Physical Distribution

Physical Distribution
The activities associated with the
movement of material, usually finished
goods or service parts, from the
manufacturer to the customer
APICS 12th Edition Dictionary
Physical Distribution
Physical Supply
goods moving from supplier to manufacturer
inbound
Physical Distribution
goods moving from manufacturer to
customers
outbound
Physical Distribution
Figure 13.1 Supply chain (logistics system)
Channels of Distribution
Any series of firms or individuals that
participates in the flow of goods and
services from the raw material supplier and
producer to the final user or consumer.
APICS 12th Edition Dictionary
Channels of Distribution
Company may deliver directly to
customers
Use other companies or individuals to
deliver goods
Intermediaries
wholesalers agents
transportation companies warehousers

Distribution Channels
Transaction channel
negotiate, sell, contract
concerned with the transfer of ownership (and
money)
Distribution channel
concerned with the delivery of goods or
services
Distribution Channels
Figure 13.2 Separation of distribution and transaction channels
Physical Distribution
Adds place value
by delivering goods to customers
Adds time value
by delivering goods when customers want
them
The Way Materials Move
Depends on:
the channels of distribution being used
the types of markets served
geographic dispersion
number of customers
the characteristics of the product
type of transportation available
Reverse Logistics
A complete supply chain dedicated to the
reverse flow of products and materials for
the purpose of returns, repair,
remanufacture, and/or recycling.
APICS 12th Edition Dictionary
Reverse Logistics
Can represent major costs to a company
Amount of goods returned
up to 50% in the publishing industry
90% of automotive starter motors or
alternators
Reverse Logistics - Information
Goods are returned to supplier
Information is also needed
reason / approval for the return
credit information
Information
Reverse Logistics
Supplier Customer
Returned Goods
Reverse Logistics
Green Logisitics
Return and disposal of packaging
materials
Return and disposal of environmentally
sensitive materials
heavy metals
solvents
Use of reusable (returnable) packaging
Returned Goods
quality demands by customers
damage or defects
excessive inventories
seasonal inventories
out-of-date inventories
remanufacturing or refurbishment
Returned Goods - Disposition
Returned to inventory
Refurbished for resale
Sold into alternate markets
Disassembled to retrieve components
Sorted for material recovery
V
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Physical Distribution - Activities
1. Transportation
2. Distribution inventory
3. Warehouses
4. Materials handling
5. Protective packaging
6. Order processing
Transportation
Movement of goods
Highest portion of distribution costs
30 - 60%
Adds place value to the product
Distribution Inventory
Includes all finished goods anywhere in
the distribution system
Second highest cost of distribution
25 - 30%
Inventories add time value to the product
Warehouses
Used to store inventory
improved customer service
transportation efficiencies
Warehouse management concerned with:
site selection, number of warehouses
layout and methods of receiving, storing and
retrieving goods
Materials Handling
Movement and storage of goods within a
distribution center
Type of equipment used affects the costs
of operation
High capital cost
Tradeoff between capital cost and
operating (labor) cost
Protective Packaging
Containment, protection and identification
Packages must fit in storage spaces and
transportation vehicles
item
package
carton
pallet
container
Order Processing
The activity required to administratively
process a customers order and make it
ready for shipment or production.
APICS 12th Edition Dictionary
Represents an element of time in a
customers order
Important part of customer service
May involve intermediaries
Total Cost Concept
Provide the required level of customer
service at the least total system cost
Cost reduction should not involve only one
area of cost
Changes in one activity will affect other
activities, total system cost and customer
service
Total Cost Concept - Example Problem
A company normally ships a product by rail. Transport by
rail costs $200, and the transit time is 10 days. However,
the can be moved by air at a cost of $1000 and it will take
one day to deliver. The cost of inventory in transit is $100
per day. What are the costs involved in the decision?
Rail Air
Transportation Cost $ 200 $1000
Inventory Carrying Cost 1000 100
Total $1200 $1100
Total Cost Concept
Cost trade-off
a cost decrease in one area may incur a
smaller increase in another area
Total cost
consider all of the costs
increases in one area are offset by reductions
in other areas
Keep customer service in mind
Global Distribution
Differences in:
Distance
Language
Currency
Measurement
Distance
Further away
longer transport time
different time zones
different working days

The Internet makes this easier
Language
Biggest problem - errors in translation

Use of the Internet
written transactions
Currency
Need for exchange and fund transfers
Currency fluctuations
risks
Measurement Systems
Metric versus Imperial system

Units of measure e.g.
Ton 907 Kg
Tonne 1000 Kg
long ton 1016 K6
Standards
ISO (International Organization for
Standardization)
Geneva Switzerland
Incoterms (International Commercial
Terminology)
Standard size containers
3PLs Third Party Logistics Providers
Provide a wide range of logistics services
Delivery
Warehousing
EDI
Freight Forwarding
Packaging
3PLs Third Party Logistics Providers
Can provide the service at less cost
They have the equipment and networks
Can react to seasonal increase
Reverse logistics
Examples:
Fed Ex
Kuehne and Nagel
DHL
Interfaces
A bridge between:

Marketing

Production
Marketing
Product
Promotion
Place
Price
Created by
Physical
Distribution
Interface with Marketing
Marketing is responsible for the transfer
of ownership
selling, advertising, sales promotion,
merchandising and pricing

Physical distribution is responsible for
delivering the goods
contributes to creating demand
prompt delivery, availability of product, accurate
order filling
Interface with Production
Production requires a steady flow of raw
materials and components
interruptions are very expensive
Factory location may depend on the
transportation cost
raw materials
finished goods
Factory demand is created by
distribution centers
Transportation - Modes
Rail
Road
Air
Water
Pipeline

Vary by flexibility and operating cost
Transportation Costs
Fixed Costs
the costs that do not change with the volume
moved
buildings, equipment, land
Variable Costs
the costs that change with the volume moved
fuel, maintenance, wages
Transportation Costs
Ways
road, water, air
Terminals
where goods are loaded or unloaded
Vehicles
equipment used to move goods

Transportation Costs
Ways
land, water, road, space, etc over which
goods are moved
may be owned by the operator (railroad
tracks), operated by the government (roads,
canals) or mother nature (ocean)
Transportation Costs
Terminals
Used to sort, load and unload goods
connection between line-haul and local
deliveries
connection between different modes or
carriers
dispatching, maintenance, administration
Transportation Costs
Vehicles
owned or leased by the carrier

Other (fixed or variable)
maintenance
administration
fuel
labor
Rail
Provide own ways, terminals and
vehicles
large capital investment
need high volume
modest flexibility

Used for bulky commodities over long
distances
Road
Pay for ways through taxes or tolls
Provide their own terminals
Vehicle cost though large, is smaller than
vehicle costs for water or rail
Door-to-door service (very flexible)
Used for small volume goods to many
delivery locations
Air
Uses government provided terminals and
air traffic control systems (ways)
High variable costs for fuel and operating
costs
Most expensive mode
Used for high value, low weight goods
over long distances
Water
Nature provides ways
canals are government controlled
Carrier pays for use of terminals
Carrier owns the ships
Operating cost is very low
Slow and not very flexible
Used for low value bulk cargo over long
distances
Pipelines
Very high capital costs
Operating costs are very low
Not flexible!

Used for high volume gases or liquids
moving from point to point
Legal Types of Carriage
Public
for hire
subject to regulations
rates
routes
market served
Private
not for hire
For Hire Carriers
Common carriers
licensed to carry only certain goods
available to public
designated points or areas served
scheduled service
Contract carriers
provides specific service to a shipper
Private Carriers
Need to buy and operate their own
equipment
Carry their own goods
licenses are still required
Very high volume to justify expense
Transportation - Service Capability
The control the shipper has over the
transportation agency
very high with private ownership
Common carriers have established
schedules
Must consider: timing of pickups and
delivery, speed of service, flexibility of
delivery location, other services
Other Transportation Agencies
Use combinations of modes
Freight Forwarders
Post Office
Couriers

Agencies make use of load consolidation
Transportation Cost Elements
Line haul
Pickup and delivery
Terminal handling
Billing and collecting

Principles are the same for all modes
Transportation Cost Elements
Figure 13.3 Shipping patterns
Line Haul Costs
Fuel, labor, depreciation
Approximately the same per mile whether
full or empty

LHC = Total Line-Haul Cost
Distance Travelled
Line-Haul Costs - Example
For example, for a given commodity, the line-haul cost is
$3 per mile and the distance shipped is 100 miles. The total
line-haul cost is therefore, $300. If the shipper sends
50,000 pounds, the total line haul cost is the same as if
10,000 pounds were shipped. However the line-haul cost
per hundred weight (cwt) will vary.
LHC
50,000 lbs
= $300 = $.60 per cwt
500
LHC
10,000 lbs
= $300 = $3.00 per cwt
100
Line-Haul Costs
Total line-haul cost varies with:
cost per mile
distance moved
weight moved
Line-haul Cost - Example
For a particular commodity, the line-haul cost is $2.50 per
mile. For a trip of 500 miles and a shipment of 600 cwt,
what is the cost of shipping per cwt? If the shipment is
increased to 1000 cwt, what is the savings per cwt?
Cost
600
=($2.50 x 500) / 600 = $2.083 / cwt

Cost1000 = ($2.50 x 500) / 1000 = $1.25 / cwt

Savings = $2.083 - 1.25 = $0.833 / cwt
Increasing Weight Shipped
Truck will have a weight limitation
Some products have a low density and the
truck is filled before the weight limitation is
met

Therefore, nest products or ship products
unassembled to increase the weight
shipped

Shipping un-assembled




Shipping Cost - Example
A company ships barbecues fully assembled. The
average line-haul cost is $12.50 per mile, and the
truck carries 100 assembled barbecues. The
company decides to ship the barbecues
unassembled and can ship 500 barbecues in a
truck. Calculate the line-haul cost per barbecue
assembled and unassembled. If the average trip is
300 miles, calculate the savings per barbecue.
Shipping Cost - Example
Line-haul cost
assembled
= $12.50/100 =$0.125 / bbq / mile

Line-haul cost
unassembled
= $12.50/500 =$0.025/ bbq/mile

Savings per mile = $0.125 - 0.025 = $0.10 / bbq / mile

Trip savings = 300 miles x $0.10 / bbq/mile

=$30 per barbecue
probably worth the
cost of assembly
at the buyers
Pickup and Delivery Costs
Depends on time spent (not distance)
Charged for each pickup

Therefore, consolidate multiple shipments
to avoid many trips
Terminal Handling
Cost depends on how many times the
shipment must be handled
Full truckloads (TL) go directly to the
customer
Less than truckloads (LTL) must be sent to
a terminal, sorted and consolidated
Therefore, consolidate shipments into
fewer parcels
Billing and Collecting
Costs of paperwork
Costs of invoicing

Therefore, reduce the number of pickups
and pieces shipped (consolidating)
Total Transportation Costs
Line-haul + pickup and delivery + terminal
handling + billing and collecting
To reduce costs:
increase the weight shipped (line-haul cost)
reduce the number of pickups (pickup and delivery
cost)
decrease the number of parcels (terminal handling
costs)
consolidate shipments (billing and collecting costs)
Distance Versus Cost of Carriage
T
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Distance
Fixed Cost: pickup, and delivery
terminal handling, billing and collecting
Rate Charged - Other Factors
Value - to cover carriers liability
Density - can affect the total weight
shipped
Perishability - may require special
equipment i.e. refrigeration
Packaging - to reduce the risk of damage
and breakage
Warehousing
Plant warehouses
Regional warehouses
Local warehouses
Wholesalers
Public warehouses
Warehousing - Services
General warehouse
storage and protection of goods
need to minimize handling and movement
Distribution warehouse
goods are received in large volumes
goods are then sorted and consolidated into
customer orders
concerned with throughput
Role of Warehouses
Transportation consolidation
Product Mixing
Service
Transportation Consolidation
Reduces transportation costs
Truckload (TL) shipments to warehouse
Less than truckload (LTL) shipments to
local customers
Break-bulk
breaking down large shipments from factories
into small shipments for local buyers
Product Mixing
Avoids many small LTL shipments
Customers want a mix of products often
from different manufacturers or locations
The distribution center can assemble
many small items into one shipment
Service
Local distribution centers can improve
customer service by being close to the
customer
Faster response time
Improved variety of products
May add value
e.g. customer specific labelling
Product Mixing
Figure 13.6 Product mixing
Warehousing and Transportation Costs
Number of customers
Geographic distribution of
customers
Customer order size
Number and location of
plants and distribution
centers
Customer
Service
$
Warehousing and Transportation Costs
- Example Problem
A plant located in Toronto is serving customers in the
Boston area. If they ship direct to customers most
shipments will be LTL. However if they locate a distribution
center in Boston they can ship TL to the warehouse and
LTL from the warehouse to the local customers. Costs are
as follows:
Plant to customer (LTL) = $100 / cwt
Plant to distribution center (TL) = $50 / cwt
Distribution center = $10 / cwt
Distribution center to customer (LTL) = $20 / cwt
Warehousing and Transportation Costs
- Example Problem
Costs if a distribution center is used:
TL Toronto to Boston = $50 per cwt
Distribution center costs = $10 per cwt
LTL Boston area = $20 per cwt
Total cost = $80 per cwt

Savings per cwt = $100 - $80 = $20 per cwt

Annual savings at 10,000 cwt = $20x10,000 = $200,000
Market Boundaries
The line between two methods of
distribution where the laid down cost is the
same.

Deciding which customers should be
served from which location

Laid-down cost (LDC)
The sum of the product and the
transportation costs. The laid-down cost is
useful in comparing the total cost of a
product shipped from different suppliers
from a customer point of view
APICS 12th Edition Dictionary
Laid-down Costs - Example Problem
Syracuse is 300 miles from Toronto. The product cost is
$10 per cwt, and the transportation cost is $0.20 per mile.
What is the laid down cost per cwt?

LDC = Product cost +(transn cost per mile x distance)
= $10 + ($0.20 x 300)
= $70 per cwt
Market Boundary - Example Problem
Figure 13.7 Market boundary
Market
Boundary
Market Boundary - Figure 13.7
In the example, the distance between A and B is 100 miles. If we
let the distance from A to Y be X miles, then the distance from B to
Y is (100 - X) miles. Assume supply A is the factory and B is a
distribution center. Assume the product cost from A is $100 and
from B is $110 which includes inventory and TL costs to the
distribution center. LTL costs are $40 per unit per mile from either
location.
LDC
A
= LDC
B
100 + 0.40X = 110 + 0.40(100 - X)
X = 62.5 miles

Customers within 62.5 miles from the factory, ship direct. The rest
of the customers, ship from the distribution center.
Market Boundary - Example Problem
The distance between Toronto and Boston is
about 500 miles. Given the cost structure in the
previous example, calculate the location of the
market boundary between Toronto and Boston.
Assume the product cost at Toronto is $10 per
cwt.
Product cost at Boston = product cost at Toronto
+ TL transportation
+ handling costs

Market Boundary - Example Problem
Product cost at Boston
= product cost at Toronto + TL transportation + handling
= $10 + $50 + $10 = $70
LDC
T
= LDC
B

$10 + $0.20X = $70 + $020(500 - X)
0.4X = 160
X = 400
The market boundary is 400 miles from Toronto or 100
miles from Boston. Ship orders direct within 400 miles from
Toronto. Closer to Boston ship from Distribution Center in
Boston.
Effect of Adding More Warehouses
As more distribution centers are added:
TL shipments to DCs will increase
LTL costs to customers will decrease
Total cost of transportation will decrease
Effect of Adding More Warehouses
Figure 13.8 Transportation cost versus number of warehouses
Packaging
Identifies product
may be part of marketing promotion
size, description, date of manufacture
Contains and protects the product
movement
environment
Contributes to distribution efficiency
handling in larger quantities
Packaging
Primary package
holds the product for the consumer
e.g. a box of cereal
Secondary package
contains small products for distribution
e.g. a corrugated carton
Unit load
e.g. a pallet
Unitization
In warehousing, the consolidation of
several units into larger units for fewer
handlings.
APICS 12th Edition Dictionary
Container
Box Pallet
Pallets
Standard sizes
e.g. 48x40x4 (grocery)
Sized to fit into further unitized loads
e.g. railcar, truck, container
Handled by fork lift trucks
Materials Handling
Objectives:
Increase the cube utilization
use as much height as possible
keep aisles to minimum
Improve operating efficiency
increase the load per move
Improve speed of response
Equipment
Conveyors
move in a fixed route, consume space
need high volumes
Industrial trucks
can move anywhere in the plant
do not consume fixed space
Cranes and hoists
make use of overhead space
Pallet Position Plan
Figure 13.10 Railcar and trailer pallet position plan
Multi-Warehouse System
+ Transportation costs
+ Inventory-carrying cost
+ Warehousing costs
+ Materials handling costs
+ Packaging costs
= Total system cost

System service capability
Transportation Costs
TL shipments will be made over long
distances
LTL shipments to customers will be
shorter
Total costs decrease with more
warehouses
diminishing effect as more warehouses are
added
Inventory-Carrying Cost
Inventory
order quantity - stays the same
safety stock
increases with the number of warehouses
varies with the square root of the change

SS
new
= SS
old
Previous # of warehouses
New # of warehouses
Inventory Carrying Costs
A company is considering adding a warehouse. For an
item with an average demand of 1000 units each
warehouse will have a demand of 500 units.
The safety stock in one warehouse was 100 units for a
service level of 90%. What is the new safety stock?
SS = 100 x 500 = 71 units (in each warehouse)
1000
Warehousing Costs
+ Space for additional inventory
+ Duplication of non-storage space
offices, washrooms, lunchrooms
+ Duplication of support staff
supervisory, clerical, support
Materials Handling Costs
Number of units handled will remain the
same
As number of warehouses increase, the
size of the loads handled will decrease
Handling of non-unitized loads
increases costs
Packaging Costs
Per unit costs remain the same

Total costs increase with inventory
Total System Cost
Figure 13.11 Total system cost
System Service Capability
Customer service (speed of delivery)
improves with more distribution centers
diminishing effect as more DCs are added
Must consider cost of service with total
system cost
System Service Capability
Figure 13.12 Estimate of market reached versus number of warehouses
System Service Capability
3 distribution centers provide the lowest total
system cost
Figure 13.13 Cost versus number of warehouses