NITIE,

Mumbai
Chap 13 Physical
Distribution

Dipak Ramchandra Sutar

Chapter 13 Physical Distribution

Physical distribution is the movement of materials from the producer to the consumer. This
movement of materials is divided into two functions: Physical supply is the movement and storage of
goods from suppliers to manufacturing. Physical distribution is the movement and storage of
finished goods from the end of production to the customer. The particular path in which the goods
move through distribution centers, wholesalers, and retailers is called the channel of distribution.

A channel of distribution is one or more companies or individuals who participate in the flow of
goods and/or services from the producer to the final user or consumer. The transaction channel is
concerned with the transfer of ownership. Its function is to negotiate, sell, and contract. The
distribution channel is concerned with the transfer or delivery of the goods or services.

To extend markets requires a well-run distribution system. Distribution adds place value and time
value by placing goods in markets where they are available to the consumer at the time the consumer
wants them. The specific way in which materials move depends upon many factors, some of which
are the channels of distribution that the firm is using, the types of markets served, the characteristics
of the product, and the type of transportation available to move the material.

Physical Distribution System

The objective of distribution management is to design and operate a distribution system that attains
the required level of customer service and does so at least cost. To reach this objective, all activities
involved in the movement and storage of goods must be organized into an integrated system.

In a distribution system, six interrelated activities affect customer service and cost of providing it:
Transportation, Distribution inventory, Warehouses (distribution centers), Materials handling,
Protective packaging and Order processing and communication.

National Institute of Industrial Engineering | Chap 13 physical distribution

The objective of distribution management is to provide the required level of customer service at the
least total system cost. Management must treat the system as a whole and understand the
relationships among the activities.

Interfaces

The marketing mix is made up of product, promotion, price, and place, and the latter is created by
physical distribution. Marketing is responsible for transferring ownership. Physical distribution is
responsible for giving the customer possession of the goods and does so by operating distribution
centers, transportation systems, inventories, and order processing systems. Physical distribution
contributes to creating demand. Prompt delivery, product availability, and accurate order filling are
important competitive tools in promoting a firms products. The distribution system is a cost, so its
efficiency and effectiveness influence the companys ability to price competitively. All of these affect
company profits.

Physical supply establishes the flow of material into the production process. The service
level must usually be very high because the cost of interrupted production schedules caused
by raw material shortage is usually enormous. Cost and availability or transportation for raw
materials to the factory and the movement of finished goods to the marketplace are important
factors in factory site selection. Unless a firm is delivering finished goods directly to a
customer, demand on the factory is created by the distribution center orders and not directly
by the final customer. This can have severe implications on the demand pattern and the
efficiency at the factory.

Transportation

The carriers of transportation can be divided into five basic modes: Rail, Road (including trucks,
buses, and automobiles), Air, Water (including ocean going, inland, and coastal ships), and Pipeline.
Each mode has different cost and service characteristics.

To provide transportation service, any carrier, whatever mode, must have certain basic physical
elements, ways, terminals, and vehicles. Ways are the paths over which the carrier operates.
Terminals are places where carriers load and unload goods to and from vehicles and make
connections between local pickup and delivery service and line-haul service. Vehicles of various
National Institute of Industrial Engineering | Chap 13 physical distribution

types are used in all modes except pipelines. They serve as carrying and power units to move the
goods over the ways.

Carriers are legally classified as public (for hire) or private (not for hire). In the latter, individuals or
firms own or lease their vehicles and use them to move their own goods. Public transport, on the
other hand, is in the business of hauling for others for pay. All modes of transport have public and
for-hire carriers. For-hire carriers are subject to economic regulation by federal, state, or municipal
governments. Economic regulation has centered on three areas: regulation of rates, control of routes
and service levels, and control of market entry and exit. Private carriers are not subject to economic
regulation but, like public carriers, are regulated in such matters as public safety, license fees, and
taxes. A for-hire carrier may carry goods for the public as a common carrier or under contract to a
specified shipper as a contract carrier.

Transportation Cost Elements

The four basic cost elements in transportation are line haul, pickup and delivery, terminal handling,
and billing and collecting. The total cost of transportation consists of line-haul, pickup and delivery,
terminal handling, and billing and collecting costs. To reduce shipping costs, decrease line-haul costs
by increasing the weight shipped, decrease pickup and delivery cost by reducing the number of
pickups, decrease terminal-handling costs by decreasing the number of parcels by consolidating
shipments, and decrease billing and collecting costs by consolidating shipments.

The fate charged by a carrier will also vary with the commodity shipped and will depend upon the
value, density, perishability, and packaging.

Warehousing

The service functions warehouses perform can be classified into two kinds: (1) The general
warehouse where goods are stored for long periods and where the prime purpose is to protect goods
until they are needed. (2) The distribution warehouse has a dynamic purpose of movement and
mixing. The emphasis is on movement and handling rather than storage. The size of the warehouse
is not so much its physical size as it is the throughput, or volume of traffic handled. Items should be
warehoused only if there is an offsetting benefit gained from storing them.

Warehouses serve three important roles: transportation consolidation, product mixing, and service
National Institute of Industrial Engineering | Chap 13 physical distribution

Any distribution system should try to provide the highest service level (the number of orders
delivered in a specified time) at the lowest possible cost. See example problem on page 347.

The market boundary is the line between two or more supply sources where the laid-down cost is
the same. Laid-down cost (LDC) is the delivered cost of a product to a particular geographic point. .

Packaging

The basic role of packaging in any industrial organization is to carry the goods safely through a
distribution system to the customer. The package must do the following: identify the product,
contain and protect the product and contribute to physical distribution efficiency. There are usually
at least three levels of packaging required in a distribution system, primary package, shipping
container, and unit load.

Unitization is the consolidation of several units into large units, called unit loads, so there is less
handling. A unit load is a load made up of a number of items, or bulky material, arranged or
constrained so the mass can be picked up or moved as a single unit too large for manual handling.
The most common unit-load is the pallet. To get the highest cube utilization in the capacity of
pallets, trucks or other vehicles, and warehouses, there should be some relationship between the
dimensions of the product, the primary package, the shipping cartons, the pallet, the truck, and the
warehouse space.

Reference

1. Introduction to Material management: Fifth Edition J. R. Tony Arnold, Stephen N.

National Institute of Industrial Engineering | Chap 13 physical distribution