SALES AND DISTRIBUTION MANAGEMENT

LESSON 29: PHYSICAL DISTRIBUTION CONCEPTS AND OBJECTIVE

Learning Objective
To understand the concept of Physical Distribution. Introduction to Supply chain Management To know the importance of Physical Distribution.

which is a time-consuming and thereforeexpensive process, the retailer can provide the manufacturerwith up-to-date price lists, the manufacturer can price theproducts and charge the retailer for the service; the resultbeing lower costs in total. Supply Chain Management (SCM) SCM is larger in scope than both physical distribution andmarketing logistics. It encompasses materials management taskas well. Supply chain actually refers to the whole business chain,encompassing procurement of inputs, in-bound logistics,conversion of inputs into products, physical distribution/marketing logistics and channel functions, which finally take theend product to the ultimate consumers Essentially, SCM can be viewed as the combination of materials management and endproduct distribution, which constitute the two vital componentsof the business process and form the key tasks at the front and back ends of the process, respectively.It can be seen that the supply chain is in effect the firms valuechain. Value is actually spread through the firms supply chain. A firm can optimise its total customer value by managing activitiesin the supply chain in an integrated manner, treating them asone continuous chain. The supply chain constitutes a valuedelivery network. That is why it is often said that firms competein the marketplace using their supply chains as the weapon, nottheir products and brands. Superiority in supply chain is thus amajor competitive advantage. A firm with the better supplychain wins in the market. We have discussed the value chainconcept in detail in the two chapters on Industry Analysis, andCompetitive Advantage. Taking note of the advantage in dealing together materialsmanagement and physical distribution of end products, whichconstitute the two major functions at either end and whichform a virtual chain permeating the business from end-to-end,many experts have preferred to combine the two subjects anddeal them as SCM. The SCM approach, no doubt, has some merits. It facilitates theintegrated handling of the functions of the business, especiallythe procurement function and the logistics functions at thefront and the back ends of the business. As a result, it comeshandy in value creation! value addition.The approach, however, has a strong demerit as well. It gives prominence to materials management and treats the customerrequirements of logistics as an appendix to the business cycle.The requirements from the side of the customer/market getdiluted in such an approach. Moreover, in the nature of things,the focus as well as requirements of materials management andphysical distribution of end products are somewhat differentfrom each other. Perhaps all things considered, the two subjectsshould be studied independently, rather than as one unified subject. In this text, we shall in any case avoid the SCM approach. Merall, in a marketing text there is no scope for discussing
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Let us begin our discussions in this chapter with a clarificationof the distinction between physical distribution/ marketinglogistics on the one hand, and supply chain management whichis a comparatively recent idea on the other. Physical Distribution, Marketing Logistics, and Supply ChainManagement Distribution/Marketing Logistics Physical distribution is the process of delivering the product tothe marketing channels and consumers. It encompasses thevarious activities involved in the physical flow of the productfrom the producer to the consumer.Marketing logistics is somewhat larger in scope compared tophysical distribution. It covers physical distribution plus a partof the task of marketing channels. While physical distributiontakes care of functions such as transportation, warehousing andinventory management and facilitates the flow of the product,marketing channels actually connect the firm with its customers.Marketing logistics covers physical distribution in full measure,plus a part of the function of marketing channels. Marketinglogistics bring in greater value addition in the delivery chain,beyond mere transportation or distribution. The Physical Distribution Concept This emphasizes the connection between costs and service levelsand aims to minimize the total distribution costs at a givenservice level, when backed by an integrated logistics network. Itsfour main components are: 1. The total cost approach: this considers all the costs of thephysical distribution network, visible and invisible, whiletrying to achieve a given service level. It is necessary toremember the interdependence of all these elements and totry to minimize the total costs instead of attempting toreduce them piecemeal. 2. Trade-offs in costs: certain costs may increase while othersare being reduced, but theobjective should be to reduce thetotal distribution costs. 3. Minimum sub optimization: owing to theinterdependence of all the distribution functions, anychange in one will affect the others. When these functionsare integrated, the goal should be to minimize suboptimization through systems management. 4. The total system perspective: this takes the concept a stagefurther by considering the costs in the entire marketingprocess from the beginning to the sale to the enduser, For example, instead of the retailer pricing the goodsreceived,

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materialsmanagement. We shall confine ourselves to distribution of endproducts. We shall, however, make a slight deviation from thetraditional way of handling the subject. Instead of treating itmerely as a physical distribution task, we shall treat it asmarketing logistics. Materials Management The materials management cycle consists of the inflow ofgoods through materials acquisition whether it is by outrightpurchase or partially or fully on credit basis, plus internaltransport and inventory management. The relevant strategiesregarding purchasing, transport and warehousing must includecosteffective methods in these functions. The materials flowInvolves vendors and suppliers, and is integral to the operationof the business, Purchasing forecasts are directly based onproduction schedules or otherinternal usage plans, highlyintegrated materials management is possible given a disciplinedinternal planning process.The logistics activity in a company acts to co-ordinate the flowof material and the related information through the system. Ithas to co-ordinate production planning; delivery frequenciesrequired to match sales demands and customer order frequencies.All this has to be achieved through shared information. This requires an integrated information system in which: 1. Data entering one subsystem is also available to any othersubsystem requiring it; for example, data concerningcustomer orders should be available to inventory control,production scheduling, sales forecasting, etc. 2. All inter-related subsystems should have access to data in acommon data base. 3. Closely connected activities are integrated into the sameprocedure, order processing, credit checking and stockallocation. A high degree of sharing of expensive capital equipmentshould be allowed for; for example, the central computerinstallation, the data base and the application packages, amongothers, can be shared among the various functions. The logistics information system consists of two subsystemsdealing with supplies and customers. The supply subsysteminput consists of the materials requirements plan, indicatinghow many of what types of items are needed und when theyare needed for production; this has to be checked against thestanding inventory and any orders outstanding. If necessary,sources of supply for any extramaterials needed will have to bedecided upon and purchase orders generated. This processappears simple but a company may have a register of hundredsof suppliers and maintain an inventory with many thousandsof stock-keeping units. Also a sharp look-out must be kept forpossible shortages and the suppliers checked for their reliability,prices and service. At the same time, the inventory must beminimized while making sure that production is not held updue to a stockout. It is obvious that a sophisticated informationsystem is necessary to balance all these factors simultaneously.In many ways, the customer subsystem is the mirror image of the supply system. An order from a customer is the start of theprocess. Hundreds of such orders per day have to be monitoredagainst customer records for creditworthiness and specialterms or needs,

among other things. After which stock has tobe assigned to the order, replenishment of inventory catered forif necessary, delivery and invoices as well as other complementaryactivities arranged for, A host of other informationregarding achievements of service levels, re-order levels, etc., hasto be gathered at this point to assist in making demandforecasts. These two subsystems come together in the manufacturingfunction and have to be integrated through production controlso that the supply sub system generates what the customersubsystem demands. Many companies have installed materialsrequirements planning (MRP) systems. Basically these forecastthe components and materials needed from the companysmaster production schedule (MPS) and the bill of material(BOM) for each end product. The requirements are calculated bytaking existing stock levels and orders already placed intoaccount, as well as the times when the items will be needed and the supply lead times. A successfully implemented MRP systemcan reduce inventory levels, speed up changes in the productionprocess to meet changes in demand and increase the level ofservice in meeting demand. The basic idea is simple but thecontrol of such multiple activities has only become possiblethrough the use of advanced computer technology.Other methods such as the just-in-time (JIT) system can reduceinventory levels while maintaining service levels. The idea is thatthe materials needed should arrive just in time for their use inmanufacture. Reliable lead times are necessary for these systemsto work properly. A similar development in the distributionfield is the distribution requirements planning (DRP) system.This starts from the demand for the finished product andproduces requirements schedules at each level of the distributionchain. This is a pull system in that the end demand pullsthe required products down the chain rather than a centrallydecided production plan pushing the products down the line. Since the emphasis is now on customer needs, the formermakes more sense than the latter, though both have theiradvantages. The latest innovation is a combination of the MRP and D RPsystems into logistics requirements planning (LRP) systems,which will link the end demand through the whole chain backto the suppliers. This has a number of complex requirementswhich must be satisfied before such a system can be contemplated,including a high degree of dedication on the parts of themanagement and the whole organization. Importance of Physical Distribution/Marketing Logistics Physical distribution/marketing logistics forms a pivotal part ofthe marketing task. Confers Place and Time Utility on Products It is physical distribution that confers place-utility and timeutilityto a product by making it available to the user at the rightplace and at the right time. Thereby, it maximises the chance tosell the product and strengthen the companys competitiveposition. If any product made in any place could be consumedin its entirety at the very place of production and at the verytime of production, there would be no need for physicaldistribution of that product. But such products are very rare. Inpractice, almost every product gets consumed at places andtimes that are different from those of their manufacture.
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Theyhave to be carried to places of consumption; they have to bestored; and they have to be distributed. Importance of Physical Distribution/Marketing Logistics
Ensures the physical flow of the product from theproducer to

Q1. What do mean by Physical Distribution? Q2. What is the importance of Physical distribution?

SALES AND DISTRIBUTION MANAGEMENT

Notes:

the consumer. Without this flow, marketingcannot take place. Confers place and time utility on products
Helps build clientele. Where production locations and markets are distanced,physical

distribution becomes all the more crucial.

A promising area for cost reduction.

Where Production Locations and Markets are Distanced, Physical Distribution Becomes more Crucial In some cases, production locations are totally dictated byconsiderations, like proximity to sources of raw material. As aresult, the points of production might be far away from themarkets for the product. In some cases, huge productioncapacities get established at a given location on co-derations oftechnology and economies of scale. In all such cases, the product has to be marketed over an extended territory; it has tobe transported over long distances, stored for a considerablelength of time and sold. Then, there are products, which areimpacted by the seasonality factor-either production is continuousbut demand is seasonal. or demand is continuous butproduction is seasonal. Here too, physical distribution becomesparticularly crucial. It has to perform the balancing act betweenproduction and consumption. Helps Build Clientele It is physical distribution that determines the customer servicelevel to a large extent. As a result, it serves as a vital tool inbuilding clientele/market for the product. And conversely ineffective physical distribution leads to loss of customers andmarkets. A Promising Area for Cost Reduction Physical distribution is a fertile area for cost savings. Over theyears, in most businesses, physical distribution costs havegrown into a sizeable chunk of the total costs and now rankssecond among all cost elements, next only to material costs.And surprisingly, it has remained one of the neglected areas ofcost control. The Dark Continent Peter Drucker has rightly comparedphysical distribution to the dark continent of Mrica ofNapoleons days. He said, we know about physical distributiontoday just as much as what Napoleons contemporariesknew about the interior of Africa. We know it is there and weknow it is big and thats all. The message is obvious. Physicaldistribution is the most promising area for cost control Conclusion We discussed that Physical distribution is part of MarketingChannel which is part of Supply Chain Management. Importanceof Physical distribution lies in making products availableto the user at the right place and at right time. Questions
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