Definition

Physical distribution is the group of activities associated with the supply of finished product
from the production line to the consumers. The physical distribution considers many sales
distribution channels, such as wholesale and retail, and includes critical decision areas like
customer service, inventory, materials, packaging, order processing, and transportation and
logistics. You often will hear these processes be referred to as distribution, which is used to
describe the marketing and movement of products.
Importance of Physical Distribution
The importance of physical distribution to a company can vary and is typically associated
with the type of product and the necessity it has to customer satisfaction. Strategically staging
products in locations to support order shipments and coming up with a rapid and consistent
manner to move the product enables companies to be successful in dynamic markets.
Physical distribution is managed with a systems approach and considers key interrelated
functions to provide efficient movement of products. The functions are interrelated because any
time a decision is made in one area it has an effect on the others. For example, a business that
is providing custom handbags would consider shipping finished products via air freight versus
rail or truck in order to expedite shipment time. The importance of this decision would offset the
cost of inventory control, which could be much more costly. Managing physical distribution from
a systems approach can provide benefit in controlling costs and meeting customer service
demands.
1. Creation of utilities:
The physical distribution function of a firm provides the place and time dimensions which
contribute a basic element of marketing mix. The major components of physical distribution are
transportation and warehousing.
Creation of or addition of utility is addition of value to a thing. It is transport system that creates
place utility making goods more useful by bringing them from the places where they are not
needed to the places where they are badly needed.
Warehousing system is known for creating time utility. By holding the goods from the time of
their production till their consumption thus avoiding gluts and shortages over a given period of
time. The outcome is the maximization of consumer satisfaction and profits to the firm.
2. Improved consumer services:
In general terms, consumer service is the service provided to the customer from the time of
order placed till the product is delivered.

In fact, it is much more than this and covers price, sales representation, after-sale services,
product range offering, product availability and the like. Customer service in physical distribution
function consists of providing products at the time and location corresponding to the customer
needs. Improvement in customer service is possible when we talk of a service level.
A customer service level is a measure of how well the customer service function is being
performed. Customers would be cent-percent 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.
This is an ideal case indeed which is rate to a customer. However, high levels of customer
satisfaction can be possible through a viable distribution system that takes into account the
factors that affect customer service such as time, dependability, communication, availability and
convenience.
3. Cut in distribution costs:
The prices paid by the user consist of not only production costs but also delivery costs. Experts
have estimated that the physical distribution costs are in the range of 20 to 25 percent of the
price.
If the total physical distribution costs are taken, transportation accounts for 45 percent;
warehousing 25 percent; inventory carrying costs 10 per cent; receiving and shipping costs 5
percent; packing 6 percent; administration 5 per cent and order processing 4 percent.
Therefore, physical distribution system can be instrumental in slashing down these costs.
There are tangible and intangible costs for which the customer is to bear the brunt. Economy
can be brought about in tangible and intangible costs by systematic planning of inventory levels,
warehousing location and operations, transportation schedules and modes, material handling,
order processing and communication. It is the last frontier for cost economies and the
economys dark continent. It is the virgin land for cost control and cost reduction.
4. Increased market share:
A new look and approach to physical distribution can contribute beyond the attainment of the
twin objectives of improving consumer satisfaction and dealer profit margins. An increased
market share one of the major aims of any growth aspiring marketing unit can be possible.
There are definite ways in which an efficient physical distribution system can contribute towards
this end.
A well designed physical distribution frame can decentralize its warehousing operations; devise
the combinations of efficient and economic means of transport to pen errata into the areas
untapped so far, planning inventory operations to avoid stock-outs and gluts.

These minute points are constructive in arresting the loss of consumer interest and loyalty.
Thus, it can also add to rebuilding the class of customers the greatest asset for any marketing
organisation that is adaptive.
5. Price stabilization:
Physical distribution can contribute considerably to the attainment of the situation of price
stabilization. Physical distributional components are capable of bringing about much desired
price stabilization.
Among other things the customers expect price stability over a period and place. It is the best
use of available transport and warehousing facilities that can bring about amicable and
matching adjustment between the demand for and supply of goods thus preventing price
fluctuations and distortions.
This is of particular importance in all the underdeveloped and developing economies where
these components particularly transportation and warehousing have not reached the heights of
sophistication and refinement.

Functions of Physical Distribution

The key functions within the physical distribution system are:

Customer service

The customer service function is a strategically designed standard for

consumer satisfaction that the business intends to provide to its
customers. As an example, a customer satisfaction approach for the
handbag business mentioned above may be that 75% of all custom
handbags are delivered to the customer within 72 hours of ordering. An
additional approach might include that 95% of custom handbags be
delivered to the customer within 96 hours of purchase. Once these
customer service standards are set, the physical distribution system is
then designed to attain these goals.

Order processing

Order processing 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. For example, if the

handbag business has an error in the processing of a customer order, the

business has to turn to premium transportation modes, such as next day
air or overnight, to meet the customer service standard set out, which will
increase the transportation cost.

Inventory control

Inventory control is a major role player in the distribution system of

a business. Cost include investment into current inventory, loss of
demand for products, depreciation. There are different types of
inventory control systems that can be implemented, such as first
in-first out (or FIFO) and flow through, which are methods for
businesses to handle products.

Transportation and logistics

The United States' transportation system has long been a governmentregulated industry, much like its telephone and electrical utilities. But in 1977
the deregulation of transportation began with the removal of federal regulations
for cargo air carriers not engaged in passenger transportation. The deregulation
movement has since expanded in ways that have fundamentally altered the
transportation landscape for small business owners, large conglomerates and,
ultimately, the consumer.

Transportation costs are largely based on the rates charged by carriers. There are two basic
types of transportation rates: class and commodity. The class rate, which is the higher of the
two rates, is the standard rate for every commodity moving between any two destinations. The
commodity rate is sometimes called a special rate, since it is given by carriers to shippers as a
reward for either regular use or large-quantity shipments. Unfortunately, many small business
owners do not have the volume of shipping needed to take advantage of commodity rates.
However, small businesses are increasingly utilizing a third type of rate that has emerged in
recent years. This rate is known as a negotiated or contract rate. Popularized in the 1980s
following transportation deregulation, contract rates allow a shipper and carrier to negotiate a
rate for a particular service, with the terms of the rate, service, and other variables finalized in a
contract between the two parties. Transportation costs vary by mode of shipping, as discussed
below.
TRUCKINGFLEXIBLE AND GROWING The shipping method most favored by small
business (and many large enterprises as well) is trucking. Carrying primarily manufactured
products (as opposed to bulk materials), trucks offer fast, frequent, and economic delivery to
more destinations in the country than any other mode. Trucks are particularly useful for shortdistance shipments, and they offer relatively fast, consistent service for both large and small
shipments.
AIR FREIGHTFAST BUT EXPENSIVE Because of the relatively high cost of air transport,
small businesses typically use air only for the movement of valuable or highly-perishable

products. However, goods that qualify for this treatment do represent a significant share of the
small business market. Owners can sometimes offset the high cost of air transportation with
reduced inventory-holding costs and the increased business that may accompany faster
customer service.
WATER CARRIERSSLOW BUT INEXPENSIVE
There are two basic types of water carriers: inland or barge lines, and oceangoing deep-water
ships. Barge lines are efficient transporters of bulky, low-unit-value commodities such as grain,
gravel, lumber, sand, and steel. Barge lines typically do not serve small businesses.
Oceangoing ships, on the other hand, operate in the Great Lakes, transporting goods among
port cities, and in international commerce. Sea shipments are an important part of foreign trade,
and thus are of vital importance to small businesses seeking an international market share.
RAILROADSLONG DISTANCE SHIPPING Railroads continue to present an efficient mode
for the movement of bulky commodities over long distances. These commodities include coal,
chemicals, grain, non-metallic minerals, and lumber and wood products.
PIPELINESSPECIALIZED TRANSPORTERS
Pipelines are utilized to efficiently transport natural gas and oil products from mining sites to
refineries and other destinations. In addition, so-called slurry pipelines transport products such
as coal, which is ground to a powder, mixed with water, and moved as a suspension through the
pipes.
INTERMODAL SERVICES Small business owners often take advantage of multi-mode deals
offered by shipping companies. Under these arrangements, business owners can utilize a given
transportation mode in the section of the trip in which it is most cost efficient, and use other
modes for other segments of the transport. Overall costs are often significantly lower under this
arrangement than with single-mode transport.
Of vital importance to small businesses are transporters specializing in small shipments. These
include bus freight services, United Parcel Service, Federal Express, DHL International, the
United States Postal Service, and others. Since small businesses can be virtually paralyzed by
transportation strikes or other disruptions in small shipment service, many owners choose to
diversify to include numerous shippers, thus maintaining an established relationship with an
alternate shipper should disruptions occur. Additionally, small businesses often rely on freight
forwarders who act as transportation intermediaries: these firms consolidate shipments from
numerous customers to provide lower rates than are available without consolidation. Freight
forwarding not only provides cost savings to small businesses, it provides entrepreneurial
opportunities for start-up businesses as well.

Packaging and materials

Suboptimization is a term that has been adopted for a common policy mistake. It
refers to the practice of focusing on one component of a total and making changes
intended to improve that one component and ignoring the effects on the other
components. The nature of the problem is most easily understood from examples.

Examples of Suboptimization

If a firm focuses on minimization cost, a desirable aim if all other factors remain
equal, and takes measures which not only reduce cost but also reduce revenues
even more the profit of the firm is adversely affected.

A government agency that promotes a program for its benefits but ignores its
costs may make society worse off rather than better off. Maximization of benefits
without taking into account costs is not rational.

An educational institution concerned about thefts of equipment might take steps

to minimize theft which result in students not being able to use the equipment at
all. This is clearly not optimal because it results in the same effect as if all the
equipment were stolen. The proper policy has to consider the tradeoffs between
security and access for legitimate use.

Minimization of air pollution may be a valid goal if all other variables, such as
economic production, are held constant. But minimization of air pollution without
regard to what happens to production is not valid. The proper goal is
maximization of net social benefit which means that the tradeoffs between air
pollution and economic production must be taken into account.

CUSTOMER SERVICE
Customer service is a precisely-defined standard of customer satisfaction which a small
business owner intends to provide for its customers. For example, a customer service
standard for the above-mentioned provider of customized computers might be that 60
percent of all PCS reach the customer within 48 hours of ordering. It might further set a
standard of delivering 90 percent of all of its units within 72 hours, and all 100 percent of
its units within 96 hours. A physical distribution system is then set up to reach this goal at
the lowest possible cost. In today's fast-paced, technologically advanced business
environment, such systems often involve the use of specialized software that allows the
owner to track inventory while simultaneously analyzing all the routes and transportation
modes available to determine the fastest, most cost-effective way to delivery goods on
time.

TRANSPORTATION
The United States' transportation system has long been a government-regulated industry, much
like its telephone and electrical utilities. But in 1977 the deregulation of transportation began
with the removal of federal regulations for cargo air carriers not engaged in passenger
transportation. The deregulation movement has since expanded in ways that have
fundamentally altered the transportation landscape for small business owners, large
conglomerates and, ultimately, the consumer.

Transportation costs are largely based on the rates charged by carriers. There are two basic
types of transportation rates: class and commodity. The class rate, which is the higher of the
two rates, is the standard rate for every commodity moving between any two destinations. The
commodity rate is sometimes called a special rate, since it is given by carriers to shippers as a
reward for either regular use or large-quantity shipments. Unfortunately, many small business
owners do not have the volume of shipping needed to take advantage of commodity rates.
However, small businesses are increasingly utilizing a third type of rate that has emerged in
recent years. This rate is known as a negotiated or contract rate. Popularized in the 1980s
following transportation deregulation, contract rates allow a shipper and carrier to negotiate a
rate for a particular service, with the terms of the rate, service, and other variables finalized in a
contract between the two parties. Transportation costs vary by mode of shipping, as discussed
below.
TRUCKINGFLEXIBLE AND GROWING The shipping method most favored by small
business (and many large enterprises as well) is trucking. Carrying primarily manufactured
products (as opposed to bulk materials), trucks offer fast, frequent, and economic delivery to
more destinations in the country than any other mode. Trucks are particularly useful for shortdistance shipments, and they offer relatively fast, consistent service for both large and small
shipments.
AIR FREIGHTFAST BUT EXPENSIVE Because of the relatively high cost of air transport,
small businesses typically use air only for the movement of valuable or highly-perishable
products. However, goods that qualify for this treatment do represent a significant share of the
small business market. Owners can sometimes offset the high cost of air transportation with
reduced inventory-holding costs and the increased business that may accompany faster
customer service.
WATER CARRIERSSLOW BUT INEXPENSIVE
There are two basic types of water carriers: inland or barge lines, and oceangoing deep-water
ships. Barge lines are efficient transporters of bulky, low-unit-value commodities such as grain,
gravel, lumber, sand, and steel. Barge lines typically do not serve small businesses.
Oceangoing ships, on the other hand, operate in the Great Lakes, transporting goods among
port cities, and in international commerce. Sea shipments are an important part of foreign trade,
and thus are of vital importance to small businesses seeking an international market share.
RAILROADSLONG DISTANCE SHIPPING Railroads continue to present an efficient mode
for the movement of bulky commodities over long distances. These commodities include coal,
chemicals, grain, non-metallic minerals, and lumber and wood products.
PIPELINESSPECIALIZED TRANSPORTERS
Pipelines are utilized to efficiently transport natural gas and oil products from mining sites to
refineries and other destinations. In addition, so-called slurry pipelines transport products such

as coal, which is ground to a powder, mixed with water, and moved as a suspension through the
pipes.
INTERMODAL SERVICES Small business owners often take advantage of multi-mode deals
offered by shipping companies. Under these arrangements, business owners can utilize a given
transportation mode in the section of the trip in which it is most cost efficient, and use other
modes for other segments of the transport. Overall costs are often significantly lower under this
arrangement than with single-mode transport.
Of vital importance to small businesses are transporters specializing in small shipments. These
include bus freight services, United Parcel Service, Federal Express, DHL International, the
United States Postal Service, and others. Since small businesses can be virtually paralyzed by
transportation strikes or other disruptions in small shipment service, many owners choose to
diversify to include numerous shippers, thus maintaining an established relationship with an
alternate shipper should disruptions occur. Additionally, small businesses often rely on freight
forwarders who act as transportation intermediaries: these firms consolidate shipments from
numerous customers to provide lower rates than are available without consolidation. Freight
forwarding not only provides cost savings to small businesses, it provides entrepreneurial
opportunities for start-up businesses as well.
WAREHOUSING
Small business owners who require warehousing facilities must decide whether to maintain their
own strategically located depot(s), or resort to holding their goods in public warehouses. And
those entrepreneurs who go with non-public warehousing must further decide between storage
or distribution facilities. A storage warehouse holds products for moderate to long-term periods
in an attempt to balance supply and demand for producers and purchasers. They are most often
used by small businesses whose products' supply and demand are seasonal. On the other
hand, a distribution warehouse assembles and redistributes products quickly, keeping them on
the move as much as possible. Many distribution warehouses physically store goods for fewer
than 24 hours before shipping them on to customers.
In contrast to the older, multi-story structures that dot cities around the country, modern
warehouses are long, one-story buildings located in suburban and semi-rural settings where
land costs are substantially less. These facilities are often located so that their users have easy
access to major highways or other transportation options. Single-story construction eliminates
the need for installing and maintaining freight elevators, and for accommodating floor load limits.
Furthermore, the internal flow of stock runs a straight course rather than up and down multiple
levels. The efficient movement of goods involves entry on one side of the building, central
storage, and departure out the other end.
Computer technology for automating warehouses is dropping in price, and thus is increasingly
available for small business applications. Sophisticated software translates orders into bar
codes and determines the most efficient inventory picking sequence. Order information is
keyboarded only once, while labels, bills, and shipping documents are generated automatically.

Information reaches hand-held scanners, which warehouse staff members use to fill orders. The
advantages of automation include low inventory error rates and high processing speeds.

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