Chapter 2

PHYSICAL FLOWS
The objective of logistics process is to get the
right quantity and quality of materials
(or services) to the right place at the right time,
for the right client, and at the right
price.
The Council of Supply Chain Management Professionals
(CSCMP) defines the logistics management as follows:

Logistics management is that part of supply chain

management that plans, implements, and controls the
efficient, effective forward and reverses flow and
storage of goods, services and related information
between the point of origin and the point of
consumption in order to meet customers’
requirements.
The entire process of logistics, which deals with the moving
of materials into, through, and out of a firm, can be divided
into three parts:
01 02
1 inbound logistics

2 materials management

3 outbound logistics
inbound logistics

Inbound logistics is the way

materials and other goods are
brought into a company. This
process includes the steps to
order, receive, store, transport
and manage incoming supplies.
Inbound logistics focuses on the
supply part of the supply-
demand equation.
material management

Materials management is the

process of planning and
controlling material flows. It
includes planning and procuring
materials, supplier evaluation
and selection, purchasing,
expenditure, shipping, receipt
processes for materials
(including quality control),
warehousing and inventory, and
materials distribution.
outbound logistics

Outbound logistics focuses on

the demand side of the supply-
demand equation. The process
involves storing and moving
goods to the customer or end
user. The steps include order
fulfilment, packing, shipping,
delivery and customer service
related to delivery.
TRANSPORTATION SYSTEM

Firms and their products’

markets are often separated
geographically. Transportation
increases the time and place
utility of products by delivering
them at the right time and to the
right place where they are
needed.
 TRANSPORTATION MODES

1. Road Rail 2.
01 02

3. Air Water 4.

5. Pipeline Digital 6.
A B
 ROAD

Road transport—also known as highway, truck, and motor carriage—steadily

increased its share of transportation.
 ROAD

Advantages Disadvantages
• Cost effective; • Subject to traffic delays;
• Flexible (door-to-door) and versatile • Subject to breakdown;
(having the widest range of vehicle • Goods susceptible to damage through
types). careless driving;
• Fast delivery; • Bad weather;
• Ideal for short distances, national or • Driving regulations can cause delays;
mainland; • Legislative control and driver fatigue
• Ideal for transporting perishables (e.g. are some problems of motor carriers’
fruits and vegetables). long journeys
• Easy to monitor location of goods.
• Easy to communicate with driver.
• Ideal for sending by courier shortages
to customers.
 RAIL

The second dominant mode of transportation. However, in some

countries such as the People’s Republic of China, the countries of the
former Yugoslavia, and Austria, rail remains the dominant transportation
mode.
 RAIL

Advantages Disadvantages
• Fast delivery; • Subject to unforeseen delays;
• Capacity; • Reliance on rail freight operator’s
• Cost Effective; timetable;
• Safe mode of transport; • Suppliers/customers are not always
• Reliable located near a rail freight depot and
delivery to/from the depot can be
costly and time consuming.
 AIR

Airfreight offers the shortest time in transit (especially over long distances)
of any transport mode, most shippers consider air transport as a premium
emergency service because of its higher costs.
 AIR

Advantages Disadvantages
• Fast delivery, usually between 24 • Flight delays and/or cancellations
hours and 48 hours. • Customs and Excise restrictions
• Customer is not kept waiting for order • Costly
fulfillment.
• Reduced lead time on supplier.
• Improved service levels.
 WATER

Water carriage—as the oldest mode of transportation.

Water carriage by nature is particularly suited for movements of heavy, bulky,
low-value-per-unit commodities that can be loaded and unloaded efficiently by
mechanical means in situations where speed is not of primary importance.
 WATER

Advantages Disadvantages
• Ideal for transporting heavy and bulky • Longer lead/delivery times
goods • Bad weather
• Suitable for products with lead times • Difficult to monitor exact location of
goods in transit
• Customers and Excise restrictions
• Could be costly
 PIPELINE

Pipeline systems were mainly developed for transporting large volumes of

products, often over long distances. Pipelines tend to be product specific,
which means they are used for only one particular type of product
throughout their design life
 PIPELINE

Advantages Disadvantages
• They are ideally suited to transport the • It is not flexible, i.e., it can be used
liquids and gases. only for a few fixed points.
• Pipelines can be laid through difficult • Its capacity cannot be increased once
terrains as well as under water. it is laid.
• It involves very low energy • It is difficult to make security
consumption. arrangements for pipelines.
• It needs very little maintenance. • Underground pipelines cannot be
• Pipelines arc safe, accident-free and easily repaired and detection of
environmentally friendly leakage is also difficult.
 DIGITAL

Digital or electronic transport is the fastest mode of transportation. Besides its

high speed, digital transport is cost efficient and benefits from its high
accessibility and flexibility. However, only a limited range of products can
be shipped by this mode, including electric energy, data, and products
such as texts, pictures, music, movies, and software, all of which are
composed of data
 INTERMODAL

In addition to the six basic modes of transportation, several

intermodal combinations are available to shippers. Such
combinations can lead to transportation services with cost and
service characteristics that rank between those of the single
modes. In fact, intermodalism combines the cost and service
advantages of two or more transportation
modes.
 INTERMODAL

10 POSSIBLE INTERMODAL SERVICE COMBINATIONS

1 2 3 4 5 6 7 8 9 10

Rail Rail Rail Rail Road Road Road Water Water Air
Road Water Air Pipeline Air Water Pipeline Air Pipeline Pipeline

These are combinations in theory, but in practice only a few of them turn out to be convenient.
The most frequent combined intermodal services are railroad (“piggyback”),
roadwater (“fishyback”), and roadair (“birdyback”). Roadwater combinations are gradually
gaining acceptance, especially for international shipments of high-valued products. However,
only railroad combinations have seen widespread use throughout the world
CHARACTERISTICS OF TRANSPORATION
MODE
 OTHER TRANSPORT OPTIONS
In addition to the options previously explained, there exist other important entities in
transportation systems. These entities, whether unimodal or multimodal in scope, include -
third parties that provide various services to shippers. Themajor alternatives are:

Shipper’s Third Party

Brokers Logistics Service
Association
Provider

Freight Intermodal
Small Package
Forwarder Marketing
Carrier
Company
 FREIGHT FORWARDER

Freight forwarders or forwarding agents are agencies that

organize the freight shipments of other companies or
individuals. They often do not own transport equipment
FREIGHT FORWARDER

except for pickup and delivery operations. Freight forwarders

purchase long-distance transport services from truck, rail,
air, and water carriers. Then they consolidate numerous
small shipments of different shippers into large shipments.
After transporting the bulk load through one or more of the
basic modes to a destination, they split the load into the
original smaller quantities.
 SHIPPER’S ASSOC. COOPERATIVE

A shippers’ association is a nonprofit transportation

SHIPPERS ASSOC. COOPERATIVE

membership cooperative that organizes the domestic or

international shipments for member companies. These
associations consolidate the small shipments of their
members into vehicle-load freight so that small and medium
shippers can also benefit from the economies of scale. They
contract with motor, rail, air, and water carriers to physically
move their members’ cargo, benefiting both shippers and
carriers.
 INTERMODAL MKTG. COMPANIES

Shippers’ agents or intermodal marketing companies (IMCs)

INTERMODAL MKTG. COMPANIES

are important intermodal links between shippers and carriers.

These agencies are much like shippers’ associations in their
operations, but they offer specialized TOFC or COFC services
to shippers. They purchase large quantities of piggyback
services at discount rates and then resell the available
services in smaller quantities to the shippers. Similar to
shippers’ associations, these companies are not licensed by
the ICC, and their importance is increasing as the use of
intermodal transportation is growing in today’s world

Piggyback service combines the convenience and

flexibility of short-haul trucking and the long-haul
economy of rail transportation.
 BROKERS

Brokers are the intermediaries that organize the

transportation of products for shippers, consignees, and
carriers and charge a fee to do so. Besides providing timely
information about rates, routes, and capabilities to bring
BROKERS

shippers and carriers

together, brokers also provide other services such as rate
negotiation, billing, and tracking. These agents are subject to
the same regulations that apply to carriers,
and they are all licensed by the ICC.

Interstate Commerce Commission (ICC)

 SMALL PACKAGE CARRIER

Small-shipment delivery services can be important

SMALL PACKAGE CARRIER

transportation options for many shippers. Electronics firms

and cosmetic companies, as well as book distributors and
catalog merchandisers, are examples of these shippers. Well-
known small package carriers include the US Postal
Service’s parcel post, United Parcel Service (UPS), and air-
express companies.
 THIRD PARTY LOGISTIC SERVICE
PROVIDER
THIR PARTY LOGISTIC SERVICE

Nowadays, more companies are outsourcing their logistics

functions to third-party logistics service providers, as the
emphasis on supply-chain management has increased. Third-
PROVIDER

party logistics providers, commonly referred to as 3PLs,

provide their clients with several logistics services, such as
freight forwarding, packaging, transportation, and inventory
management, as well as warehousing and cross docking.
PHYSICAL
NATURE OF THE
PRODUCT
A product’s physical nature substantially
affects almost every aspect of logistics and
distribution systems, including packaging,
material handling, storage, and
transportation.

In fact, both the structure and the cost of a

distribution system for a given product are
directly affected by the product’s particular • Volume-to-weight ratio
characteristics. These characteristics can be
• Value-to-weight ratio
classified into four main categories, based
on • Substitutability
• Special characteristics
Volume-to-weight
ratio

Both the volume and weight

characteristics of a product significantly
affect distribution
costs.
Value-to-weight
ratio

This ratio shows the value per unit weight

of a given product. High-value, low-weight
products, such as electronic equipment's
and jewelry, have greater potential for
absorbing the distribution costs because
the relative transport cost of these
products to their overall value is not
significant.
Substitutability

The degree to which a given product can

be substituted by an alternative from
another source is referred to as its
substitutability. Highly substitutable
products, such as soft drinks and junk
food, are those that customers would
readily substitute with another brand or
type of products if the initially desired
products are not available.
Special
Characteristics

Certain other characteristics of products

imply a degree of risk in their distribution.
These characteristics, including fragility,
perishability, hazard and contamination
potential, time constraints, and extreme
value, pose some requirements and
restrictions on a distribution system.
Therefore, a special transport, storage,
and handling system is required to
minimize this risk or even satisfy the legal
obligations.
CHANNELS OF DISTRIBUTIONS

A distribution channel is
the network of businesses
or intermediaries through
which a good or service
passes until it reaches the
final buyer or the end
consumer. Distribution
channels can
include wholesalers, retail
ers, distributors, and even
the internet.
 COMPONENTS OF DISTRIBUTION
CHANNEL
Producer: Producers combine labor and capital to create goods and
services for consumers.
Agent: Agents commonly act on behalf of the producer to accept
payments and transfer the title of the goods and services as it moves
through distribution.
Wholesaler: A person or company that sells large quantities of goods,
often at low prices, to retailers.
Retailer: A person or business that sells goods to the public in small
quantities for immediate use or consumption.
End Consumer: A person who buys a product or service.
 TYPES OF DISTRIBUTION CHANNEL

Direct

A direct channel allows the consumer to make

purchases from the manufacturer. This direct, or short
channel, may mean lower costs for consumers
because they are buying directly from the
manufacturer.
 TYPES OF DISTRIBUTION CHANNEL

Indirect

An indirect channel allows the consumer to buy the

goods from a wholesaler or retailer. Indirect channels
are typical for goods that are sold in traditional brick-
and-mortar stores.
 TYPES OF DISTRIBUTION CHANNEL

Hybrid

Hybrid distribution channels use both direct channels

and indirect channels. A product or service
manufacturer may use both a retailer to distribute a
product or service and may also make sales directly
with the consumer.
 DISTRIBUTION CHANNEL LEVEL
Level 0
This is a direct-to-consumer model where the
producer sells its product directly to the end
consumer. Amazon, which uses its platform to sell
Kindles to its customers, is an example of a direct
model. This is the shortest distribution channel
possible, cutting out both the wholesaler and the
retailer.
 DISTRIBUTION CHANNEL LEVEL
Level 1
A producer sells directly to a retailer who sells the
product to the end consumer. This level includes only
one intermediary. HP or Dell are large enough to sell
their computer products directly to reputable retailers
such as Best Buy.
 DISTRIBUTION CHANNEL LEVEL
Level 2
Including two intermediaries, this level is one of the
longest because it includes the producer, wholesaler,
retailer, and consumer. In the wine and adult
beverage industry, a winery cannot sell directly to a
retailer. It operates in a multi-tiered system, meaning
the law requires the winery to first sell its product to
a wholesaler who then sells to a retailer. The retailer
then sells the product to the end consumer.
 DISTRIBUTION CHANNEL LEVEL
Level 3
This level may add the jobber, this level adds the role
of the individual who may assemble products from a
variety of producers, stores them, sells them to
retailers, and acts as a middle-man for wholesalers
and retailers.
 DISTRIBUTION CHANNEL LEVEL
Level 3
This level may add the jobber, this level adds the role
of the individual who may assemble products from a
variety of producers, stores them, sells them to
retailers, and acts as a middle-man for wholesalers
and retailers.
Distribution Channels in the Digital Era
Digital technology has transformed the way
businesses, especially small businesses use direct
channels of distribution. With increasing consumer
demand for online shopping and easy-to-use
eCommerce tools, direct selling means more success
for businesses.

Online advertising through social networks and search engines

targets specific areas or demographics and social media networks
are increasingly considered the industry standard and changing
marketing strategies.
 Choosing the Right Distribution
Channel

Not all distribution channels work for all products, so

companies need to choose the right one. The channel
should align with the firm's overall mission and
strategic vision including its sales goals.
 Choosing the Right Distribution
Channel

The method of distribution should add value to the

consumer. Do consumers want to speak to a
salesperson? Will they want to handle the product
before they make a purchase? Or do they want to
purchase it online with no hassles? Answering these
questions can help companies determine which
channel they choose.
 Choosing the Right Distribution
Channel

Secondly, the company should consider how quickly it

wants its product(s) to reach the buyer. Certain
products are best served by a direct distribution
channel such as meat or produce, while others may
benefit from an indirect channel.
 What Is the Difference Between Direct
and Indirect Distribution Channels?

Direct distribution channels are those that allow the

manufacturer or service provider to deal directly with its end
customer. For example, a company that manufactures clothes
and sells them directly to its customers using an e-commerce
platform would be utilizing a direct distribution channel. By
contrast, if that same company were to rely on a network of
wholesalers and retailers to sell its products, then it would be
using an indirect distribution channel.
 How Is Placement Important in a
Distribution Channel?

Placement is the way a company ensures its target market has

access to its products or service in the location they would be
most likely to look for that product or service. An effective
distribution system ensures that products are placed in the right
location as needed.
 How Is Placement Important in a
Distribution Channel?

Placement is the way a company ensures its target market has

access to its products or service in the location they would be
most likely to look for that product or service. An effective
distribution system ensures that products are placed in the right
location as needed.
STORAGE AND WAREHOUSING
 What is Storage?

A manufacturer needs to keep adequate stock of raw materials

to ensure smooth production. A trader has to maintain adequate
stock of the products he sells to meet the demand. Maintenance
of stocks of raw materials and finished products calls for storage.
Storage helps to preserve goods at a particular place until these
are required elsewhere.
 Functions of Storage

1. To preserve goods that are produced only during a particular

season but are demanded throughout the year (agricultural
goods).
2. To preserve goods that are produced throughout the year but
demanded during a particular season (crackers, umbrellas,
etc.).
3. To preserve the quality of certain goods, which in the absence
of proper storage will deteriorate.
4. To enable businessmen to make speculative gain, i.e., to wait
and sell at a higher price.
5. To protect goods from pests and insects.
6. To ensure smooth production and distribution.
 What is Warehousing?

The meaning of the word ‘ware‘ is ‘article‘. A warehouse is a

place where goods are stored. It is otherwise known as a
‘godown‘. It is usually found away from the place of business of a
merchant.
 Advantages of Warehouse

1. It protects the goods until they are moved to the factory (to be
used in production) or to the market (for sale).
2. It provides place for goods that are received in bulk.
3. It facilitates easy sale of goods when it is located near the
market.
4. It facilitates uninterrupted sale. ‘Out of stock’ situation is
avoided.
5. The ‘warehouse receipt‘ issued to a merchant, who has
stored his goods in a public warehouse, also enables him to
get financial assistance. A warehouse receipt is a document
of title.
6. It helps to equalize price by matching the demand and supply
position.
 Advantages of Warehouse

7. It provides employment opportunities to many.

8. Cold storage provides longer life to certain easily perishable
items like fish, dairy products, etc.
9. It facilitates large-scale production of goods. The producer
need not bother about storage.
10. It is necessary to perform certain marketing activities like
grading, packing, etc.
 Different kinds of warehouses

In its simplest definition, a warehouse is a large building where

goods and materials are temporarily stored before being sold or
exported. A large variety of companies and businesses might
need access to warehouses, especially larger companies that
have grown enough to need more accommodating space for
their products
 Public warehouse

1. Public Warehouse
A public warehouse is a warehouse owned by governmental
entities that are available to private sector companies. These
types of warehouses can be rented out for business or personal
use. Public warehouses are an especially attractive option for
business owners that might need to only store inventory for a
short amount of time as other warehouse options might be more
expensive. Public warehouses are commonly used by new or
growing businesses, such as e-commerce companies and
startups, due to their affordability versus a private warehouse.
 Public warehouse

2. Private Warehouse
Another popular warehouse option is a private warehouse,
oftentimes referred to as proprietary warehousing. While a public
warehouse is owned by a government body or a third-party,
private warehouses are owned by a company division. If a
business is interested in a private warehouse they will need to
make a large upfront investment to secure the building, facilities
management, and general maintenance and upkeep. Private
warehouses are a popular option for wholesalers, distributors,
and manufacturers. While a private warehouse is a more
expensive option than a public warehouse, they offer business
owners more overall control of their inventory management.
 Public warehouse

3. Smart Warehouse
An increasingly popular warehouse option is a smart warehouse,
which is a warehouse where the storage and fulfillment processes
are automated with AI, such as robots and drones. The AI is
responsible for packing, weighing, transporting, and storing raw
materials, with many incoming orders being automated to be
fulfilled immediately. Smart warehouses have been a go-to option
for large e-commerce companies such as Amazon that seek to
make their order fulfillment and inventory management a more
accurate and expedited process.
 Public warehouse

4. Cooperative Warehouse
A cooperative warehouse is a warehouse owned by multiple
organizations or businesses. These companies tend to work
closely together and access to the cooperative warehouse can
save money for both companies. Cooperative warehouses are
especially common among farmers or wineries, as these
businesses can easily store their products in a mutual space.
Both businesses that utilize a cooperative warehouse can reduce
their spending for inventory storage, increasing all of the co-op
member’s profits in the long run.
 Public warehouse

5. Consolidated Warehouse
Consolidated warehouses are warehouses that collect small
shipments from numerous different suppliers into one
geographical location to combine them into a bigger, thus more
economical, shipping load to one area. The grouping together of
these smaller shipments is an attractive feature for companies
that might not have a very large amount of inventory, such as new
companies or startups. The only caveat of this warehouse type is
that these shipments will need to be intended for only one area,
which might be restrictive for companies trying to expand.
 Public warehouse

6. Bonded Warehouse
A bonded warehouse is a type of warehouse that stores imported
goods before customs duties are completed and paid for the
products. Customs clearance can be an extensive process, and
bonded warehouses provide a safe space for these goods in the
meantime. Government bodies provide businesses a bond to rent
the space to ensure the business doesn’t suffer from any loss of
profits once products are ordered. These features of bonded
warehouses can be attractive for importers that might need short-
term or long-term storage for items that would usually be
restricted.
 Public warehouse

7. Government Warehouse
A government warehouse is owned by the government that is
available for either public or private businesses to
use. Government warehouses are often seen as a more ideal
option than public warehouses as they tend to have increased
security, which might be a necessity for certain products or goods.
While the increased security of the facility is an appealing option,
government warehouses tend to involve an intense application
and extensive paperwork to store products in those facilities.
Another drawback of government warehouses occurs in the case
of a business failing to pay their rent, as the government can
easily dispose of inventory to recover that rent.
 Public warehouse

8. Cold Storage Warehouse

A cold storage warehouse is a warehouse used for the storage of
temperature-sensitive products. Cold storage warehousing might
include an entire building or even a specific portion of a
warehouse that can accommodate these goods. Cold storage
warehouses have regulated environmental conditions to ensure
inventory is safe and no losses are suffered before goods are
delivered. While cold storage warehouses seem like any other
warehouse from the outside, they have vastly different inner
workings to provide a safe space for these goods.
 Public warehouse

9. On-Demand Warehouse
With the increase in online commerce, on-demand warehousing
has only become more popular. On-demand warehousing, or on-
demand storage, is warehousing provided to businesses that
need to connect to companies with an excess of warehousing
space. Since the company utilizing the warehouse might not need
the extra space, on-demand warehousing provides an attractive
option to businesses that might need storage for temporary or
seasonal needs for the warehouse. Similar to cooperative
warehouses, on-demand warehouses are great for merchants
that are willing to combine their inventory needs.
 Public warehouse

10. Distribution Centers

Distribution centers are built around the premise of taking large
quantities of inventory in for the purpose of moving it out to
retailers and merchants relatively quickly. Products move within a
distribution center much more than a typical warehouse.
Distribution centers are different from fulfillment centers, as
fulfillment centers are typically used by third-party logistic
companies rather than businesses or companies. Products stored
in a distribution center are moved around quickly within a supply
chain. Distribution centers are paramount to the connection
between suppliers and customers and are not simply for inventory
storage but rather distribution, order fulfillment, and shipment
preparation.
 Qualities To Look For In A Warehouse

While each warehouse might be unique, with some widely

differing from others, many features of an efficient warehouse
should be identified before choosing one. Some of the qualities
businesses should identify in a well-managed warehouse include,
but are not limited to:
• Up-to-date Software
• Updated Mechanical Systems
• Proper Security
• Up-to-date Emergency and Safety Protocols
• Prompt Delivery and Positive Customer Service
• Required Storage Space
• Proper Temperature Controls (If needed for cold storage)
END OF DISCUSSIONS