The Market Position:
Here, the focus is on the reputation of the manufacturer. A product promoted by an established and reputed manufacturer has a higher degree of market acceptance and, therefore, can be sold through various channels with little effort. A new product, thus, has quick sales based on the producer’s reputation. This may, however, have long-term risks.
2. Market Factors/Considerations:
i. The Existing Market Structure and Size:
Producers may have to study the existing market structure. It can be geographically concentrated or wide spread. For example, industrial markets are usually concentrated in a few large cities involving only large customers. Producers or channel commanders can have difficulty in changing that.
However, consumer goods market has a different structure, as; it is directly related to, the masses. Consumer preferences dictate channel selection. For example, baby food manufacturers changed their channel of distribution to supermarkets, as; research revealed that mothers preferred super markets over drug stores.
ii. Consumer Behavior and Nature of the Purchase Deliberation:
Purchase decisions are made differently for different products. Consumers spend more time and effort on durables such as washing machine and mobile phone than on a pack of biscuits or toothpaste. The frequency of purchase influences purchase deliberations. Products, which are purchased frequently by consumers, have more buyer-seller contacts and middlemen are suggested.
iii. Availability of the Channel:
Availability of a channel refers to the willingness of channel members to accept a brand. For this, the channel commander or the producer has the task of winning over the cooperation of the channel members. The producer may adopt push or pull strategy. In push strategy, the producer resorts to regular activities of convincing the existing channel members to accept the product and passes it through various points to reach the retailer and then the final consumer.
In the pull strategy, the producer resorts to aggressive promotional activities on the final consumer, relying on the fact that strong consumer demand will force middlemen to accept the product in order to cater to the consumer satisfaction.
iv. Competitor’s Channels:
A new firm always studies the existing distribution pattern and this, necessarily, includes identifying the distribution channels employed by competitors. Every business has certain established norms and practices and this may, even, apply to channels of distribution. If the existing pattern has given success to the competitors, a new firm may adopt the same channel as long as it is suitable and logical. As a matter of fact, finding new avenues may prove to be costlier and cumbersome.
3. Institutional Factors/Considerations:
The channel members also influence the choice of the channel to be selected.
They are briefly discussed as follows:
i. Financial Ability of Channel Members:
In the process of sending the goods through the channels of distribution, it is found that manufacturers need to aid the retail dealers financially, either through, interest free loans, or other credit terms. Credit terms being competitive the willingness to extend credit is a determinant in channel acceptance. Retailers also sometimes finance their suppliers either directly or by investing in the company. Usually, government agencies are restricted from making advance payments.
ii. The Promotional Strengths of Channel Members:
Every producer, i.e., the channel commander, wants his product to be promoted. For national brands, producers themselves take up the responsibility. However, for others, distributors promote jointly with the producer. In case of certain private brands, the job is taken up by wholesalers or retailers who establish the brand name.
iii. The Post-Sale Service Ability:
Many products carry a warranty and this is used by the consumer post purchase. The responsibility of serving the warranty has to be well established. It can be the manufacturer himself or a channel member.
Since the retailer-distributor is the closest in touch with the consumer, the consumer may expect this service from them itself. In certain cases, the product may be returned to the manufacturer for servicing or services may be performed by an independent service outlet established for this purpose.
4. Unit or Firm Specific Factors/Considerations:
Every firm has its own strengths and weaknesses, which influence channel decisions.
Among them, important ones are discussed below:
i. The Company’s Financial Position:
Huge companies, which have the financial and human resource capability may not only produce the goods but also may have the ability to set up their own retail outlets thereby creating a lot of visibility for themselves. On the other hand, smaller companies which do not have either the financial capability or manpower resources might just concentrate on production and leave the marketing of goods to others.
ii. The Extent of Market Control Desired:
Market control refers to the ability of a firm to influence the behavior of channel members according to the will of the management.
Here, the entire distribution network is served by factors such as resale price maintenance, territorial restrictions, quotas and the like. The channel commander, i.e., the producer or the manufacturer, may desire to exercise such command from time to time. The extent to which they want the control is the question to be answered, as, higher the control, higher will be the channel directness.
iii. The Company’s Reputation:
Popular companies, known for their products or services, have little or no problem in settling with a particular channel. This is because reputed companies do not go in search of intermediaries. Instead, the intermediaries come in search of them.
Reputation is reflected through higher sales, timely and quick replenishment of stocks, low levels of inventory, easy settlement of claims, competitive margins granted etc. The selected channel turns out to be cheaper and dependable due to the willingness and cooperation extended by channel members.
iv. The Company’s Marketing Policies:
A company’s marketing strategy lays down the method of distribution. Important factors such as advertising, sales promotion, pricing, delivery and after sale services influence the channel selection the most.
For instance, a company that invests heavily in advertising and sales promotion makes the selected channel direct, as, little effort is required to push the product through the chosen line. Alternatively, a company adopting a price penetration policy, [comes with a low margin], chooses a longer channel.
i. Economic and Legal Factors:
Due to the economic disparity prevalent in the economy, the government promotes public distribution system through fair price shops to reach out to the economically weak sector. This constitutes the public distribution system, which primarily focuses on the distribution of necessities.
The private distribution system also needs a certain amount of regulation. Much legislation has been passed from time to time to regulate the functioning of the various channels of distribution. One such important legislation is the MRTP Act of 1969.
The provisions of this Act aim at preventing exclusive dealership, regulating territorial restrictions, reselling price maintenance, full line forcing, etc. The Companies Act, 1956, forbids sole selling agency arrangements in industries like paper, cement, vanaspati, etc. Such provisions keep away cut throat competition; prevent creation of monopoly and the like which are objectionable to public interests.
ii. Fiscal Factors:
Sales tax rates vary from state to state as it is a state fiscal matter. Although such sales tax is part of the retail price set for a product, it is actually borne by the final consumer; it has its role to play in channel arrangements.
For example, let us say, sales tax rate in Karnataka is higher when compared to Kerala, a producer may, therefore, take advantage of this benefit, prefer to open his office in Kerala and pass on the reduced tax benefit in the form of reduced price. This can also become a competitive advantage to the product.
Physical Distribution – Components
The process of physical distribution involves co-ordination and integration of five components:
1. Order processing,
2. Inventory Control,
4. Material Handling and
Most important components are warehousing, inventory and transport.
1. Order Processing:
We should have standard procedure for handling and execution of orders. Order processing time must be reasonable. Any delay in order execution creates ill-will and may lead to loss of business. Customer demands assured delivery within a fixed period always. The speed in order execution reflects the degree of customer service. Even a slight increase in customer service can increase your business to the extent of 20 per cent. Order serving time can act as a selling point in our marketing programme.
2. Inventory Control:
In fact the entire physical distribution management, size, location, handling and transporting of inventories assume unique role in physical distribution. Inventories are reservoirs of goods held in anticipation of sales. The inventory inter-connects production activity (purchase activity) and the customers’ orders (sales activity). Inventory cost increases at an accelerated rate as the customer service level approaches 100 per cent. We must reconcile and balance the inventory cost and the customer service level.
We must have a balanced assortment of merchandise for sale to meet the expected customer demand. Too small inventory will mean stock outs and lost sales. Too large inventory means huge capital investment, lower turnover and higher inventory operating cost. The main objective of inventory control is to secure minimum capital investment and fluctuations in inventories as well as prompt order execution as per customer demand.
Storage is the process of holding and preserving goods. It can equalise supply time-wise. The selection and proper location of warehouses is of special importance in the process of marketing. The distribution centres are now located around the markets rather than around transport facilities.
Distribution centre (a special kind of warehouse facility, strongly market related) enables order processing and delivery of goods directly to customers under one roof. We can have better and quicker customer service at lower cost of distribution under distribution centres.
We can also have a few warehouses and normal inventory stock. The new system of distribution reduces delivery time and also storage time. Emphasis is given on selling and not on storing. Many companies are shifting from storage warehouses to distribution centres. One distribution centre is set up in one region around the market and not around transport facilities merely.
Distribution centres use the latest equipment for data processing, material handling and inventory control. The range of services a distribution centre offers can be matched with those offered by a wholesaler. However, a wholesaler is the merchant middleman, whereas a distribution centre is an agent middleman.
4. Material Handling System:
Instead of manhandling, we have automated material handling equipment in modern warehouses. New concepts of packaging, containerisation, and palletization have brought about remarkable reduction in the cost of physical distribution. We have now conveyor system and forklift trucks. Material handling is now almost mechanised in the Western countries.
Standard size containers to pack and transport goods can be stored on pallets or small platforms which can then be moved by mechanical transport. Modern mechanised handling of goods and protective packaging have improved customer service, lowered distribution cost, and have also speeded up order execution.
Physical distribution is nothing but a network of activities consisting of storage at many locations interconnected by a series of transport links in the process of distribution. Transport is called the Gordian Knot, if not the snake pit, of physical distribution management. The costs of transport are ever — rising since 1970.
Let us now describe the various means of transport, their relative advantages and disadvantages and the criteria for choice of mode of transport.
Physical Distribution – Key Functions
Physical distribution is part of a larger process called “distribution,” which includes wholesale and retail marketing, as well the physical movement of products. The physical distribution functions include transportation and storage of goods. Until the goods have been sold out they should be kept safe and after selling they should be transported from one place to another.
The key functions of the physical distribution system can be categorized into following two areas namely the primary functions and other functions –
iii. Transportation and logistics
iv. Order processing
v. Packaging and materials handling
Produced goods should be safely kept in warehouse until demanded by market, the same is called warehousing. A firm needs warehouses as storage facilities for finished goods. One objective of physical distribution is to decide how many warehouse locations the firm needs, and where to locate them.
If the warehouses are too far away from the consumer, it might mean a slower time to deliver the product to the customer. On the other hand, if it is close to the customer location, the cost of the warehouse might increase the total cost of distribution.
The sub functions of warehousing are –
c. Balancing demand and supply
ii. Inventory Control:
There is a trade-off between having too much inventory on hand, with its incurred additional costs, and not having enough inventories on hand to satisfy shifting customer demand. Another objective for physical distribution is to put in suitable inventory policies so as to bring down the total cost of the physical distribution function.
Goods should be kept collected in stock to supply them at right time and place to the customers when demanded. This task is called inventory management. Both short stock and large stock are dangerous for any company. So, considering both aspects, goods should be kept in balance.
The following methods should be studied and analyzed for inventory management:
a. Economic order quantity (EOQ) – Giving order for supply of goods in the quantity that minimizes total expense is called economic order quantity.
b. Re-order point – Repeated orders should be given for keeping stock of goods/inventory. Decision should be taken to give timely re-order for the supply of goods so that there is neither lack of stock nor unnecessarily huge quantity of inventor.
c. Safety stock – Sufficient stocks of goods should always be kept in warehouse. If there is no such stock, goods cannot be distributed according to the demands. Safety stock should be kept so that there is no shortage of goods at any time.
d. ABC (Activity Based Costing) analysis – Under analysis, stock/inventory goods are classified in A.B.C. groups according to their cost. A class includes costly goods, in B average priced goods and in C cheap priced goods.
e. Just in time [JIT] – Receiving just in time method of inventory control has become very popular. According to this concept, very small amounts of goods are purchased. They reach at the right time of production or right time of sale. In some countries, inventory manager can give such direction to high level management.
iii. Transportation and Logistics:
One factor that influences the decision is the cost of transportation. The company has to make decisions relating to what mode of transportation to use for its physical distribution. For instance, it could truck the products, ship them, send them by train, or fly them. Sending a product by air is faster for international delivery, but it is also likely to be more expensive. Other decisions related to transportation include how often to transport goods, or the frequency of transportation, and the transportation route.
The physical distribution manager should take decision on the following matters in order to systematize the transportation –
iv. Order Processing:
In processing the order of the customer, the company might have to move it through a number of channels. It could go from the manufacturer to the wholesaler to the retailer, and finally reach the consumer. Some companies have found ways to cut down on the multiple middlemen involved in this classic distribution system.
It is designed to take the customer orders and execute the specifics the customer has purchased. The business is concerned with this function because it directly relates to how the customer is serviced and attaining the customer service goals. If the order processing system is efficient, then the business can avoid other costs in other functions, such as transportation or inventory control.
The sub functions of order processing are –
v. Packing and Material Handling:
After the order has been received from customers; the order should be kept recorded and sent to store and account sections. This task is called order handling. If the quantity of goods is not sufficient in the store to meet the demand, information is given to factory for production. If the goods as demanded are stock in store, they should be packed properly and then only they should be dispatched to the customer.
For handling the materials in such way, appropriate equipment also should be selected. Efficient and proper equipment cuts down material handling cost and save from breaks and damages. Nature of goods, package size, and packing method etc., also determine the sorts of handling equipment.
Material handling can be done in two ways:
a. Mechanical handling – Different types of equipment and machines are used to move goods from places to places. Lorry, truck, crane, fork-lift conveyer belt, etc.
b. Non-mechanical handling – Under this non-mechanical handling, human labour is used instead of machines. Porters can be employed to transfer carton or boxes.
The sub functions of materials handling are –
a. Proper equipment
c. Minimising breakage
d. Security against spoilage and theft
2. Other Functions / Facilitating Functions:
Distribution channels offer a variety of services that ease and enhance selling and buying goods. They offer credit to customers and accept returned merchandise. They also advertise and promote products through special displays, sales prices etc. Depending on the product, distribution channels service the products they sell. This includes maintenance and repair services, and they often are trained and supported by the manufacturer. Distribution channels may even add value to products before distributing the customers.
i. Information and customer education
vi. Marketing intelligence
viii. Bulk breaking
ix. Consolidation and distribution
x. Customer relationships
i. Information and customer education – It is an important function of physical distribution to provide every information required by the customer with respect to product or the company and educating the customer about the features and utility of the product.
ii. Selling – In case of sale through intermediaries, the selling function is effected by the physical distribution system only.
iii. Financing – Many dealers design and offer variety of financing services to the buyer for products which are expensive. Either finance is organized for the consumers or the dealer lets the consumer pay in instalments.
iv. Promoting – For increasing sale in the outlets the dealers come up with several promotional schemes that boost the sales.
v. Negotiating – The intermediaries also resort to negotiations in behalf of the consumer with the company so that the customer gets the best deal.
vi. Marketing intelligence – The distribution system effectively gauges the pulse of the market and helps the company in taking timely decisions.
vii. Servicing – The customer service function is a strategically designed standard for consumer satisfaction that the business intends to provide to its customers.
viii. Bulk breaking – In the pursuit of efficiency, manufacturers often produce large quantities at a time, but consumers usually buy only a few or even one product. Distribution channels, such as retail store chains, can sell smaller quantities, so, wholesalers act as agents between manufacturers and retailers.
ix. Consolidation and distribution – Consumers often prefer to buy a wide variety of consumer goods at one time and place. Retail stores enable consumers to do just that because they stock and display a great number of different products. Up the distribution channel chain, wholesalers can accumulate large amounts of many different products from different manufacturers and efficiently deliver many products to many retailers. This lowers carrying and transportation costs.
x. Customer relationships – Consumers often trust distribution channels more than they do manufacturers. They expect these channels to provide objective information about products and originating companies. Distribution channels communicate with customers and perform transaction functions. They are closer to customers and end users; they can provide manufacturers with a wealth of information on customer preferences. This helps in building customer relationships.
Physical Distribution – Subsystems
The manufacturer is concerned with order processing— a physical distribution function— because it directly affects the ability to meet the customer service standards defined by the owner. It is the method chosen by the organization to receive orders from the customer. It could be by mail, telephone, through salespeople, or via computer or the Internet.
Once received, orders must be processed quickly and accurately then shipped to the customer. If the order processing system is efficient, the owner can avoid the costs of premium transportation or high inventory levels.
Order processing varies by industry, but often consists of four major activities – a credit check; recording of the sale, such as – crediting a sales representative’s commission account; making the appropriate accounting entries; and locating the item, shipping, and adjusting inventory records.
It is the storing of products while they wait to be sold. This storage function is necessary because production and consumption cycles rarely match. Organizations use either storage warehouses or distribution centers to process their products. A distribution center is a large, highly automated warehouse designed to receive goods from various plants and suppliers.
The Web has erased many of the distribution barriers between producers and their potential customers. Many electric commerce sites do not have warehouses because they do not carry inventory. E-commerce distributors dispense with warehouses whenever possible.
However, a warehouse enables merchants to exercise more control over service. Amazon(dot)com Inc. sells books online and believes that the warehouse model better serves customers.
It involves knowing both when to order and how much to order. During the past decade, many companies have greatly reduced their inventories and related costs through just-in-time logistics systems. For example, FedEx offers order processing and fulfillment services, streamlined distribution by guaranteeing 48-hour delivery globally, and just-in-time delivery for manufacturers.
It’s a suite of services that forms the backbone for Web-based companies like Dell. “Inventory velocity has become a passion for us,” writes Chairman and Chief Executive Officer Michael Dell in his new book “Direct from Dell” (Harper Business).
“In 1993, we had $2.9 billion in sales and $220 million in inventory. Four years later, we posted $12.3 billion in sales and had inventory of $233 million. We’re now down to less than eight days of inventory [on hand] and we’re starting to measure it in hours instead of days.”
Another important component of a small business physical distribution system is material handling. This comprises all of the activities associated with moving products within a production facility, warehouse, and transportation terminals.
One important innovation is known as unitizing— combining as many packages as possible into one load, preferably on a pallet. Unitizing is accomplished with steel bands or shrinks wrapping to hold the unit in place. Advantages of this material handling methodology include reduced labor, rapid movement, and minimized damage and pilferage.
A second innovation is containerization—the combining of several unitized loads into one box. Containers that are presented in this manner are often unloaded in fewer than 24 hours, whereas the task could otherwise take days or weeks. This speed allows small export businesses adequate delivery schedules in competitive international markets. In-transit damage is also reduced because individual packages are not handled en route to the purchaser.
It involves the choice of transportation carriers. This affects the pricing of products, delivery performance, and condition of the goods when they arrive—all of which affect customer satisfaction. The major forms of transportation available are rail, truck, water, pipeline, and air.
Each shipping method has its advantages, disadvantages and costs. Manufacturers need to balance the total costs of a shipping method with its disadvantages in terms of possible service level. Rail transportation is the most efficient way to move bulk shipments over long distances. Rail is relatively dependable and cost-effective, but it is not always flexible.
Trucking offers a fast way to ship and consistent service for both large and small shippers. Trucks are dependent on highway infrastructures, which may not be available in some countries. Trucking is very flexible because trucks can haul goods wherever there are roads.
Air carriers are the fastest way to move shipments but air transport is more expensive than other transportation modes. Water transportation, although slow, is one of the least expensive modes of transportation. It lends itself mainly to hauling bulk commodities that are easily containerized.
Containerization involves putting goods in containers (boxes) that can be transferred from one transportation mode to another. (Train to truck is called piggyback and water to truck is called fishy back.) Pipelines form an extremely efficient transportation network for liquid products like natural gas and petroleum. The investment needed to establish the pipeline at first is significant.
Many shippers use a combination of transportation methods called intermodal transportation to move a shipment. This approach allows shippers to gain the service and cost advantages of various transportation modes.
For example, FedEx handles 59 million pounds of airfreight a month and has 624 airplanes, 42,500 vehicles, 145,000 employees and millions of square feet in its sorting centers. It sends 58 million electronic transmissions every day. The company relies on its information network as much as its air force and its ground troops.
Organizations can contract all of their logistics functions to third party logistics providers such as – UPS Worldwide Logistics and Emory Global Logistics. These specialized companies are able to offer smaller companies significant economies of scale as they invest the capital needed to build advanced distribution systems for all their customers.
An organization can instantly set up a worldwide distribution system without incurring the costs and facing the problems of setting up its own system.
Physical Distribution – Organisational Responsibilities
High level co-ordination and integration is a condition precedent for implementation of physical distribution activities effectively. The responsibility relating to physical distribution in majority of commercial institution is decentralised / scattered so badly that optimum the objectives of consumer service and minimum distribution cost cannot be achieved.
The responsibility of physical distribution of commodities oftenly rests on the top management but this liability is discharged by one out of following organisational where the size of a company / firm / institution is very large.
1. Committee of Physical Distribution Committee:
A committee for organising the functions of physical distribution is set up. The sales manager inventory control manager, transportation / traffic manager etc. are included as member to the committee. Any chief/top executive is appointed / nominated chairman to such committee. This committee discharges the responsibility to increase in efficiency reduction in distribution costs and establishing a co-ordination in the functions discharged by all these executives.
2. Physical Distribution Department:
A number of institutions have now started a separate dept. with them in order to establish a co-ordination among all functions of physical distribution. All physical distribution functions under this dept. are carried on by a chairman. This department is fully independent from other department.
A problem arises under this system is that for what executive the physical distribution officer should be made responsible. Gradually, the executive of physical distribution dept. is being made responsible for the chairman or marketing manager.
3. Marketing Director:
A number of institutions neither constitute any committee not any department separately for discharge of the responsibility of physical distribution. The chief executive of marketing department is assigned with the burden of marketing director.
Physical Distribution – Advantages
i. Provide Better Customer Services
ii. Increase Sales by –
a. Making goods always available
b. Contingency plans for quick order processing of item
iii. Reduce Costs through –
a. Proper location of warehouses
b. Improve materials handling
c. Correcting inefficient procedures
iv. Gain Advantage over Rivals through –
a. Effective customer services e.g., Rapid deliveries, avoiding delivery of damaged goods
v. Develop Communication System for Salesmen sending orders to producers within shortest possible time.
vi. Establish Appropriate Supply Chain of distribution
vii. Inventory Control to ensure economic order quantity of inventory
viii. Maintain Equilibrium in Demand and Supply
ix. Demand Supply Coordination in case of seasonal goods like sugar / wheat to ensure round the year supply
x. Price Stabilization –
a. Maintain buffer stock
b. Excess production to be stored
c. Extra supplies to be released in case of demand upsurge
xi. Smooth Distribution of Products
xii. Provide Right Quantity at right time and at reasonable cost.