Physical Distribution Meaning
As with all marketing mix elements, physical distribution cannot be seen in isolation and must interact and coordinate with all other components to produce the best possible customer offering.
Physical distribution is a significant part of logistics and a range of activities aimed at efficiently transporting products from producers to consumers and other end-users. Physical distribution systems must effectively meet the needs of both the supply chain and customers.
Market logistics or simply logistics is the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and the related information flows) through the organisation and its marketing channels in such a way that current and future profitability is maximised through the co-effective fulfilment of orders. It involves the integration of transportation, information, inventory, material handling, warehousing and packaging.
Planning an efficient physical distribution system is crucial to developing an effective marketing strategy because it can decrease costs and increase customer satisfaction. The objective of distribution management is to design and operate a physical distribution system that consistently meets the desired level of customer service while minimizing costs. To achieve this goal, it is essential to organize all activities concerning the movement and storage of goods into a cohesive and integrated system.
Physical Distribution Definition
Physical distribution starts at the factory. Managers carefully select a specific set of warehouses (stocking points) and transportation carriers that will deliver the goods to final destinations in the desired time or at the most cost-effective rate. Physical distribution focuses on the outbound side of the logistic system.
According to William J. Stanton, “Physical distribution involves the management of the physical flow of products and the establishment and operation of flow system”.
According to American Management Association, “Physical distribution means moving of finished products from one end of a production line to customers”
The physical distribution system integrates costs and services through a network designed to minimize total distribution costs while maintaining a specified customer service level.
Components of Physical Distribution
The various elements of physical distribution are as follows:
- Order Processing
- Material Handling
- Managing Inventory Stock or Inventory Control
- Customer Service
1) Order Processing
Order processing involves the receipt and transmission of sales order information. Efficient order processing facilitates product flow. Order processing directly affects the firm’s ability to meet its customer service standards. A company may have to compensate for inefficiencies in its order processing system by shipping products via costly transportation modes or by maintaining large inventories at many expensive field warehouses.
Order processing entails three main tasks:
- Order Entry
- Order Handling
- Order Delivery
i) Order Entry: Order entry begins when customers or salespeople place purchase orders via telephone, mail, e-mail, or website.
ii) Order Handling: Once an order is entered, it is transmitted to a warehouse, where product availability is verified, and to the credit department where prices, terms, and the customer’s credit rating are checked. If approved, the order is assembled.
iii) Order Delivery: After assembling and packing the order for shipment, the warehouse arranges delivery through a suitable carrier. A stock-out occurs when an order for an item is not available for shipment. A firm’s order processing system must advise affected customers about a stockout and provide them with a range of alternative actions to choose from.
2) Managing Inventory/Stock or Inventory Control
Inventory management involves the development and maintenance of well-rounded product assortments to meet customers’ needs. Effective management of finished product inventory is important for running a business efficiently and profitably. Without it, smooth operation and financial success are impossible to run any business efficiently and profitably.
Inventory decision making involves the ability to make informed decisions regarding the timing and quantity of orders. When inventory diminishes, it becomes crucial for management to establish the stock level that signals the need for a new order, referred to as the order (reorder) point. An order point of 20 means reordering when the stock level reaches 20 units. The order point should balance the potential risks of stock depletion and the costs associated with excessive inventory.
It sets the overall policies for stock, considering the materials to store, investment, customer service, stock levels, order sizes, order timing, and so on. Inventory management is the third major component of physical distribution tasks. It will be evident that without effective management of finished product inventory, it is impossible to run any business efficiently and profitably.
3) Material Handling
Materials handling, the physical handling of products, is an important factor in warehouse operations, as well as in transportation from points of production to points of consumption. Efficient procedures and techniques for materials handling minimise inventory management costs, reduce the frequency of goods handling, improve customer service, and ultimately boost customer satisfaction.
Two common methods used in materials handling are:
- Unit Loading
i) Unit Loading: Placing one or more boxes on a pallet or skid enables their streamlined loading through mechanical tools.
ii) Containerisation: Consolidating multiple items into a single large container, sealing it at the point of origin, and opening it upon arrival at its destination are essential components of efficient logistics.
Material handling is the area of physical distribution that has experienced the greatest change and improvement in efficiency. Two primary changes took place in this area:
- Elimination of Man Handling
i) Elimination of Man Handling: The first advancement entailed replacing human handling with mechanical handling, though it remains in use during the retail phase for the ultimate consumer. Improved conveyor systems and left equipment have changed to total mechanisation.
ii) Containerisation: The second improvement in material handling was containerisation. It is a method by which a large number of units of a product are combined into a single compact unit for storage and transportation. It reduced material handling costs and time spent.
Material handling decisions and costs intertwine with various other decisions and costs. The use of improved handling equipment and containerisation will naturally increase efficiency and reduce wastage and costs. It also makes the best utilisation of space in storage, possible.
Any firm can choose to either have its dedicated network of warehouses or share space with others in third-party operated warehouses. The former offers greater flexibility in design to meet product characteristics and storage needs, greater control over warehouse operations, effective market feedback and lower cost per unit as opposed to a third-party arrangement. However, third-party warehouses do not necessitate any fixed investment by the firm. Also, flexibility in terms of location and space utilisation makes this an attractive alternative. Customer service can undergo substantial improvement with the implementation of this approach. These are also called distribution centres.
Distribution centres are large, centralised warehouses that receive goods from factories and suppliers, regroup them into orders, and ship them to customers quickly, the focus being on the movement of goods rather than storage. They are designed and located for a rapid flow of products. Benefits include improved customer service and product availability, minimised delivery time, lower transportation costs, and lower inventory costs. By using the appropriate warehouse, a company may effectively reduce transportation and inventory costs or improve service to customers. Conversely, the wrong warehouse may drain company resources.
Transportation involves the movement of products from their manufacturing location to their intended destination, which is the most expensive physical distribution function. The importance of transportation in physical distribution originates from a variety of factors. Transportation provides both ‘time utility’ and ‘place utility’ to the product. it determines the company’s customer service and it also impacts the other elements of physical distribution and marketing, such as warehousing, inventory control and channel management. Finally, transportation is also a very important cost element in most businesses.
Transportation Modes: There are five basic transportation modes, each of which offers a distinct advantage:
i) Trucks: Trucks provide the most flexible schedules and routes of all major transportation modes because they can go almost anywhere.
ii) Railroads: Railroads carry heavy, bulky freight that must be shipped long distances overland.
iii) Pipelines: Pipelines, the most automated transportation mode, usually belong to the shipper and carry the shipper’s products.
iv) Waterways: Waterways are the cheapest method of shipping heavy, low-value, non-perishable goods.
v) Air Transportation: It is the fastest yet most expensive form of shipping.
To take advantage of the benefits offered by various transportation modes and to compensate for deficiencies, marketers often combine and coordinate two or more modes. This approach sometimes called inter-modal transportation, has become easier in recent years because of new developments within the transportation industry.
6) Customer Service
Customer service standards state the goals and define acceptable performance for the quality of service that a firm expects to deliver to its customers. Designers of a physical distribution system involve establishing the desired levels of customer service. These designers then assemble physical distribution components in a way that ensures the highest standard is achieved while keeping the total cost at its minimum. This overall cost breaks down into five components which are as follows:
- Customer service/order processing.
- Administrative costs, and
- Inventory control.
Customer Service Standard refers to different levels of service that different customers may require. Service needs vary from buyer to buyer and sellers need to analyse and adapt to customer preferences. The basic dimensions that relate to customer service in distribution include fair prices, dependable product delivery, availability, timeliness, adequacy of inventory in stock, replacement of defective goods, efficient order processing and warranties.