Physical distribution set1

Good supply chain management is one of the most important aspects of business success and
will make your company grow or disappear, depending on strategies used. It is a critical success
factor.
Physical distribution and Supply Chain Management cover the delivery of customer and
economic value through integrated management of the flow of physical goods and associated
information. It is a network of facilities and distribution options which performs the function of
procurement of materials and the distribution of these products to customers.

Physical distribution is the set of activities concerned with efficient movement of finished goods from
the end of the production operation to the consumer. Physical distribution takes place within
numerous wholesaling and retailing distribution channels, and includes such important decision
areas as customer service, inventory control, materials handling, protective packaging, order
procession, transportation, warehouse site selection, and warehousing. Physical distribution is part
of a larger process called "distribution," which includes wholesale and retail marketing, as well the
physical movement of products.

Physical distribution activities have recently received increasing attention from business managers,
including small business owners. This is due in large part to the fact that these functions often
represent almost half of the total marketing costs of a product. In fact, research studies indicate that
physical distribution costs nationally amount to approximately 20 percent of the country's total gross
national product (GNP). These findings have led many small businesses to expand their cost-cutting
efforts beyond their historical focus on production to encompass physical distribution activities. The
importance of physical distribution is also based on its relevance to customer satisfaction. By storing
goods in convenient locations for shipment to wholesalers and retailers, and by creating fast, reliable
means of moving the goods, small business owners can help assure continued success in a rapidly
changing, competitive global market.

A SYSTEM APPROACH
Physical distribution can be viewed as a system of components linked together for the efficient
movement of products. Small business owners can ask the following questions in addressing these
components:

• Customer servicehat level of customer service should be provided?
• Transportationow will the products be shipped?
• Warehousinghere will the goods be located? How many warehouses should be utilized?
• Order processingow should the orders be handled?
• Inventory controlow much inventory should be maintained at each location?
• Protective packaging and materials handlingow can efficient methods be developed for
handling goods in the factory, warehouse, and transport terminals?
These components are interrelated: decisions made in one area affect the relative efficiency of
others. For example, a small business that provides customized personal computers may transport
finished products by air rather than by truck, as faster delivery times may allow lower inventory
costs, which would more than offset the higher cost of air transport. Viewing physical distribution

from a systems perspective can be the key to providing a defined level of customer service at the
lowest possible cost.

CUSTOMER SERVICE
Customer service is a precisely-defined standard of customer satisfaction which a small business
owner intends to provide for its customers. For example, a customer service standard for the above-
mentioned provider of customized computers might be that 60 percent of all PCS reach the
customer within 48 hours of ordering. It might further set a standard of delivering 90 percent of all of
its units within 72 hours, and all 100 percent of its units within 96 hours. A physical distribution
system is then set up to reach this goal at the lowest possible cost. In today's fast-paced,
technologically advanced business environment, such systems often involve the use of specialized
software that allows the owner to track inventory while simultaneously analyzing all the routes and
transportation modes available to determine the fastest, most cost-effective way to delivery goods on
time.

TRANSPORTATION
The United States' transportation system has long been a government-regulated industry, much like
its telephone and electrical utilities. But in 1977 the deregulation of transportation began with the
removal of federal regulations for cargo air carriers not engaged in passenger transportation. The
deregulation movement has since expanded in ways that have fundamentally altered the
transportation landscape for small business owners, large conglomerates and, ultimately, the
consumer.

Transportation costs are largely based on the rates charged by carriers. There are two basic types of
transportation rates: class and commodity. The class rate, which is the higher of the two rates, is the
standard rate for every commodity moving between any two destinations. The commodity rate is
sometimes called a special rate, since it is given by carriers to shippers as a reward for either regular
use or large-quantity shipments. Unfortunately, many small business owners do not have the volume
of shipping needed to take advantage of commodity rates. However, small businesses are
increasingly utilizing a third type of rate that has emerged in recent years. This rate is known as a
negotiated or contract rate. Popularized in the 1980s following transportation deregulation, contract
rates allow a shipper and carrier to negotiate a rate for a particular service, with the terms of the rate,
service, and other variables finalized in a contract between the two parties. Transportation costs vary
by mode of shipping, as discussed below.

TRUCKINGLEXIBLE AND GROWING The shipping method most favored by small business (and
many large enterprises as well) is trucking. Carrying primarily manufactured products (as opposed to
bulk materials), trucks offer fast, frequent, and economic delivery to more destinations in the country
than any other mode. Trucks are particularly useful for short-distance shipments, and they offer
relatively fast, consistent service for both large and small shipments.

AIR FREIGHTAST BUT EXPENSIVE Because of the relatively high cost of air transport, small
businesses typically use air only for the movement of valuable or highly-perishable products.

However, goods that qualify for this treatment do represent a significant share of the small business
market. Owners can sometimes offset the high cost of air transportation with reduced inventory-
holding costs and the increased business that may accompany faster customer service.

WATER CARRIERSLOW BUT INEXPENSIVE

There are two basic types of water carriers: inland or barge lines, and oceangoing deep-water ships.
Barge lines are efficient transporters of bulky, low-unit-value commodities such as grain, gravel,
lumber, sand, and steel. Barge lines typically do not serve small businesses. Oceangoing ships, on
the other hand, operate in the Great Lakes, transporting goods among port cities, and in
international commerce. Sea shipments are an important part of foreign trade, and thus are of vital
importance to small businesses seeking an international market share.

RAILROADSONG DISTANCE SHIPPING Railroads continue to present an efficient mode for the
movement of bulky commodities over long distances. These commodities include coal, chemicals,
grain, non-metallic minerals, and lumber and wood products.

PIPELINESPECIALIZED TRANSPORTERS

Pipelines are utilized to efficiently transport natural gas and oil products from mining sites to
refineries and other destinations. In addition, so-called slurry pipelines transport products such as
coal, which is ground to a powder, mixed with water, and moved as a suspension through the pipes.

INTERMODAL SERVICES Small business owners often take advantage of multi-mode deals offered
by shipping companies. Under these arrangements, business owners can utilize a given
transportation mode in the section of the trip in which it is most cost efficient, and use other modes
for other segments of the transport. Overall costs are often significantly lower under this
arrangement than with single-mode transport.

Of vital importance to small businesses are transporters specializing in small shipments. These
include bus freight services, United Parcel Service, Federal Express, DHL International, the United
States Postal Service, and others. Since small businesses can be virtually paralyzed by
transportation strikes or other disruptions in small shipment service, many owners choose to
diversify to include numerous shippers, thus maintaining an established relationship with an
alternate shipper should disruptions occur. Additionally, small businesses often rely on freight
forwarders who act as transportation intermediaries: these firms consolidate shipments from
numerous customers to provide lower rates than are available without consolidation. Freight
forwarding not only provides cost savings to small businesses, it provides entrepreneurial
opportunities for start-up businesses as well.

WAREHOUSING
Small business owners who require warehousing facilities must decide whether to maintain their own
strategically located depot(s), or resort to holding their goods in public warehouses. And those
entrepreneurs who go with non-public warehousing must further decide between storage or
distribution facilities. A storage warehouse holds products for moderate to long-term periods in an

attempt to balance supply and demand for producers and purchasers. They are most often used by
small businesses whose products' supply and demand are seasonal. On the other hand, a
distribution warehouse assembles and redistributes products quickly, keeping them on the move as
much as possible. Many distribution warehouses physically store goods for fewer than 24 hours
before shipping them on to customers.

In contrast to the older, multi-story structures that dot cities around the country, modern warehouses
are long, one-story buildings located in suburban and semi-rural settings where land costs are
substantially less. These facilities are often located so that their users have easy access to major
highways or other transportation options. Single-story construction eliminates the need for installing
and maintaining freight elevators, and for accommodating floor load limits. Furthermore, the internal
flow of stock runs a straight course rather than up and down multiple levels. The efficient movement
of goods involves entry on one side of the building, central storage, and departure out the other end.

Computer technology for automating warehouses is dropping in price, and thus is increasingly
available for small business applications. Sophisticated software translates orders into bar codes
and determines the most efficient inventory picking sequence. Order information is keyboarded only
once, while labels, bills, and shipping documents are generated automatically. Information reaches
hand-held scanners, which warehouse staff members use to fill orders. The advantages of
automation include low inventory error rates and high processing speeds.

INVENTORY CONTROL
Inventory control can be a major component of a small business physical distribution system. Costs
include funds invested in inventory, depreciation, and possible obsolescence of the goods. Experts
agree that small business inventory costs have dropped dramatically due to deregulation of the
transportation industry.

Inventory control analysts have developed a number of techniques which can help small businesses
control inventory effectively. The most basic is the Economic Order Quantity (EOQ) model. This
involves a trade-off between the two fundamental components of an inventory control cost:
inventory-carrying cost (which increases with the addition of more inventory), and order-processing
cost (which decreases as the quantity ordered increases). These two cost items are traded off in
determining the optimal warehouse inventory quantity to maintain for each product. The EOQ point
is the one at which total cost is minimized. By maintaining product inventories as close to the EOQ
point as possible, small business owners can minimize their inventory costs.

ORDER PROCESSING
The small business owner is concerned with order processingnother physical distribution
functionecause it directly affects the ability to meet the customer service standards defined by the
owner. If the order processing system is efficient, the owner can avoid the costs of premium
transportation or high inventory levels. Order processing varies by industry, but often consists of four
major activities: a credit check; recording of the sale, such as crediting a sales representative's

commission account; making the appropriate accounting entries; and locating the item, shipping, and
adjusting inventory records.

Technological innovations, such as increased use of the Universal Product Code, are contributing to
greater efficiency in order processing. Bar code systems give small businesses the ability to route
customer orders efficiently and reduce the need for manual handling. The coded information
includes all the data necessary to generate customer invoices, thus eliminating the need for
repeated keypunching.

Another technological innovation affecting order processing is Electronic Data Interchange. EDI
allows computers at two different locations to exchange business documents in machine-readable
format, employing strictly-defined industry standards. Purchase orders, invoices, remittance slips,
and the like are exchanged electronically, thereby eliminating duplication of data entry, dramatic
reductions in data entry errors, and increased speed in procurement cycles.

PROTECTIVE PACKAGING AND MATERIALS HANDLING
Another important component of a small business physical distribution system is material handling.
This comprises all of the activities associated with moving products within a production facility,
warehouse, and transportation terminals. One important innovation is known as unitizingombining as
many packages as possible into one load, preferably on a pallet. Unitizing is accomplished with steel
bands or shrink wrapping to hold the unit in place. Advantages of this material handling methodology
include reduced labor, rapid movement, and minimized damage and pilferage.

A second innovation is containerizationhe combining of several unitized loads into one box.
Containers that are presented in this manner are often unloaded in fewer than 24 hours, whereas
the task could otherwise take days or weeks. This speed allows small export businesses adequate
delivery schedules in competitive international markets. In-transit damage is also reduced because
individual packages are not handled en route to the purchaser.

Customer satisfaction is an important issue. Not only logistics, physical delivery and supply system
must be discussed but also communication and administration involved, maintaining a total high
standard service level.
We are convinced that our customer focus, flexibility and tailor made options offered together with
our commitment and experience will be one of the keys to your success.

Note:2
Physical Distribution

Related Terms: Distribution Channels; Transportation

Economists and business people talk about the movement of goods in and out of business
operations as "physical distribution"; it has its counterpart in "materials management," the
movement of materials through a plant during production. When these materials
movements are considered as part of a system which is planned and managed by people, it
is called "logistics." In the commercial sector logistics involves sourcing of materials and
marketing of goods, managing the distribution system, and planning and rationalizing
materials flow in production.

Physical distribution costs money. The cost of incoming transportation tends to be hidden
in the price, but the business owner will feel the price directly if he or she has to ship
product any distance or deliver it locally to the consumer. Jean-Paul Rodrique, Claude
Comtois, and Brian Slack, in their book titled The Geography of Transportation Systems,
estimated that logistics accounts for 10 to 15 percent of worldwide Gross Domestic Product.

MODES AND NODES
Physical distribution, narrowly considered, is based on modes of transport that connect
important nodes where goods are temporarily held. The major modes are air, water, rail,
and road; to these must be added the highly specialized mode of transporting oil and gas in
pipelines. The nodes are warehouses situated in close proximity to major systems of

distribution. In the pipeline industry tank farms serve the same role; in gas distribution
pumping stations are needed to boost the pressure of gas being moved at intervals.

In pre-industrial times the only effective long-distance mode of transportation was by
water; early on ships "coasted" ocean shores, keeping them always in sight until navigation
developed and sailors discovered nearby lands either by exploration or by storm-tossed
accident; later they crossed oceans; inland they followed rivers, and in part access to water
almost determined where major communities were formed. Canals were dug all over the
world as this mode developed; their traces are still around but used largely for recreational
travel today. In America George Washington was involved in canal construction before
making his name as a soldier and father of his country. In current times waterborne
shipping carries all imaginable goods in bulk and container vessels; in inland river
transportation barge traffic mainly carries commodities—grains, gravel, coal, cement.

The development of the steam engine in the 18th century first influenced water
transportation by providing an engine for ships—and in the 19th century led to the almost
explosive development of rail as a major mode of transportation. Rail captured the bulk of
long-distance goods distribution, of which a very substantial part was coal, the black gold
that fueled the industrial revolution. Well into the 20th century the U.S. landscape was
overlaid by a system of rails not unlike a fairly tight hairnet. Rails reached most towns of any
size—and towns formed along the rails as before they'd formed around waterways. Much of
the 19th century rail system has since been abandoned. In 1876 the first practical internal
combustion engine saw the light of day.

Long-distance land transportation today is dominated by trucking, made possible by that
combustion engine (modified into the diesel engine), the extensive development of a
highway network, itself suggested by national defense needs, and the development of a
major new oil and gas sector which, these days, itself heavily relies on water transportation
to bring us fuel. In many areas oil moves by pipeline. Tonnage moved by truck overtook
tonnage moved by rail in the last quarter of the 20th century. Much as rivers and rails
stimulated location of businesses and people, so did the development of the Interstate
Highway System. Its important interchanges became locations of choice for warehousing
nodes.

Air transportation was the last major mode to develop. It expanded after World War II in
the second half of the 20th century as a people-transport system, which it largely remains,
but air freight eventually emerged and has a small share of air tonnage. Air shipment is used
for small packages and, occasionally, for larger products that must be delivered in a hurry.

With the maturing of transport systems came combined modes generally referred to as
"intermodal" transportation. Typical examples of it are "container ships" that carry boxes
which can be placed directly on semi tractor trailers and trucked to their final destinations.
Within these boxes goods are packed on pallets ready for unloading by forklift trucks. These
same containers can be transported by rail for long-distance hauls and then transferred to
trucks for the final leg of the trip.

In terms of costs, the lowest cost is associated with water, then with rail, then with trucking,
and finally with air transportation.

EVERYTHING IS RELATIVE
What Einstein held to be true for bodies moving in space and time is true for physical
distribution generally. In pre-industrial times physical distribution could be understood by
simply looking at such factors as price of product, its size, weight, and its distance from the
buyer; using such factors the cost of "sourcing" products could be readily calculated. In early
days, however, labor costs were largely the same everywhere and most goods moved were
raw materials rather than highly processed or manufactured goods. Labor costs and
technology have changed all that so that physical distribution is today greatly influenced by
factors external to physical movement. It is quite possible, for instance, to buy a heavy cast-
iron outdoor umbrella stand at a lower cost from China—the stand itself made from scrap
metal shipped to China from Los Angeles—than a functionally identical product made
somewhere in Louisiana or Ohio. The driving force is the production cost of the item moved
—itself based on the producer's raw material, energy, and labor costs. If the product has a
low production cost, it can "carry" a high transportation cost and arrive at our door more
inexpensively than an item traveling a short distance but having a higher production cost.

FIGURING IT OUT
Physical distribution is sometimes a problem for the small business if it is located in
outlying areas poorly served by modes. Until the 1970s, transportation was regulated by the
federal government under the laudable principle that transportation was, in a sense, a utility
which should serve all locations—with the most cost-effective points subsidizing service to
distant and less profitable points. Deregulation began in 1977 across the board of all
"utilities" and continues in the mid-2000s with energy distribution. Airlines were
deregulated first. Most small business, however, is located in or near major hubs. And
distribution, running at somewhere around 15 to 20 percent of GDP, is a very big industrial
sector and fairly competitive. Discovering the right match of modes to serve a business's
markets is, of course, part of initial business planning.

Small businesses rarely have the resources to become experts in physical distribution and
therefore converge on typical modes of distribution used in their industry by discovering
how others do the job. Occasionally the small business is required to come up with
something new and innovative as the consequence of an unusual contract, a new product
launch, or the appearance of a new customer. An alternative to doing heavy homework is to
make use of transport brokerage, freight forwarding, and transport service organizations
that specialize in designing optimal methods of getting the goods where they belong. A
Google search with the words "freight forwarding" followed by the name of the state will
typically produce a large number of hits or a directory from which the business can select
companies to call for initial discussions.

Note:3

Part of logistics management, physical distribution is concerned with the transporting of
merchandise, raw materials, or by-products, such as hazardous waste, from the source
to the customer. A manager of physical distribution must also assess and control the
cost of transporting these goods and materials, as well as to determine the most efficient
way to store them, which usually involves some form of warehousing. Hence, physical
distribution (PD) is concerned with inventory control, as well as
with packaging and handling. Customer relations, order processing,
and marketing are also related activities of PD.

In essence, physical distribution management (PDM) involves controlling the
movement of materials and goods from their source to their destination. It is a highly
complex process, and one of the most important aspects of any business. PDM is the
"other" side of marketing. While marketing creates demand, PDM's goal is to satisfy
demand as quickly, capably, and cheaply as possible.

One could maintain that PD is as old as civilization. Even merchants in ancient times
had to move goods and raw materials to their destination, and to engage in storage and
inventory control. Until the Industrial Revolution, however, these activities were carried
out inefficiently: goods usually were replenished slowly, and there were far fewer goods

than in the era of mass production. If marketing was conducted at all, it was usually
done at the point of purchase.

The Industrial Revolution ushered in mass production and, by the late 19th century, the
beginnings of mass marketing. Goods and raw materials also were conveyed over
greater distances. Nonetheless, until World War II, PD was far less important than
production and marketing. Physical distribution of goods and materials also remained
basically unchanged, carried out as separate, unrelated activities—transportation and
handling, storage, and inventory control.

The postwar years witnessed an unprecedented explosion of consumer goods and
brands, thanks to modern mass marketing, the population explosion, and the increasing
sophistication of the average consumer. The sheer volume and variety of goods
enormously complicated their distribution and storage. A wholesaler of breakfast
cereals, for instance, no longer handled a few cereal brands, but dozens of them, and
with the proliferation of supermarkets, was confronted with the problem of greater
demand and continuous product turnover. The cost of distribution escalated as well,
further adding to the complexity of distribution. A seminal article on physical
distribution ("New Strategies to Move Goods"), appearing in a September 1966 issue
of Business Week, for the first time fostered an awareness of PD as a separate category
of business. This eventually generated textbooks on physical distribution management,
as well as courses in business schools. For the first time, PD, as well ascost
control, became central concerns of upper management.

By this time, computers had slowly entered the realm of PD, at least in the United
States. It was not until the 1970s, however, that computers were fully utilized. Their
effect over time was to integrate the hitherto disparate categories of PD—transportation,
storage, inventory, and distribution—into closely related activities.

Currently, computerization is performing the major functions of physical distribution
management, from long-range strategic planning to day-to-day logistics, inventory, and
market forecasting. The best of these systems are tightly integrated with inventory and
other logistics systems, and may even be linked to customers' systems, as is the case

with efficient consumer response (ECR) systems. ECR systems, which some have
criticized as being to narrowly focused, attempt to maximize distribution efficiency by
delivering inventory on a just-in-time basis. Advanced distribution systems may employ
satellite tracking and routing of trucks, electronically tagged pallets or cargo containers,
and elaborate data monitoring and storage capabilities. Data collected from these
activities are used to identify weak spots in the chain and benchmark improvements.

Often upstart companies, and even some large ones as well, rely on third-party
distributors for at least some of their physical distribution, and hence there is an entire
industry of third-party logistics services. These and other outsourcing services received
a great deal of attention during the 1990s, as manufacturing companies sought to
eliminate peripheral activities when they could do so at cost savings. Smaller companies,
on the other hand, frequently lack the expertise or resources to perform their own
distribution. Nonetheless, some distribution analysts criticize the outsourcing
movement because the net cost savings may be less than anticipated and the quality of
the logistics service may be hard for the manufacturer to control.

Up to now, PDM has been concerned with the movement of physical objects. In the
future, however, it will have to accommodate itself to the increasing shift of the economy
away from manufacturing and toward service industries. In this new
realm, environmental cleanup and the disposal of waste undoubtedly will be
increasingly important to PDM. The expansion of global markets is also affecting PDM,
requiring enormous technical and operational refinement.

Note:4

Good supply chain management is one of the most important aspects of business success and will make
your company grow or disappear, depending on strategies used. It is a critical success factor.
Physical distribution and Supply Chain Management cover the delivery of customer and economic
value through integrated management of the flow of physical goods and associated information. It is a
network of facilities and distribution options which performs the function of procurement of materials and
the distribution of these products to customers.
It is of major importance, when making decisions, that various items are discussed and looked at such
as:
 The existing supply chain strategy
 Logistic concepts within your organization
 Outsourced activities – subcontracted functions
 Possible gains – time/financial
 Actual purchase management
 Warehousing procedures and facilities
 Actual stock movement/change
 Distribution systems – eventual lower cost with a smart distribution system
 Is everybody aware of your actual existing logistic costs within your organization ?
 Used data systems and handling management
 JIT management applicable ?
 Order picking involved and/or required ?
 Checks with other logistic technology trends and new distribution logistics trends.
 Possible full redesign of the supply chain
 ……
Customer satisfaction is an important issue. Not only logistics, physical delivery and supply system must
be discussed but also communication and administration involved, maintaining a total high standard service
level.
We are convinced that our customer focus, flexibility and tailor made options offered together with our
commitment and experience will be one of the keys to your success.

Physical distribution set1

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