PRINCIPLES OF MARKETINGDISTRIBUTION—CHAPTER 27

Physical Distribution

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 factoriesFinished goods from factories to

warehousesFinished goods from warehouses to retail

storesExamples: Pepsi truck, Frito-Lay truckAka 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 handlingInventory 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 chainSuppliers 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

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 cargoDisadvantages

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

Modes of Transportation

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

terrorismAka 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 continuouslySafe from damage or theftNot subject to delivery delaysLimited number of products that can be carriedBuilding a pipeline is expensive, but costs to

operate are smallLeaks do not often occur; but can cause great

environmental damage

Distribution of Services and Ideas

Services “Transported” by individuals, through their

performance of the serviceIdeas

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 supplierThe 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 orderPO 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 dockHire 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 leaseInventory 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