STUDY NOTES

Q What is physical distribution?

Physical distribution involves planning, implementing & controlling the physical flows of materials & final goods from point of origin to point of use to meet customer needs at a profit.

Procurement Suppliers --- Manufacturing --Physical distribution

Channels --- Customers

Q What is the objective of Physical distribution?

Making the product available at the right time, at the right place and at lower cost.

Q What are the Major activities involved in physical distribution

o o o o o o o o o o o o o

Sales forecasting. Distribution planning. Production planning. Materials procurement. Inventory management. Receiving. In bound transportation. Packaging. In plant ware housing. Shipping. Out board transportation. Field ware housing. Order processing Customer service.

Q What are the elements of physical distribution? Order processing. Ware housing. Inventory. Transportation.

Organizations responsibility for physical distribution. ORDER PROCESSING It is the first step in the physical distribution management. The efficiency of order processing has a direct effect on lead times. Orders are received from the sales team through the sales department. Many companies establish regular supply routes that remain relatively stable over a period of time providing that the supplier performs satisfactorily.

Very often contracts are drawn up and repeat orders (forming part of the initial contract) are made at regular intervals during the contract period. Taken to its logical conclusion this effectively does away with ordering and leads to what is called partnership sourcing. This is an agreement between the buyer and seller to supply a particular product or commodity as an when required without the necessity of negotiating a new contract every time an order is placed Order-processing systems should function quickly and accurately. Other departments in the company need to know as quickly as possible that an order has been placed and the customer must have rapid confirmation of the orders receipt and the precise delivery time. Even before products are manufactured and sold the level of office efficiency is a major contributor to a companys image. Incorrect paperwork and slow reactions by the sales office are often an unrecognized source of ill-will between buyers and sellers. When buyers review their suppliers, efficiency of order processing is an important factor in their evaluation

A good computer system for order processing allows stock levels and delivery schedules to be automatically updated so management can rapidly obtain an accurate view of the sales position. Accuracy is an important objective of order processing as are procedures that are designed to shorten the order processing cycle.

WAREHOUSING

Types of Warehouses

Private Warehouses Public Warehouses Government Warehouses Bonded Warehouses Co-operative Warehouse

Characteristics of ideal warehouse

Bhave 47 Warehouse should be located at a convenient place near highways, railway stations, airports and seaports where goods can be loaded and unloaded easily. Mechanical appliances should be there to loading and unloading the goods. This reduces the wastages in handling and also minimises handling costs. Adequate space should be available inside the building to keep the goods in proper order Ware houses meant for preservation of perishable items like fruits, vegetables, eggs and butter etc. should have cold storage facilities. Proper arrangement should be there to protect the goods from sunlight, rain, wind, dust, moisture and pests. Sufficient parking space should be there inside the premises to facilitate easy and quick loading and unloading of goods. Round the clock security arrangement should be there to avoid theft of goods. The building should be fitted with latest fire-fighting equipments to avoid loss of goods due to fire. Functions of Warehouses

Warehouses perform the following functions: Storage of goods Protection of goods Risk bearing Processing Protection and preservation of goods

Advantages of Warehouses

Regular flow of goods Continuity in production Convenient location Easy handling Useful for small businessman Creation of employment Facilitates sales of goods Availability of finance Reduces risk of loss Grading and branding & Transportation

Factors to be considered in the warehouse decision

Location of customers; Size of orders; Frequency of deliveries; Lead times

INVENTORY MANAGEMENT

Inventory (or stockholding) can be described as the accumulation of an assortment of items today for the purpose of providing protection against what may occur tomorrow.

An inventory is maintained to increase profitability through manufacturing and marketing support. Manufacturing support is provided through two types of inventory system:

An inventory of the materials for production An inventory of spare and repair parts for maintaining production equipment. Similarly, marketing support is provided through: Inventories of the finished product; Spare and repair parts that support the product.

Supply and demand could be perfectly coordinated, there would be no need for companies to hold stock. However, future demand is uncertain, as is reliability of supply. Hence inventories are accumulated to ensure availability of raw materials, spare parts and finished goods.

Generally speaking, inventories are kept by companies because they:

Act as a hedge against contingencies (e.g. unexpected demand, machinery breakdown);

Act as a hedge against inflation, price or exchange rate fluctuations; Assist purchasing economies; Assist transportation economies Assist production economies; Improve the level of customer service by providing greater stock availability.

Inventory, or stock management, is a critical area of PDM because stock levels have a direct effect on levels of service and customer satisfaction. The optimum stock level is a function of the type of market in which the company operates. Few companies can say that they never run out of stock, but if stock-outs happen regularly then market share will be lost to more efficient competitors. The key lies in ascertaining the re-order point. Carrying stock at levels below the reorder point might ultimately mean a stock-out, whereas too high stock levels are unnecessary and expensive to maintain. The stock/cost dilemma is clearly illustrated by the systems approach to PDM that is dealt with later.Sometimes a company may be obliged to support high stock levels because the lead-times prevalent in a given market are particularly short. In such a case, the company must seek to reduce costs in other areas of the PDM mix TRANSPORTATION

Human powered Animal powered Air Road Rail Inland water transport Sea-multimodal transport Transportation through pipeline

Transportation

Channel Strategy analyzing each shipping mode to determine which mode, or combination of modes, will be both effective and efficient in a given situation
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REVERSE LOGISTICS Reverse logistics stands for all operations related to the reuse of products and materials. It is "the process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. More precisely, reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. Remanufacturing and refurbishing activities also may be included in the definition of reverse logistics." Normally, logistics deal with events that bring the product towards the customer. In the case of reverse, the resource goes at least one step back in the supply chain. In this way, the downstream partner is able to offer high level of service without carrying the risks associated with large inventories. In certain industries, goods are distributed to downstream members in the supply chain with the understanding that the goods may be returned for credit if they are not sold. Newspapers and magazines serve as examples. This acts as an incentive for downstream members to carry more stock, because the risk of obsolescence is borne by the upstream supply chain members. However, there is also a distinct risk attached to this logistics concept. The downstream member in the supply chain might exploit the situation by ordering more stock than is required and returning large volumes. The supplier effectively finances the inventory for the downstream member. It is therefore important to analyze customers account for hidden cost For instance, goods move from the customer to the distributor or to the manufacturer. In this way, the downstream partner is able to offer high level of service without carrying the risks associated with large inventories. The supplier effectively finances the

inventory for the downstream member. It is therefore important to analyze customers account for hidden cost.

WHOLESALERS

Wholesalers are one of the important middlemen in the channel of distribution who deals with the goods in bulk quantity. They buy goods in bulk from the producers and sell them in relatively smaller quantities to the retailers. In some cases they also sell goods directly to the consumers if the quantity to be purchased is more. They usually deal with a limited variety of items and also in a specific line of product, like iron and steel, textiles, paper, electrical appliances, etc. Wholesalers buy goods directly from producers or manufacturers. Wholesalers buy goods in large quantities and sells in relatively smaller quantities. They sell different varieties of a particular line of product. For example, a wholesaler who deals with paper is expected to keep all varieties of paper, cardboard, card, etc. They may employ a number of agents or workers for distribution of products. Wholesalers need large amount of capital to be invested in his business. They generally provides credit facility to retailers. He also provides financial assistance to the producers or manufacturers. In a city or town they are normally seen to be located in one particular area of the market. For example, you can find cloth merchants in one area, book publishers and sellers in one area; furniture dealers in one area etc

Functions of wholesalers

Collection of goods: A wholesaler collects goods from manufacturers or producers in large quantities.

Storage of goods: A wholesaler collects the goods and stores them safely in warehouses, till they are sold out. Perishable goods like fruits, vegetables, etc. are stored in cold storage.

Distribution: A wholesaler sells goods to different retailers. In this way, he also performs the function of distribution.

Financing: The wholesaler provides financial support to producers and manufacturers by sending money in advance to them. He also sells goods to the retailer on credit. Thus, at both ends the wholesaler acts as a financier

Risk taking: The wholesaler buys finished goods from the producer and keeps them in the warehouses till they are sold. Therefore, he assumes the risks arising out of changes in demand, rise in price, spoilage or destruction of goods.

Breaking the bulk: He buys products in large quantities, breaks the bulk and sells in small quantities to the retailers or his customers.

Warehousing: since the wholesalers buys goods in large quantities he has to necessarily have large storage space

Types of Wholesalers

Merchant wholesalers. These wholesalers own (take title to) the products they sell.

General merchandise wholesalers. These are service wholesalers who carry a wide variety of nonperishable items such as hardware, electrical supplies, plumbing supplies, furniture, drugs, cosmetics, and automobile equipment.

Single-line (or general-line) wholesalers. These are service wholesalers who carry a narrower line of merchandise than general merchandise wholesalers. For example, they might carry only food, wearing apparel, or certain types of industrial tools or supplies.

In consumer products, they serve the single- and limited-line stores. In business products, they cover a wide geographic area and offer more specialized service.

Specialty wholesalers. These are service wholesalers who carry a very narrow range of products and offer more information and service than other service wholesalers. A consumer products specialty wholesaler might carry only health foods or oriental foods instead of a full line of groceries.

Cash-and-carry wholesalers. These wholesalers operate like service wholesalers except that the customer must pay cash. Small retailers, or customers are too small to be served or profitably by a service wholesaler. A new breed of wholesalers who book the orders from such customers in small quantities, buy from big wholesalers, and supply to their customers at a charge.

Drop-shippers. These wholesalers own (take title to) the products they sell but they do not actually handle, stock, or deliver them. These wholesalers are mainly involved in selling. They get orders from wholesalers, retailers, or other business users and pass these orders on to producers. Then the producer ships the order directly to the customers. Because drop-shippers do not have to handle the products, their operating costs are lower. Drop-shippers commonly sell products so bulky that additional handling would be expensive and possibly damaging.

Truck wholesalers. These wholesalers specialize in delivering products that they stock in their own trucks. By handling perishable products in general demand tobacco, candy, potato chips etc. truck wholesalers may provide almost the same functions as full-service wholesalers. Their big advantage is that they deliver perishable products that regular wholesalers prefer not to carry.

Wholesalers Marketing decisions.

o o o o o o Target Market. Product assortment & services. Price decisions. Promotion decisions. Place decisions. Trends in wholesaling

RETAILERS

Retailer is a French word meaning BREAKING THE BULK. Retailer is a trader who breaks the bulk and supplies the goods in small quantities to end consumers for self use or consumption.

Functions of retailers

1. 2. 3. 4. 5. 6. 7. 8. 9.

Breaking the bulk Providing variety and assortment After sales service Display and merchandizing Market intelligence Participates in company promotions Taking risk Warehousing Inventory management

In short the retailer provides the four utilities of marketing that is making the products available at the right time, at the right place, at the right time and enables the consumers to possess the products: possession utility.

Types of Retailers

Convenience stores Provide high level of convenience. Sell mostly food and essential items. Product usually priced low and easy to obtain. Offer limited variety of assortment. Convenient locations Speedy checkout. Usually 1500 to 8000 sq. ft. in area. Modern version of POP & MOM grocery stores. The products sold have following characteristics: Low cost items. Regularly consumed. Purchased very frequently. Sold easily-no hassles of measuring, trying or testing. 7 11 stores of Southland Corporation, Japan having 21,000 outlets.

Super Markets

Conventional super markets are primarily self service food stores. They offer almost all items of daily necessity. Stores are around 30,000 sq. ft. in size. Sell non food items also. Are very promotional and have sales promotions round the year. Offer their own discount coupons. To draw foot fall generally sell fast moving food/items at cost. Appeal to customers on account of low prices self service. Provide neat/clean environment, fast check out counters and attractive organized layouts. Examples of popular international SMs: *Safe Ways * Krogers *A&P *Giant Eagle. *Food lion

Speciality stores

Also called limited line stores. Attract customers by specializing a particular line of merchandise. Large variety in terms of width/depth Usually less than 18,000 sq. ft. Compared to departmental/discount stores Focus on narrow market segment /niche. Customers attracted by their deep assortments, personalized service and intimate stores atmosphere.

Speciality stores-category specialists

Similar to specialty & discount stores offering narrow variety/deep assortments. By offering complete assortment in a category, generate large volumes. Can kill category of merchandize for other retailers and also known as category killers. toys R US account for 40% of toys and games market in the U.S.

Discount stores

Similar to departmental stores in many ways. Offers wide variety of merchandize. Limited service/discounted prices. Charge lower prices than departmental stores Low cost location/ Spartan atmosphere. Usually self service stores. Sales people available only where needed Size usually varies from 80,000 to 150,000 sq. ft. Tend to offer more variety/less depth.

Typically carry fewer brands/sizes in each category. Examples of known discount stores in U.S. are: *Wall Mart, * K. Mart, *Target, *AMES *Family Dollar.

Super stores/combination stores

Large supermarkets with an area ranging between 130,000 /250,000 sq. ft. are known as super stores. Similar to discount stores but stock much larger variety of food products. Combination stores/combo stores are also food based retailers. Also carry non-food merchandize. Usually situated on the outskirts of the city. Popular super stores are: Wall Mart K. Mart Target. Warehouse stores/warehouse clubs

Offer merchandize in no frills environment. Carry mostly non-food merchandize. Generally do not stock refrigerated or perishable items. The size ranges between 250,000 to 400,000 sq. ft. Profits are generated through club memberships. Typically carry only around 2500 items . Merchandize displayed on cut boxes/cartons. Project low price image with no frills/service. Located in low rent areas. Customers attracted because of savings. Sell nationally branded goods at low prices and make low profits as % of sales. Examples: Sams club, Costco, Quality stores, The Price Co.

Hyper Markets

Extremely large self service outlets. Are combination of discount stores and super stores. Built in large warehouse type covering Size varies from 150,000 to 300,000 sq. ft. Stock over 50,000 different items. Highly volume driven

Operate on low margin and prices. Wall Marts Hyper Market at Garland, Texas one of the largest 220,000 sq. ft. Carrefour of France opened its first Hyper Market in 1988 in U.S. at Philadelphia. Area 170,000 sq. ft. Currently Wall Mart, K. Mart focusing on smaller Hyper Markets of 150 000 sq. ft.. They are being called as Super Centers.

Departmental stores

Malls

Multi Tiered large stores. Stock vast range of products department wise. Look like collection of specialty operations under one roof one owner. Broad variety, deep assortment, higher level of customer service. Are run on the principle of increased revenue through high sales volumes. In some situations departments within departmental stores are leased. A leased department in an area within a retail stores that is leased or rented to an independent firm. This is also termed as shop-in-shop concept. A promotional departmental stores is a specialty departmental stores that sells most of its merchandize on weekly promotion. Examples of Departmental stores: J. C. Penny, Nordstrom, Dayton Hudson Bloomingdales

Malls are not retail stores in true sense. Signify common mall in which large no of stores are located. Anchor stores given site at much subsidized rates by the promoter. Anchor stores bring substantial traffic. Apart from monthly rentals, promoters also take % of sales from each tenant.

Catalogue showrooms

Catalogue retailers generally specialize in hard goods like jewelry, furniture, etc A customer walks into the showroom and goes through the catalogue and places the order Generally products in such cases are made to order

Off price retailers

The merchandize is sold at less than the retail prices. Off price retailers buy manufacturers seconds, overruns and /or off seasons at a deep discount . Off price retail outlets could be manufacturer owned or owned by a departmental stores etc. In such a case a case they may sell only one manufacturers products. In other cases they may sell products from various manufacturers.

Consumer cooperatives

Is a retail institution owned by its member customers A consumer cooperative may arise because of dissatisfied consumers, whose needs are not fulfilled by the existing retailers As the members of the cooperatives run the stores there is a limitation on its growth. Examples of co-operatives in India are the Sahakari Bhandars and Apna Bazars in Mumbai

FRANCHISING

A form of licensing by which the owner (franchiser) of a product, service, or business method obtains distribution through affiliated dealers (franchisees) Franchisee pays initial fee plus a percentage of gross revenues for continued support of brands, trademarks, and format at average rate

Types of franchising

Product Franchising

Product Franchising dealer acquires some of the identity of supplier as a franchisee concentrating on one companys product line and identifying their business with that company. Bottling companies, beer distributorships, petroleum and automotive distributorships.

Business Format Franchising:

The right to license a business or trade style as opposed to selling a particular product. Utilizes franchisers business concept which could include a marketing plan, operating standards and manuals. Howard Johnson, McDonalds, Kentucky Fried Rodent.

Master Franchising: fund individual franchisees. Sub-Franchising: parent has no involvement with individual franchisees. Area Development Franchising: allows area developers to seek independent franchisees or set up individual franchise units of their own.

Advantages to Franchisees

The business has an accepted product, name, or service that can lead to rapid attainment of sales potential. Managerial assistance and training for starting and operating the business often are available from the franchiser. Starting a franchise operation may require less capital than starting a new business. The franchisee gains access to the franchisers accumulated knowledge and experience with the market. The franchise operation has an established structure of controls that the franchisee can use to manage the operation. Franchisee gets cost savings of bulk pricing and buying advantage. The franchise structure can align incentives of franchise operators and substitute for more intensive monitoring and control. Franchiser gets fees from franchisee up front. Franchiser gets an ongoing royalty Franchisees contracts are often biased towards the franchiser. Royalties come out of gross revenues, NOT net profits