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
 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
Planes
 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