Physical Distribution and its Components

Meaning of Physical Distribution

Goods are produced for sale. So, the produced goods should be supplied to the ultimate consumers from production place. The same function (to supply goods to ultimate consumers) is called physical distribution. Physical distribution creates place utility, time utility and ownership utility. As the distribution completes marketing, it is
called second part of marketing. This includes the task of transport management, storage management, stock control, transferring goods, order scanning etc. In order to satisfy/fulfill customers' wants, right goods in right quantity should be supplied to right place at right time. Physical distribution also properly cares such functions.

Physical distribution can be known as the process of supplying goods in demanded quantity at right time as wanted by them. Different experts and scholars have defined physical distribution. Important ones are mentioned as follows:
Prof. William J. Stanton has defined physical distribution as, "Physical distribution consists of all activities concerned with moving the right amount of right products to the right place at the right time."
Prof. Philip Kotler has defined it as, "Physical distribution or marketing logistics involves planning implementation and controlling the physical flow of materials, final goods and related information from the point of origin to points of consumption to meet customer requirement at a profit."
Condiff Still and Govani have defined it as, "Physical distribution involves the actual movement and storage of products after their production and before their consumption."
The above mentioned definitions make it clear that all the activities done to supply produced goods to target markets are included in physical distribution. Bringing improvement in customers' services, creating higher utility of goods, bringing stability in price and quality are the important objectives of physical distribution. Physical distribution plays an important role to achieve these objectives.

Components of Physical Distribution

- Order processing
  • Order entry
  • Order handling
  • Order delivery
- Warehousing
  • Private and Public warehouse
  • Number of warehouses
  • Location of warehouse
- Material handling
  • Mechanical handling
  • Non-mechanical handling
- Inventory management
  • Economic order quantity - EOQ
  • Re-order point
  • Safety stock
  • ABC analysis
  • Just in time - JIT
- Transportation
  • Types of Carrier
  • Mode of Transportation
Several activities need to be done to supply goods to the place where the customers demand. Different elements should be active to perform such activities correctly. The same elements are called components of physical distribution. Such different components are also known as sub-system. The main components of physical distribution are mentioned as follows:

1. Order processing

Physical distribution function starts only after demand is received from customers. The task of separating such orders to send to the registration department and preparing bill and consigning (dispatching) it is called order processing. Order processing is very important function of physical distribution. This function should be effectively and systematically done to satisfy the customers so that they are enthralled to make reorder and high profit can be earned. Orders can be processed using computer or by hand. Mostly small firms/ companies process orders by hand but big firms/companies use computers. Mainly three functions are included in order processing as follows:

  • Order entry: When the orders are received from customers, their records should be entered/kept in the order according to date. Order for goods can be received through telephone, post, telegram, fax, etc. Records of total quantity, products type and subscribers/customers should be clearly kept. Besides, date and time of delivery should also be clearly mentioned in it.
  • Order handling: After the order has been received from customers, the order should be kept recorded and sent to store and account sections. This task is called order handling. Store section ascertains/confirms whether the goods as ordered are stock or not in the store, and the account section confirms whether nay outstanding amount has remained to be recovered from the customer/subscriber or not. If the quantity of goods is not sufficient in the store to meet the demand, information is given to factory for production. If the credit amount (unpaid) is high, the customer is made aware that the company also wants to recover the credit due/ outstanding amount.
  • Order delivery: If the goods as demanded are stock in store, they should be packed; if not, alternative arrangement should be done. After the goods are ready for shipment, transport section should be contacted. In case delivery is delayed for any reason, the customers may get angry or irritated. So, goods should be promptly delivered according to the order. While delivering goods in this way, bills/invoice and shipment document should be prepared. Then one copy should be given to transport section or company and other copy should be sent to the customer and the third copy should be kept filed in account section.

2. Warehousing

Produced goods should be safely kept in warehouse until demanded by market, the same is called warehousing. It creates time utility by providing goods to the customers at the time when demanded. Warehousing includes the functions to keep products/goods safe until they are sold out. Warehousing plays an important role in providing best service at the least cost. Goods should be kept stock, properly stored in warehouse and looked after them carefully. Otherwise, they may be stolen, get damaged, broken or putrefied. Warehousing collects goods, divides units, stores them, packs and ships out them.

Warehousing does not only keep goods safely, it also works as distribution center. The warehouse manager or officer should also take rational decision on how to use the warehouse. In addition to this, the functions of warehousing include from selection of place for establishment of warehouse to decision taking how much or what number of products should be kept in.

Generally, the following matters should be kept in mind while taking decision for warehousing:

  • Private and public warehouse: Mainly there are two types of warehouses. They are private and public. Private warehouse is established and operated, handled and controlled by the business organization itself. Although huge cost is needed to build, it can be operated at cheap cost. Such private warehouse can be build according to the nature, shape, size etc. of the products intended to store in. the warehouse established by public sectors (government) is called public warehouse. Goods can be stored/ kept in such warehouse paying certain rent. The manager for physical distribution should take proper decision whether to store goods in private warehouse or public warehouse.
  • Number of warehouses: Manager for physical distribution should take decision about the number of warehouses. As it directly affect the distribution cost and customer services, such decisions should not be taken at hunch or haphazardly. Geographical area of the market, storage facility with the wholesaler and sales quantity of goods help in taking decision on the number of warehouses.
  • Location of warehouse: Place analysis also should be done for establishing a warehouse. It can be established nearer to market for some reasons or nearer to factory for other reasons. If the warehouse it nearer to the factory, operation cost becomes less and transport cost more. Just the opposite if the warehouse is nearer to the market, operation cost becomes more and transport cost becomes less. Besides, best services can be provided to customers. The physical distribution manager should take proper decision to establish warehouse where it becomes appropriate.

3. Material handling

Raw materials should be purchased for production. Such materials are used to produce finished goods. Until demands for such finished goods are received, they need to be kept in warehouse. When demands have been received, they are dispatched. Generally, such activity is called material handling. For handling the materials in such way, appropriate equipment also should be selected. Efficient and proper equipment cuts down material handling cost and save from breaks and damages. Nature of goods, package size, and packing method etc. also determine the sorts of handling equipment. Material handling can be done in two ways:

  • Mechanical handling: Different types of equipment and machines are used to move goods from places to places. Lorry, truck, crane, fork-lift conveyer belt, etc. are some examples of mechanical handling. They are used to transfer goods. Similarly, pallet and containers also help in mechanical handling.
  • Non-mechanical handling: Under this non-mechanical handling, human labor is used instead of machines. Porters can be employed to transfer carton or boxes. Similarly, trolley can be used in transferring small packages of goods, which is done by the porters or labors.

4. Inventory management

Goods should be kept collected in stock to supply them at right time and place to the customers when demanded. This task is called inventory management. Both short stock and large stock are dangerous for any company. So, considering both aspects, goods should be kept in balance. Hence, the same function is called inventory management. If the stock/ inventory are insufficient, goods cannot be supplied to meet the demand. As a result, regular customers go away. Similarly, if the inventory/ stock are more than necessity, capital investment, warehouse cost, insurance cost etc. increase. While managing inventory/stock, condition of goods, demand of customers and flow of supply should be studied and analyzed carefully, and only then proper decision should be taken. Generally, the following methods should be studied and analyzed for inventory management:

  • Economic order quantity (EOQ): Giving order for supply of goods in the quantity that minimizes total expense is called economic order quantity. In this economic order quantity, ordering cost and hauling/ carrying cost lessen.
    Economic order quantity (EOQ) should be made out by applying the following formula.
    Economic order quantity =2AO/C
    A = Annual requirement
    O = Ordering cost per order
    C = Carrying cost per unit
    A = 6000 units
    C = $2
    O = $30
    EOQ = ?
    EOQ = 2AO/C
    = 2x6000x30/2 = 360000/2 = 180000 EOQ = 424.26 units

  • Re-order point: Repeated orders should be given for keeping stock of goods/inventory. Decision should be taken to give timely re-order for the supply of goods so that there is neither lack of stock nor unnecessarily huge quantity of inventor. For this also reorder result should be made out using the following formula.
    For this also, reorder result should be made out using the following formula.
    Re-order Point = Lead time x Daily consumption
    Imaginative example: Annual consumption = 720000 units
    Lead time = 12 days
    Daily consumption = Annual consumption/ Days in year
    = 720000/360
    = 2000 units
    Re-order Point = Lead time x Daily consumption
    = 12 x 2000
    ROP = 24000 units  
  • Safety stock: Sufficient stocks of goods should always be kept in warehouse. If there is no such stock, goods cannot be distributed according to the demands. Safety stock should be kept so that there is no shortage of goods at any time.
    This is made out by using the following formula:
    Safety stock = Average usage x Lead time
    Imaginative example:
    Average usage = 600 units
    Lead time = 12 days
    Safety stock = Average usage x Lead time
    = 600 x 12 = 7200 units

  • ABC (Activity Based Costing) analysis: Under analysis, stock/inventory goods are classified in A.B.C. groups according to their cost. A class includes costly goods, in B average priced goods and in C cheap priced goods. While classifying goods in this way, there is not any certain basis what priced goods should be classified as costly and what should be classified as cheap goods. So, the goods which are being dealt in are classified in A, B, C groups according to the relative prices. A class goods are controlled more than B class goods and B class goods are controlled more than C class goods. In this way, the goods are controlled according to their class.
    A table of ABC Analysis
    GroupItem PercentItems value percent
  • Just in time: Receiving just in time method of inventory control has become very popular. According to this concept, very small amounts of goods are purchased. They reach at the right time of production or right time of sale. In some countries, inventory manager can give such direction to high level management.

  • 5. Transportation

    Transportation creates place utility by carrying goods from production place/factory to other places. This is 5th important element of the physical distribution. This links production place with consumer markets. Transport also has four elements such as road, means, power and objective. Transport takes around 50% expenses of physical distribution. The physical distribution manager should take wise/rational decision on the following two matters in order to systematize the transportation.

    • Types of carrier: There are different types of transportation means. Among them suitable means should be selected according to the nature, destination and condition of the goods. Physical distribution manager should study the following alternatives while taking decision on type of carrier.
      • Private carrier: If any company uses its own means of transportation/carrier, this is called private carrier. The company itself operates and controls such transportation carrier/means. As the company has sole authority on its transportation means, it may be flexible to some extent. On the other hand, as the company has to manage these affairs by itself, the company has to invest much and incur high operation cost.
      • Contract carrier: If goods are transported contracting with independent transport organizations/companies, this is called contract carrier. As such organizations acquire special experience in transportation, they can transport goods effectively. Contract carrier costs lower than private ones.
      • Common carrier: The transportation carrier operated by public sector is called common carrier. Such carrier is conducted according to fixed timetable. Places of destination are fixed earlier. Whoever uses its services should pay predetermined rate of fare. Such public/common transportation service becomes available everywhere.
    • Mode of transportation: Train road, plane, ships are the chief modes/means of transportation. Any of the modes can be used according to the nature and condition of goods. Pipeline is used to transport liquid material. The decision to use transport means/mode should not be taken at hunch; it needs wise as well as rational decision. Cost of transport means, pace/speed, appropriateness, safety, availability etc. should be considered. They are mentioned as follows:
      • Cost: All the expense to be incurred for transportation is called cost. The distributor should, as far as possible, select less costly means/ carrier. Plane transport is the most costly means and ship is the least transport means.
      • Speed: Generally, the quickness of transportation is called speed/ pace. As far as possible the distributor should select fast speeding mode/ carrier. Air transport is the fastest means whereas transportation by human and animal is slow speeding means. Time and nature of goods also affects the decision what means should be selected.
      • Consistency: Regular, consistent and dependable means of transport should be selected. Means of transportation, which reach the destination on right time and are conducted regularly, should be selected.
      • Safety: Distributor should select safe means of transportation. If goods are transported by safe means, the goods remain safe from theft, robbery, damage or breaks. Generally, air transport becomes safer than train or bus transport.
      • Availability: Easy finding of means of transportation in markets is called availability. All the means of transport cannot be found every time whenever needed. The intended means of transport may or may not be available at the time when needed. So, while selecting means of transport, the distributor should consider their availability.

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