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Physical Distribution

When is a refrigerator not a refrigerator?


When it is in Pittsburgh at the time it is desired in Houston.

Activities concerned with efficient movement of products and raw materials from producers to consumers
.this is where the box goes.

Physical Distribution
Why study in a marketing course?
Marketing loses the sale, not physical distribution managers.

Critical cost area


20% of GNP 1/2 of marketing costs 1/4 of total product costs 1/3 of food costs

Physical Distribution
Why study in a marketing course? (cont.)
Key interactions with marketing mix variables

Key corporate strategic area


military origins a buffer for manufacturing a cost for finance a selling necessity

Physical Distribution
Why is p.d.m. ignored in marketing courses?
Lack of glamour Quantitative nature of courses Not a major area of research interest for behavioral faculty

Demand > Supply for logistics majors


Especially at BBA level Recession proof career area

Physical Distribution
Total Cost Perspective
Minimize total cost of physical distribution for a given level of customer service. Cost-service orientation versus revenue enhancement
A different way of managing assets

Physical Distribution
Visible and hidden costs
warehouse, transportation, inventory carrying costs stockout - lost profits due to failure to deliver

Visible and Hidden costs tradeoff


visible costs tradeoff against each other and together against hidden costs

Zero Sub-optimization
do not optimize one functional cost area to detriment of total costs

Physical Distribution
Customer Service Standards
Relate back to buyer behavior Must be specific
order processing and delivery time assortments order size constraints

Must be coordinated with rest of marketing strategy


This is how p.d. managers are constrained

Physical Distribution
Warehousing
Receive, identify, sort, store merchandise
Efficiency in production requires manufacturing operations to be centralized and continuous, but demand is decentralized and not continuous.

Used to hold inventory as a buffer


Demand for warehouses is a function of the need for inventory.

Physical Distribution
Warehousing (cont.)
What type?
Private versus public

How many?
Centralized or decentralized

Where?
Near factory or near customers

Physical Distribution
Warehousing (cont.)
Private
owned by firm that owns the inventory inside stable inventory levels peculiar handling requirements high volume

Physical Distribution
Warehousing (cont.)
Public
rented space highly seasonal demand low volume

Physical Distribution
Warehousing (cont.)

Centralized
customer
warehouse

customer customer

Lower warehouse cost, lower inventory cost, higher transportation costs

Physical Distribution
Warehousing (cont.)

Decentralized
customer
warehouse

field warehouse

customer

customer

higher warehouse cost, higher inventory cost, lower transportation costs

Physical Distribution
Inventory Management
Match quantity produced with quantity demanded
holding costs ordering costs stockout costs

Physical Distribution
Inventory Management (cont.)
When to reorder?

How much to reorder?


How much to keep as safety stock?

Key is accurate forecasting


of demand order filling time

Physical Distribution
Inventory Management (cont.)

Stock

Zero safety stock model


time place order receive order

on hand

order filling time

Physical Distribution
Inventory Management (cont.)
stockout

If demand increases...
Stock

on hand
time

place order
receive order

safety stock

Physical Distribution
Inventory Management (cont.)
If order filling time increases...
Stock stockout time

on hand

place order
receive order

safety stock

Physical Distribution
Transportation Management
What mode?

What route?

Physical Distribution
Transportation Management (cont.)
Modes
water
bulk, low value, slow inland waterways heavily subsidized by government

rail
flexible, long-haul, bulk, still slow, rough (high damage) dominant mode in ton-miles

Physical Distribution
Transportation Management (cont.)
Modes (cont.)
Motor Carriers (trucks)
flexible, medium to short haul, high theft only true door-to-door mode dominant mode in number of shipments

Air
fast, high value, light weight flexible but expensive

Pipeline
liquids and near liquids, inflexible, high fixed cost, not vc

Physical Distribution
Transportation Management
Trends
increased use of air freight truck trains - double, triple bottoms rail making comeback
3:1 fuel efficiency advantage over trucks 10:1 + over planes

subsidies on inland waterways decreasing deregulation has led to increase in intermodal firms

Physical Distribution
Symptoms of Poor PDM
low inventory turnover
6-12 times a year minimum

stockout
inventory = 2 mos. Sales > 99% in stock inventory = 1 mo. Sales > 90% in stock

interwarehouse shipments
do not ship it to yourself

frequent use of premium freight


instead of what system was designed to use

Physical Distribution
PD Management Trends
increasing importance relative to the rest of operations, marketing increasing fuel costs international complexity
rail traffic in Europe

increasing opportunitiesSupply Chain Management,


recycling

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