Chapter 9

Physical Distribution

What is Physical Distribution

● Physical distribution is that marketing function which facilitates the movement

of goods from the manufacturer to the location of the ultimate users. On a
broader scope, physical distribution includes the flow of raw materials, parts, and
supplies to the firm's production line (Figure 33).

Figure 33: A Physical Distribution System

● Physical distribution, in combination with marketing channels, comprise the

total system perspective of distribution called supply chain management
(Figure 34).

Figure 34: Supply Chain Management

 ● Physical distribution management is the development and operation of
processes resulting in the effective and efficient physical flow of products. The
physical distribution managers are the people assigned to ensure that physical
distribution activities are carried out.

The Objectives of Physical Distribution

● Every activity in the organization must be made to contribute to the overall

profitability of the firm. These include activities concerning physical distribution.

● The reduction of costs, however, must be made without sacrificing the quality of
service to customers, at least those that will affect profitability or the attainment of
other worthwhile objectives.

● When physical distribution activities are well-managed, some concerns come into
fore and provide opportunities for the firm to compete effectively.

These opportunities are as follows:

1. Improve Customer Service

- When customers are satisfied with the services provided by the firm
through an effective physical distribution system, they are motivated to
patronize the firm.

2. Reduce Distribution Costs

- When the physical distribution system is effective, cost reduction is
possible. The economic order quantity and the just- in-time inventory
concepts, for example, are designed to minimize costs.

3. Create Time and Place Utilities

- Producers are, sometimes, confronted by difficulties that derail actions to
achieve profit goals. These occur when production and consumption are in
imbalanced which consists of two types:

a. year-round consumption vs. seasonal production; and

b. year-round production vs. seasonal consumption.

- To correct these imbalances, storage, which is a part of warehousing, is

used to create time utility. In the case of onions, for instance, harvesting
and selling in March or April is impractical since these are the months
when mass harvesting is done by farmers.

- Transportation which is a part of physical distribution creates place utility.

Tomatoes, for example, which are sold cheap in Nueva Ecija during
harvest seasons, are transported to other provinces where their values are
enhanced.
 4. Stabilize Prices
- There are times when the market is flooded with an oversupply of a
certain product. The effect is a drastic decrease in the price of the product.
When this happens, the profit objectives of the producer may be
jeopardized.

5. Influence Channel Decisions

- Sometimes, a firm's management has to decide which channel to tap in
the distribution of its products or services. Not all types of channel will
serve the requirements of the firm's physical distribution.

6. Control Shipping Costs

- When physical distribution activities are not functioning properly, the
smooth flow of products from the company to the customers will not be
possible. There may be a flow of products but it will not be smooth and
one result could be "loose control" over shipping costs.

Elements of an Efficient Physical Distribution

● Physical distribution is efficient if its assigned objective is achieved at the least

cost. It is possible if the following elements are properly managed:

1. Inventory Planning and Control

- Maintaining an inventory of stocks is a requirement of physical distribution.
Too much inventory, however, is a drain on the financial resources of the
firm. This is in addition to the cost of keeping the inventory.

- A widely used inventory control technique is the Economic Order Quantity

(EOQ) mode. It can be used to determine what quantity to order so as to
minimize total inventory costs. The EOQ formula is as follows:

Example:

If the cost per unit of a product is P30.00, the total units disposed per year is 50,000,
restocking cost is P300 per order, and the annual carrying cost (warehouse cost, and
other costs.) is 15% of the inventory value, find the EOQ.
2. Transportation
- The shipping of products to customers is one of the most important
activities in physical distribution. As products must be delivered at specific
dates and at the quality required, care must be taken in deciding what
form of transportation to adapt.

- Forms of Transportation - Various forms of transportation may be used

in transporting goods. They are the following:

a. Railroads are less costly as a means of transportation. They can

carry more in terms of volume. This form of transportation is used,
however, in some parts of the Philippines and not as extensive as
those in other countries like the United States and Australia.

b. Trucks constitute the most reliable means of transporting goods

between two points inland. Among the various means of
transportation, these are the least affected by weather. Unlike
railroads, they provide delivery service to any point traversed by
roads.

c. Water vessels provide à very important means of transporta- tion

especially in an archipelago like the Philippines. Sea trans- port
accounts for a large percentage of total domestic cargo and
passenger movement between the islands.

d. Pipelines are specialized means of transporting liquid products like

oil from their sources to markets. These are less expensive forms
of shipping yet they are not readily available for service by just any
firm.

e. Airplanes constitute the fastest means of delivering goods. They

are, therefore, used in shipping perishables like food, newspapers,
and flowers.

- Special Transport Agencies - Delivering small quantities of goods pose

a problem of economy to the shipper. This difficulty. however, is taken care
of by special transport agencies like the post office, parcel services, and
freight forwarders, for minimal fees.

- The post office is one of the most economical ways of sending packages
to customers. It covers every town in the country. Delivery, however, takes
longer in areas not specified as key distribution centers.

- Freight forwarders are also transport agencies involved in the

economical distribution of goods. They pick up small shipments,
consolidate them, and deliver them to their destinations. Although speed is
compromised, the cost of shipping is reduced.
 Comparison of Transportation Modes

3. Warehousing
- Warehousing is an important component of physical distribution. Due to
some reasons, most products are not delivered to the customers right
after they come out of the production line. Nevertheless, they must be kept
in good condition until they are finally delivered to buyers. The places
where they are kept are called warehouses and the activity done is called
warehousing.

- Types of Warehousing - The company has to decide which the two types
of warehousing will be used: (1) private warehousing; or (2) public
warehousing.

a. Private warehouses are those owned or leased by the company.

The following conditions justify the use of private warehouses:

1. when the firm is able to adapt to a rapidly changing market

or product conditions;

2. when the firm has special storage and handling

requirements; and

3. when the firm has a relatively constant high volume of goods

moving into large metropolitan areas.

b. Public warehouses are those operated by professional

warehousers which provide storage and related physical
distribution facilities on a rental basis to other firms. They may also
provide services such as reshipping, filling orders, financing,
display of products, and coordinating shipments.
 - Number and Location of Warehousing Facilities. Decisions must also
be made on the number and the location of warehousing facilities. More
warehouses would bring the products nearer the market, but warehousing
costs will increase.

1. warehousing costs

2. transportation costs

3. change in inventory carrying costs

4. obsolescence costs

5. value of alternative facility use

6. production or supply alternatives

7. value of cost concessions

[Link] and data processing costs

9. channels of distribution

10. customer service costs

- Management science has come up with various formulas to determine the

most economic number and location of warehousing.

4. Order Processing
- Order processing refers to receiving, recording, filling, and assembling
orders for shipment. The steps undertaken from the time the customer
makes an order up to the time the ordered goods e delivered is called the
"order cycle."

- To efficiently serve the customers, procedures for processing orders must

be established. The objective of such procedure is to reduce the average
time of ordering goods.

Figure 35: Overview of the Components of the Physical Distribution System

● The Major Components of the Order Cycle. Four major components consist
the order cycle. These are as follows:

1. Order placement - refers to the time that elapses from the time the
customer develops the order until the order is received by the
seller. Order placement may take as long as a few days if sent
through mail or instantly if sent through electronic means.

2. Internal order processing - refers to the time required to process

the customer's order until it is ready for shipment. It involves the
following:

1. customer credit checks

2. transfer of information to sales records

3. transfer of orders to the inventory unit

4. preparation of shipping documents

3. Order preparation refers to all activities relating to the picking and

packaging of individual customer orders. Order preparation
automated systems. may be as simple as a manual system or as
sophisticated as highly automated systems.

4. Order shipment refers to the time the order is placed upon a

transport facility until the goods ordered are unloaded and received
by the customer.

Figure 36: The Major Components of the Order Cycle

 5. Materials Handling
- refers to the activities involved in moving goods over short distances into,
within, and out of warehouses and manufacturing plants. Effective
materials handling can be made to contribute to cost reduction and the
effective flow of goods.

The objectives of a materials handling subsystem are as follows:

1. to increase the usable capacity of the warehouse facility;

2. to reduce the number of times goods are handled;

3. to minimize the possibility of danger to people who are working around the
warehouse;

4. to reduce, if not eliminate, the monotonous and heavy manual labor aspects of
short-distance movements in the warehouse; and

5. to respond quickly and efficiently to customer's orders.

QUESTIONS FOR REVIEW AND DISCUSSION:

1. Why is physical distribution considered to be a very important marketing activity?

2. What is the objective of physical distribution?

3. What elements must be properly managed to make physical distribution efficient?

4. What is the consequence of too much or too little inventory?

5. What is the Economic Order Quantity mode?

6. What mode of transportation is best for transporting goods?

7. What is the advantage of post office as a means of transporting goods?

8. What are private warehouses? What conditions justify their use?

9. What are the major components of the order cycle?

10. What are the objectives of the materials handling system?