Physical Distribution
PRINCIPLES OF MARKETING
DISTRIBUTION—CHAPTER 27
Example
 Jeans manufacturers use a large quantity of denim
fabric
 A combination of ship, train, and truck bring the
denim from factory in India to the U.S.
 Trucks carry the finished jeans to the retail stores
Activities of Physical Distribution
 Definition: The physical movement of goods in the
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distribution channel
Needed to move raw materials to factories
Finished goods from factories to warehouses
Finished goods from warehouses to retail stores
Examples: Pepsi truck, Frito-Lay truck
Aka Logistics—a general term for the handling of
details of any complex activity
Physical Distribution Steps
 Order processing*
 Transporting goods*
 Storing goods in warehouses*
 Stock handling
 Inventory control
*Covered in this slide show
Components of Physical Distribution
 1—Products to be shipped
 Raw materials
 Manufactured goods used to make other manufactured goods
 Finished goods from warehouses to retailer
 Freight, cargo, items, and goods describe all types of products
 Merchandise refers to finished consumer goods
 A group of products may be shipped to fill an order or
shipment
Components of Physical Distribution
 2—Channel Members
 The businesses that need to distribute their products
 Usually own the products they distribute
 Aka suppliers because they supply products to the next step in
the supply chain
 Aka vendors because they vend(sell) products to the next step
in the supply chain
 Suppliers are responsible for making sure that their
products are shipped in the most efficient,
economical way; they may have their own
transportation vehicles; others hire transportation
Transportation Companies
 Transportation is the process of physically moving
products from buyer to seller
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Trucks
Trains
Planes
Ships
 The process of transporting products is often referred to
as shipping, even when ships are not involved
 Own the vehicles and provide the service of
transportation
 Aka carriers
Warehouses
 Definition: a building for storing large quantities of
products
 Products in a warehouse are said to be in
inventory; often called inventory
 Usually the products are waiting to be moved to the
right PLACE at the right time
 Transported from warehouse to the next segment of
the supply chain
Modes of Transportation
Trucks
Planes
 Advantages
 Can deliver door to door
 Flexible to deliver at a
specific place and time
 Can be modified to carry a
specific type of cargo
 Advantages
 Speed
 Often used for high-value, lowweight items
 Perishable goods
 Saves on inventory costs
 Disadvantages
 Traffic may cause delays
 Bad weather
 Maintenance problems
 Disadvantages
 Most expensive mode
 Bad weather may cause delays
 Usually requires another mode
of transportation from the
airport
Ships
 Advantages
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Large quantities of goods can be moved great distances at a low per
item cost
The U.S. has huge ports where imports arrive
Can be modified to suit cargo (i.e. tankers)
Barges can towed or pushed
 Disadvantages
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Ship delivery is very slow
Delivered to a port and then transported by another mode
Security programs are used to eliminate import fraud and terrorism
 Aka freighters haul large containers (8 ft X 8 ft X 40 ft)
of products which is easier than many small boxes
Pipelines
 Carry large amounts of liquid or gas products to their
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destinations through tubes
Products move slowly but continuously
Safe from damage or theft
Not subject to delivery delays
Limited number of products that can be carried
Building a pipeline is expensive, but costs to operate
are small
Leaks do not often occur; but can cause great
environmental damage
Distribution of Services and Ideas
 Services
 “Transported” by individuals, through their performance of the
service
 Ideas
 Carried by media to their target market
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Radio stations, television channels. Internet Web sites,
newspapers, magazines, outdoor billboards, and other types of
communication
Target market is aka audience
The Distribution Process
 Buyer contacts supplier
 The two will negotiate the terms of sale
 Definition: the conditions governing the sale
 Includes: discounts, transportation arrangements, date of
delivery, who pays for the transportation costs, when payment
is due and other specific conditions of the sale
 Purchase Order (PO)—a document authorizing
the purchase and delivery of certain goods at specific
prices and times
The Distribution Process, con’t.
 The PO has a number that identifies the order
 PO becomes a sales contract between the buyer and seller
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Contract is a legal written agreement
 Both the seller and the buyer sign the contract and both
keep a copy
 When a supplier receives the PO, they sign to validate the
contract
 The supplier sends confirmation back to the ordering
company that the order has been received and will be
filled
 The buyer agrees by means of the PO to pay the agreedupon price for the goods
Order Processing
 Definition: receiving and filling orders
 Once the PO is received, pick tickets are created
 Pick ticket—a list of the items requested for one order
 Includes a description of the item, its location in the warehouse, and the bar code
 Orders are picked by the warehouse staff
 Bar codes are scanned on each item into the computer for inventory control
 Picked items are moved to the packing area
 Forklifts or conveyor belts move the items
 Finished orders are packed for shipping, sealed, and labeled with
the shipping address
 When the products are received at the buyers location, receiving
employees scan the bar codes to verify the contents of cartons
 Inventories are automatically updated, and the needed goods can be
immediately unpacked and used
Computerized Order Processing
 Computer linkages enable automated order
processing with a regular supplier
 Buyer’s computer keeps track of the number of goods
in inventory
 When inventory goes below a certain number, the
computer sends a message to the supplying
company’s computer
 Supplier’s computer notifies the warehouse to pick,
pack, and send the goods
Distribution Plans
 Physical distribution is the third largest expense for most
businesses involved with goods (only materials and labor
are larger)
 Definition: a plan for moving goods in the best way
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Considers costs, timing, delivery details, and other factors like types
of transportation
Warehousing and transportation specialists know the best ways to
maximize the flow of goods
They are good at negotiating with transportation
 Calculations of shipping costs are made with the ton-
mile
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Definition: the movement of one ton of goods one mile
This must be balanced with the speed of receiving the goods
International Distribution
 Increasing for several reasons
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Fewer global trade barriers such as tariffs and quotas
Internet makes worldwide business easier to transact
Parts for many products are made in other countries
 Makes planning more complicated
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U.S. and foreign import and export laws must be followed
Regulations may differ in each country
Language barriers must be overcome
Negotiations may be delicate in different cultures
Distances are must larger
Foreign destinations may have limited transportation options
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Many parts of the world have no refrigeration, and dirt roads
Streamlining Distribution
 Managers are looking to make distribution more cost-
effective
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Definition: the benefits outweigh the expense
Combine modes of transportation economically
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Rail, air and highway used based on the locations of the beginning and
end of the channel
Fill Transportation Vehicles
Economies of scale—reductions in the cost per item as a result of
producing or transporting large numbers of items at one time
 Producing and shipping large numbers of items in a load, lowers the
cost of shipping each item
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Combine shipments by consolidated shipping
Putting the orders of two or more companies in a truckload, train car,
or shipping container
 Each company lowers its transportation costs
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Streamlining Distribution, con’t.
 Keep track of shipments
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Satellite shipment tracking—dispatchers at the shipping office know
exactly where the trucks are at all times.
Receiving companies know exactly when their shipments will arrive
Warehouse employees stay busy with other tasks until a truck is
pulling into the unloading dock
 Hire outside experts
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Outsourcing—hiring an outside company to do specific work
Outside experts can save a company money as they can get deliveries
faster and more accurate
The company can have fewer workers and no transportation vehicles
Streamlining Distribution, con’t.
 Keep warehouses efficient
 Computerized tracking equipment can mean smaller
warehouses and more efficient inventory
 Bar codes, advanced scanners and specialized computer
systems, promotes almost full automation
 Received goods can be electronically identified, sorted, routed,
and shipped in an uninterrupted flow
Channel Management and Physical Distribution
 Choose the right shipping mode considering cost,
perishability of goods, transportation time, and security
 Warehouse storage—build or lease
 Inventory Control—limit large quantities of inventory in
storage to increase profits and save money
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Includes: identifying purchase amounts, tracking inventory, handling
damaged inventory, and using inventory control systems
 Risk—redesign the supply chain, understand foreign trade
issues, implement computerized inventory control
systems
Ethical Considerations in Channel Management
 Channel member relationships should not restrict
competition among companies at the same supplychain level
 Makers of a certain product should not unite to set
wholesale prices for the product because it restricts
competition
 Retailers of a certain product cannot unite to sell the
product for the same price
 The Federal Trade Commission Web site has more
information about legal and ethical issues