Physical Distribution

Physical Distribution Chapter 13

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

Physical Distribution Figure 13.1 Supply chain (logistics system)

Channels of Distribution Any series of firms or individuals that participates in the flow of goods and services from the raw material supplier and producer to the final user or consumer.” • APICS 12th Edition Dictionary

Channels of Distribution • Company may deliver directly to customers • Use other companies or individuals to deliver goods • Intermediaries • wholesalers – agents • transportation companies – warehousers

Distribution Channels • Transaction channel • negotiate, sell, contract • concerned with the transfer of ownership (and money) • Distribution channel • concerned with the delivery of goods or services

Distribution Channels Figure 13.2 Separation of distribution and transaction channels

Physical Distribution • Adds place value • by delivering goods to customers • Adds time value • by delivering goods when customers want them

The Way Materials Move • Depends on: • the channels of distribution being used • the types of markets served • geographic dispersion • number of customers • the characteristics of the product • type of transportation available

Reverse Logistics Supplier Customer Returned Goods Information

Reverse Logistics - Information • Goods are returned to supplier • Information is also needed • reason / approval for the return • credit information

Reverse Logistics Green Logisitics • Return and disposal of packaging materials • Return and disposal of environmentally sensitive materials • heavy metals • oil • Use of reusable (returnable) packaging

Returned Goods - Disposition • Returned to inventory • Refurbished for resale • Sold into alternate markets • Disassembled to retrieve components • Sorted for material recovery Value

Physical Distribution - Activities 1. Transportation 2. Distribution inventory 3. Warehouses 4. Materials handling 5. Protective packaging 6. Order processing

Transportation • Movement of goods • Highest portion of distribution costs • 30 - 60% • Adds place value to the product

Distribution Inventory • Includes all finished goods anywhere in the distribution system • Second highest cost of distribution • 25 - 30% • Inventories add time value to the product

Warehouses • Used to store inventory • improved customer service • transportation efficiencies • Warehouse management concerned with: • site selection, number of warehouses • layout and methods of receiving, storing and retrieving goods

Materials Handling • Movement and storage of goods within a distribution center • Type of equipment used affects the costs of operation • High capital cost • Tradeoff between capital cost and operating (labor) cost

Protective Packaging • Containment, protection and identification • Packages must fit in storage spaces and transportation vehicles • item • package • carton • pallet • container Fragile

Order Processing “The activity required to administratively process a customer’s order and make it ready for shipment or production.” • APICS 12th Edition Dictionary • Represents an element of time in a customer’s order • Important part of customer service • May involve intermediaries

Total Cost Concept • Cost trade-off • a cost decrease in one area may incur a smaller increase in another area • Total cost • consider all of the costs • increases in one area are offset by reductions in other areas • Keep customer service in mind

Total Cost Concept - Example Problem A company normally ships a product by rail. Transport by rail costs $200, and the transit time is 10 days. However, the goods can be moved by air at a cost of $1000 and it will take one day to deliver. The cost of inventory in transit is $100 per day. What are the costs involved in the decision? Rail Air Transportation Cost $ 200 $1000 Inventory Carrying Cost 1000 100 Total $1200 $1100

Global Distribution • Differences in: • Distance • Language • Currency • Measurement

Standards • ISO (International Organization for Standardization) • Geneva Switzerland • Incoterms (International Commercial Terminology) • Standard size containers

3PLs – Third Party Logistics Providers • Provide a wide range of logistics services • Delivery • Warehousing • EDI • Freight Forwarding • Packaging

3PLs – Third Party Logistics Providers • Can provide the service at less cost • They have the equipment and networks • Can react to seasonal increase • Reverse logistics • Examples: • Fed Ex • Kuehne + Nagel • DHL

Interfaces • A bridge between: • Marketing • Production

Marketing • Product • Promotion • Place • Price Created by Physical Distribution

Interface with Marketing • Marketing is responsible for the transfer of ownership • selling, advertising, sales promotion, merchandising and pricing • Physical distribution is responsible for delivering the goods • contributes to creating demand • prompt delivery, availability of product, accurate order filling

Interface with Production • Production requires a steady flow of raw materials and components • interruptions are very expensive • Factory location may depend on the transportation cost • raw materials • finished goods • Factory demand is created by distribution centers

Transportation Costs • Ways • land, water, road, space, etc over which goods are moved • may be owned by the operator (railroad tracks), operated by the government (roads, canals) or mother nature (ocean)

Transportation Costs • Terminals • Used to sort, load and unload goods • connection between line-haul and local deliveries • connection between different modes or carriers • dispatching, maintenance, administration

Transportation Costs • Vehicles • owned or leased by the carrier • Other (fixed or variable) • maintenance • administration • fuel • labor

Transportation - Modes • Rail • Road • Air • Water • Pipeline • Vary by flexibility and operating cost

Rail • Provide own ways, terminals and vehicles • large capital investment • need high volume • modest flexibility • Used for bulky commodities over long distances

Road • Pay for ways through taxes or tolls • Provide their own terminals • Vehicle cost though large, is smaller than vehicle costs for water or rail • Door-to-door service (very flexible) • Used for small volume goods to many delivery locations

Air • Uses government provided terminals and air traffic control systems (ways) • High variable costs for fuel and operating costs • Most expensive mode • Used for high value, low weight goods over long distances

Water • Nature provides ways • canals are government controlled • Carrier pays for use of terminals • Carrier owns the ships • Operating cost is very low • Slow and not very flexible • Used for low value bulk cargo over long distances

Pipelines • Very high capital costs • Operating costs are very low • Not flexible! • Used for high volume gases or liquids moving from point to point

For Hire Carriers • Common carriers • licensed to carry only certain goods • available to public • designated points or areas served • scheduled service • Contract carriers • provides specific service to a shipper

Private Carriers • Need to buy and operate their own equipment • Carry their own goods • licenses are still required • Very high volume to justify expense

Other Transportation Agencies • Use combinations of modes • Freight Forwarders • Post Office • Couriers • Agencies make use of load consolidation

Transportation Cost Elements • Line haul • Pickup and delivery • Terminal handling • Billing and collecting • Principles are the same for all modes

Transportation Cost Elements Figure 13.3 Shipping patterns

Line Haul Costs • Fuel, labor, depreciation • Approximately the same per mile whether full or empty LHC = Total Line-Haul Cost Distance Travelled

Line-Haul Costs - Example For example, for a given commodity, the line-haul cost is $3 per mile and the distance shipped is 100 miles. The total line-haul cost is therefore, $300. If the shipper sends 50,000 pounds, the total line haul cost is the same as if 10,000 pounds were shipped. However the line-haul cost (LHC) per hundredweight (cwt) will vary. LHC50,000 lbs = $300 = $.60 per cwt 500 LHC10,000 lbs = $300 = $3.00 per cwt 100

Line-Haul Costs • Total line-haul cost varies with: • cost per mile • distance moved • Line-haul cost per cwt varies with: • cost per mile • distance moved • weight moved

Line-haul Cost - Example For a particular commodity, the line-haul cost is $2.50 per mile. For a trip of 500 miles and a shipment of 600 cwt, what is the cost of shipping per cwt? If the shipment is increased to 1000 cwt, what is the savings per cwt? Cost600 =($2.50 x 500) / 600 = $2.083 / cwt Cost1000 = ($2.50 x 500) / 1000 = $1.25 / cwt Savings = $2.083 - 1.25 = $0.833 / cwt

Increasing Weight Shipped • Truck will have a weight limitation • Some products have a low density and the truck is filled before the weight limitation is met • Therefore, nest products or ship products unassembled to increase the weight shipped

Shipping un-assembled Some Assembly Required

Physical Distribution