Chapter Three
Physical Distribution Systems
Learning Objective
• After completing this chapter, learners will be
able to
• Familiar with the milestones of physical
distribution
• Understand the different categories of
logistics service providers, related to the
level of outsourcing and related to the
range of services offered.
Points of Focus
• Physical Distribution Decision Area
• Level of Outsourcing
• Range of Services
• Summary
Decision Areas in Physical Distribution (1)
• Physical distribution involves coordination
and integration of five managerial
functions
– Laying down procedure for order processing
– Maintaining an inventory controlling system
– Choosing a warehousing system
– Determining a material handling system
– Selecting a mode of transport
Decision Areas in Physical Distribution (2)
• Order Processing
• Order processing procedure affects customer
service level in two ways:
• It affects reorder time (Lead time)
• It affects the consistency or uniformity of
delivery time
• Customer is primarily interested in prompt,
punctual, safe and reliable delivery services
Decision Areas in Physical Distribution (3)
• Inventory Management
• Inventory is a stock from which customer
order processed
• Marketing management is directly interested
in effective management and control of
inventories as inventory management is a
powerful tool in the process of creation and
satisfaction of customer demand
• Inventory management is the link
interconnecting the customers’ order the
company’s production capacity
Decision Areas in Physical Distribution (4)
• Warehousing system
• Warehousing performs many value added
functions in the channel of distribution
• Breaking bulk
• Dispatch consignment to retailer
• Holding stock for the retailer
• Many functions
Decision Areas in Physical Distribution (5)
• Packaging and Material Handling System
• The dimension of the package must efficient
use of containerization and palletisation
• The expansion of global trade introduces
advanced packaging and material system that
facilitate smooth flows of goods from the
manufacture to customers
Decision Areas in Physical Distribution (6)
• Transportation System
• Warehousing and transportation of
inventories constitute the core of physical
distribution
• Different modes of transport which can be
used in the distribution of goods to the
customers
Transportation Modes
Rail
Nation’s largest carrier, cost-effective
for shipping bulk products, piggyback
Truck
Flexible in routing & time schedules, efficient
for short-hauls of high value goods
Water
Low cost for shipping bulky, low-value
goods, slowest form
Pipeline
Ship petroleum, natural gas, and chemicals
from sources to markets
Air
High cost, ideal when speed is needed or to
ship high-value, low-bulk items
TRANSPORTATION FACTORS
Cost
Transit Time
Reliability
Criteria
for
Transportation
Mode
Choice
Capability
Accessibility
Traceability
Level of Outsourcing
• The above functions of physical distribution
can be outsourced or performed by own
management to logistics firms.
• Physical Logistics firms facilitate
– the movement of parts and materials from
suppliers to manufacturers
– finished products from manufacturers to
distributors and retailers.
Level of Outsourcing…Cont’d
• Among the services which they provide are
– Transportation
– Warehousing
– Cross-docking
– Inventory management
– Packaging
– Freight forwarding
Level of Outsourcing…Cont’d
• Outsourcing logistics activity to logistics
provider is a common phenomena in our
current business environment
• Outsourcing is performed in relation to a
certain decision level
–strategic
–tactical
–operational
• What are strategic, tactical and
operational activities in logistics
Strategic
System design,
tendering,
judging
Tactical
Chain
management,
Forwarding
1PL
2PL
Shipper
Shipper
Shipper
Shipper
3PL
Shipper
4PL®
Consultant,
facilitator
Operational
Execution,
Ownership of
logistic assets
Shipper
Carrier, person
in charge of
warehouse
Logistic service Logistic service
provider and/or
provider
 Forwarder sub-contractor
Logistic service Logistic service
provider and/or
provider
 Forwarder subcontractor
Level of Outsourcing ...Cont’d
• 1PL: all activities are performed under own
management.
• 2PL: the shipper only outsources certain
specialised operational activities.
Level of Outsourcing... Cont’d
• 3PL: a (large) logistics services provider takes
over all tactical and operational activities
(specialised services, e.g. transport or
warehousing, may be outsourced by him to a
third party; the shipper remains in charge of
the strategic issues).
• 4PL: all activities are outsourced; a
“facilitator” provides strategic solutions and
contracts one or more 3PL providers.
Level of Outsourcing... Cont’d
• The facilitator (4PL) does not necessarily own
logistics assets; and could be a consultant,
having comprehensive knowledge of the
transport market and appropriate
computerised analysing tools.
• He could contract the 3PL parties at his own
or the shippers’ risk.
Level of Outsourcing... Cont’d
• With regard to 4PL the following can be
determined:
• Advantage: an independent party, capable of
offering a selection of services which would be
the most favourable for the client (it has often
been speculated that 3PL companies offer
solutions which merely optimise the
utilisation of their own assets).
• Disadvantage: without having assets it would
be more difficult for the 4PL® party to manage
operations and to control performance and
service levels.
• Logistics Service Providers
Range of Services
Range of Services
• Logistics service providers distinction
can be made according to the
services offered.
–Freight Forwarders
–Carriers
–Logistics Service Providers
–Integrators or System Providers
Range of Services...Cont’d
Freight
Forwarders
 Offering world-wide logistics solutions,
integrate different means of transport
Carriers
 road hauliers, rail operators, shipping
lines, airlines, warehouse operators
Logistics Service
Providers
 offering comprehensive logistic solutions,
specialized on a certain branch or
customer, including transport,
warehousing, VAL etc.
Integrators or
System Providers
 focusing on world wide parcel distribution,
applying different transport modalities
(air, road etc.), very standardized
Examples of Logistics Service Providers Conpanies
Global Forwarders
Global Carriers
Danzas
Panalpina
Kühne & Nagel
Exel
Maersk Logistics
Logistic Link
APL Logistics
P&O Nedlloyd
Hanjin
MSC
Yang Ming
Maersk Sealand
CMA-CGM
APL
4PL
Logistics Services
Providers
Frans Maas
Geodis Vitesse
Vos Logistics
Integrators
UPS
DHL
TNT
Federal Express
Summary
PETER DRUCKERS stated that:
• Logistics is one of the last frontiers of
opportunity for organizations wishing to improve
their corporate efficiency.
• Logistics costs represent a significant proportion
of total costs
• Major cost reductions through fundamentally reengineering logistics processes, in order to
achieve sustainable competitive advantage
Summary…Cont’d
• Physical Distribution Decision Area
• Level of Outsourcing
• Range of Services
• The End of Chapter 3