Physical Distribution System

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 Content
• Definition – Physical Distribution
• Importance of Physical Distribution
• Objectives of Physical Distribution
• Physical Distribution decision areas
• Tasks in Physical Distribution Management
• Physical distribution functions in an
organization

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 Definition
 According to Philip Kotler “Physical Distribution involves planning,
implementing and controlling the physical flows of materials and
final goods, from place of production to place of end use to satisfy
buyers’ needs.”

 Physical Distribution is all about moving and storing the products

and finally making them available to the consumers.

 It is a term employed in manufacturing and commerce to describe

the broad range of activities concerned with efficient movement of
finished products from end of production line to the consumer.

 Physical distribution is the development and operation of processes

resulting in effective and efficient flow of products

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 Diagrammatically :

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  Physical Distribution
• Physical Supply
– goods moving from supplier to manufacturer
– “inbound”
• Physical Distribution
– goods moving from manufacturer to customers
– “outbound”

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 Physical Distribution

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 Physical Distribution
• This concerns movement of a finished
product/service to customers.

• In physical distribution, the customer is the

final destination of a marketing channel, and
the availability of the product/service is a vital
part of each channel participant’s marketing
effort

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 Concept :-
 All marketing efforts will be wasted if rightly designed and promoted
product of reasonable price does not reach the consumer in right
time and right place. Hence, a poor distribution system can destroy
a good product.
 Therefore, with the purpose of providing the most effective service
to the customer, Physical distribution combines various functions of
managing the outputs, including:
 Distribution Planning
 Order Processing
 Inventory Management
 Packaging
 In-Part storage
 Field Warehousing
 Distribution system analysis
 Materials Handling

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 Concept
 All these elements are to be coordinated with the objective of
getting right goods at right places at the right time and at the least
cost.
 All these functions are independent, so physical distribution is
discussed with two major aspects :
 (a) Operational aspects
 (b) Organizational aspects
 The Operational aspect :
 These include those aspects which are related to physical movements of
products reaching the hands of customers.
 Transportation, Warehousing, Storage Locations, Inventory decisions,
Packaging and some strategic issues are discussed in this aspect.
 The efficiency of these systems is a prerequisite for making the goods
available at the level of retailer from where they are ultimately
purchased by consumer.

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 Concept:-
• The Organizational Aspect :-
– These are primarily related to the channels of
distribution, with major areas as Channel
Management, with points covering issues related
to:
• How best it can be delivered to consumer from the
place of manufacturing.
• What should be the design and structure of channel.
• Relationships between producers and distributors.
• What is the most useful method of channel
communication.

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 Importance of Physical Distribution
 Physical Distribution is a critical area of marketing. The success of marketing
generally depends on the level of customer service, efforts would be needed to
manage superior service to customers, which include the following:
 Delivery consistency and Reliability
 Delivery Frequency and Flexibility
 Order cycle time
 Product availability
 E.g.: Failure of Kodak Cameras
 Depending upon the nature of product Physical distribution costs can be as much
as 30 to 40 per cent of the total sales.
 Lower Distribution costs make it possible to reduce the price and yield higher
profits.
 Physical distribution underlies in every marketing and production process and
function.
 Physical distribution is primarily important for cost reduction and customer
satisfaction.

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 Objectives of Physical Distribution
 Efficient movement and storage of finished goods from
manufacturer to end user.
 Ensuring a balance between the good customer services,
minimum costs and high profit margins.
 Total Cost concept: Physical Distribution includes various
transactions, each of these have a cost. The total Cost
concept refer to the goal of lowering the overall cost of
distribution by balancing all individual elements.
 Customer Service concept: Customer service is the key to
customer satisfaction in terms of time, dependability,
convenience , accuracy and communication.
 Distribution Costs – service trade-off :

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 Physical Distribution decision areas

• Locating Warehouses
• Number of warehouses
• Types of warehouses
• Materials Handling Equipments
• Mode of Transportation
• Routing
• Size of shipments
• Inventory Levels
• protective Packaging
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 Broadly, all the above mentioned areas can be grouped
into four categories:

1. Order Processing
2. Inventory Control System
3. Warehousing
4. Transportation

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 Order Processing

• It includes the activities of receiving, recording, filling and

assembling the orders for shipment.

• An order cycle is the period between the time of the

placement of an order by the customer to the time of the
arrival of the goods at his destination.
The cycle is made up of the transmission of the
order, document processing in the department and shipment
of the goods.

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 Insufficient goods
In stock
Supplier Receives Production
Customer places Inventory on
And enters
An order Hand checked Scheduled
order

Sufficient goods
In stock

Goods stored Goods packaged,

Orders shipped
until enough Sorted, tagged
to individual
orders are And sent to
customers
placed Local warehouse

Physical Distribution activities involved in a typical order cycle

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The following information is vital for accurate and timely order
fulfillment:

• Order number, delivery date and address

• Product name and number, quantity and unit price of product
• Customer number, address and industry branch
• Sales and sales territory
• Means of transport, freight costs
• Special instructions, where necessary

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 INVENTORY CONTROL SYSTEM

• The main objective in maintaining any inventory is to meet

market demands i.e. to make sales and fulfill customers
orders.

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 Basic elements of the Inventory Control System:

a) Ordering Cost

b) Inventory Carrying Cost

c) Cost of stock outs.

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 Ordering Cost

• This is the total ordering expenses for the ordering

or purchasing department

• This cost includes:

1. Cost of staff posted for ordering of goods

2. Inspection cost of incoming materials

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3. Expenses incurred on transportation of goods
purchased

4. Cost of stationary, typing, postage, telephone

charges etc

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 Carrying Cost
• This is the total cost of all the expenses involved in maintaining inventory.

• Such expenses include:

1. The cost of capital invested in inventories. An interest will be paid on
the amount of capital locked up in inventories

2. The loss of material due to deterioration and obsolescence.

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• Cost of spoilage in handling the materials

• Insurance cost

• Cost of storage which could have been used for

other purposes (Opportunity cost)

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 Tasks in Physical Distribution
Management
 Physical distribution refers to the actual physical flow of
products
 In contrast, physical distribution management is the
development and operation of processes resulting in the
effective and efficient physical flow of products
 Effective physical distribution management requires careful
attention to five interrelated activities:
– Order processing
– Inventory control
– Inventory location and warehousing
– Materials handling
– Transportation

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 Physical distribution functions in an
organization
Inventory
Control

Packaging Warehousing

Order Physical Material

Processing Distribution Handling

Customer
Transportation
Service

Location
Analysis

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