Physical Distribution

“When is a refrigerator not a refrigerator?”“When it is in Pittsburgh at the time it is desired in Houston.”

Activities concerned with efficient movement of products and raw materials from producers to consumers

….this is where the box goes.

Physical Distribution

Why study in a marketing course?

Marketing loses the sale, not physical distribution managers.

Critical cost area20% of GNP

1/2 of marketing costs

1/4 of total product costs

1/3 of food costs

Physical Distribution

Why study in a marketing course? (cont.)

Key interactions with marketing mix variables

Key corporate strategic areamilitary origins

a buffer for manufacturing

a cost for finance

a selling necessity

Physical Distribution

Why is p.d.m. “ignored” in marketing courses?Lack of glamour

Quantitative nature of courses

Not a major area of research interest for behavioral faculty

Demand > Supply for logistics majorsEspecially at BBA level

Recession proof career area

Physical Distribution

Total Cost Perspective

Minimize total cost of physical distribution for a given level of customer service.

Cost-service orientation versus revenue enhancementA different way of managing assets

Physical Distribution

Visible and hidden costswarehouse, transportation, inventory carrying costs

stockout - lost profits due to failure to deliver

Visible and Hidden costs tradeoffvisible costs tradeoff against each other

…and together against hidden costs

Zero Sub-optimizationdo not optimize one functional cost area to detriment of total costs

Physical Distribution

Customer Service StandardsRelate back to buyer behavior

Must be specificorder processing and delivery time

assortments

order size constraints

Must be coordinated with rest of marketing strategyThis is how p.d. managers are constrained

Physical Distribution

Warehousing

Receive, identify, sort, store merchandiseEfficiency in production requires manufacturing operations to be

centralized and continuous, but demand is decentralized and not continuous.

Used to hold inventory as a bufferDemand for warehouses is a function of the need for inventory.

Physical Distribution

Warehousing (cont.)

What type?Private versus public

How many?Centralized or decentralized

Where?Near factory or near customers

Physical Distribution

Warehousing (cont.)

Private owned by firm that owns the inventory inside

stable inventory levels

peculiar handling requirements

high volume

Physical Distribution

Warehousing (cont.)

Publicrented space

highly seasonal demand

low volume

Physical Distribution

Warehousing (cont.)

– Centralized

warehouse customer

customer

customer

Lower warehouse cost, lower inventory cost, higher transportation costs

Physical Distribution

Warehousing (cont.)

– Decentralized

warehouse field warehouse

customer

customer

higher warehouse cost, higher inventory cost, lower transportation costs

customer

Physical Distribution

Inventory Management

Match quantity produced with quantity demandedholding costs

ordering costs

stockout costs

Physical Distribution

Inventory Management (cont.)

When to reorder?

How much to reorder?

How much to keep as safety stock?

Key is accurate forecasting…of demand

…order filling time

Physical Distribution

Inventory Management (cont.)

time

Stock on hand

placeorder

receiveorder

order filling time

Zero safety stock model

Physical Distribution

Inventory Management (cont.)

time

Stock on hand

placeorder

receiveorder

If demand increases...stockout

safety stock

Physical Distribution

Inventory Management (cont.)

time

Stock on hand

placeorder

receiveorder

If order filling time increases...

stockout

safety stock

Physical Distribution

Transportation Management

What mode?

What route?

Physical Distribution

Transportation Management (cont.)

Modeswater

bulk, low value, slow

inland waterways heavily subsidized by government

railflexible, long-haul, bulk, still slow, rough (high damage)

dominant mode in ton-miles

Physical Distribution

Transportation Management (cont.)

Modes (cont.)Motor Carriers (trucks)

flexible, medium to short haul, high theft only true door-to-door modedominant mode in number of shipments

Airfast, high value, light weightflexible but expensive

Pipelineliquids and near liquids, inflexible, high fixed cost, not vc

Physical Distribution

Transportation Management

Trendsincreased use of air freight

truck trains - “double,” “triple” bottoms

rail making comeback3:1 fuel efficiency advantage over trucks

10:1 + over planes

subsidies on inland waterways decreasing

deregulation has led to increase in intermodal firms

Physical Distribution

Symptoms of Poor PDMlow inventory turnover

6-12 times a year minimum

stockoutinventory = 2 mos. Sales > 99% in stockinventory = 1 mo. Sales > 90% in stock

interwarehouse shipmentsdo not ship it to yourself

frequent use of premium freightinstead of what system was designed to use

Physical Distribution

PD Management Trendsincreasing importance relative to the rest of operations, marketing

increasing fuel costs

international complexityrail traffic in Europe

increasing opportunities…Supply Chain Management,recycling