Distribution and Logistics in Business

Distribution

• All businesses must distribute their product to a consumer or a location where they can be found.
• Distribution is key to success because it ensures consumers eventually possess the product.
• Distribution is comprised of two components: channel selection & management and physically distributing goods through these channels.
• Distribution channels describe the path of ownership goods take from producer to consumer.
• Channel selection involves determining the best path for a product to reach its target consumer.
• Logistics are the processes involved in ensuring efficient, safe, affordable, and timely product movement.

Distribution Policies

• Intensive Distribution: Products are sold everywhere (e.g., Coca-Cola) and increase brand awareness, loyalty, and require large inventory.
• Selective Distribution: Manufacturers control product distribution and may avoid conflicts in positioning or brand image. Retailers cannot be refused product sales without a valid reason. It offers reduced cost and less exposure.
• Exclusive Distribution: Manufacturers partner with one or two retailers in an area to exclusively sell their products. This strategy promotes prestige and allows manufacturers to dictate retail strategies (e.g., high fashion clothing, luxury watches).
• Integrated Distribution: Manufacturers, distributors, or retailers own both distribution outlets and manufacturing facilities for a product (e.g., IKEA, Lee Valley tools).

Distribution Channels

• There are three types of distribution channels: Direct, Indirect, and Specialty.
• Direct channels involve the customer buying directly from the producer, with no intermediaries present.
• Indirect channels involve one or more intermediaries between the producer and the customer.
• Specialty channels are indirect channels that do not involve a physical retail store.

Direct Channels

• Direct channels require an integrated distribution policy.
• Examples include farmers' markets, bakeries, and restaurants.

Indirect Channels

• Importers are intermediaries who may or may not have exclusive rights to distribute a product in their country.
• Importers may seek out new products to import or be contacted by manufacturers looking to expand.
• Wholesalers purchase products from manufacturers and sell them to retail stores or other businesses.
• Wholesalers are necessary because manufacturers often have minimum order sizes that are too large for smaller retailers.
• Wholesalers perform key functions such as breaking bulk, transporting, risk bearing, managing, financing, promoting, buying, and providing market information.
• Retailers are the "front line," selling directly to consumers.
• Retailers must have the right merchandise, price, time, place, and quantity to be successful.

Specialty Channels

• Specialty channels utilize methods that do not involve a physical retail store.
• Examples of Specialty channels include vending machines, the internet, catalogues, telemarketing, and television sales.

Logistics

• Logistics involves purchasing, manufacturing, storage, and transportation of goods.
• Logistics managers consider factors like destination, weight, volume, and the type of goods when determining the best transportation method.

Transportation

• Transportation cost is affected by the distance goods need to travel.
• Heavier items typically cost more to transport.
• Bulkier items require more space and can potentially be containerized, which can also affect cost.
• Different goods may require special handling or specialized containers.

Free On Board (FOB)

• FOB determines the point at which responsibility for shipped goods transfers from the seller to the buyer.
• In "FOB destination", ownership transfers at the destination (where the goods are going).
• In "FOB source", ownership transfers at the origin (where the goods come from).

FOB Example

• If a good is damaged while being transported from the factory to the retail store, the buyer is responsible if the system is FOB source.
• If a good is damaged while being transported from the factory to the retail store, the producer is responsible if the system is FOB destination.

Common Types of Transportation

• Trucks: Offer door-to-door delivery and are crucial in logistics plans. Truck costs vary depending on the company. Goods are consolidated until enough for a full truckload (TL), which is more cost-effective.
• Trains: Efficient for large quantities of freight over long distances. Suitable for heavy, bulky, and hard-to-handle goods. They can transport across countries.
• Planes: Expensive but ideal for small shipments requiring quick delivery.
• Ships: Designed for large cargo and heavy weight but relatively slow. Ideal for international shipments across water, often less expensive than air transport.
• Pipelines: Used for transporting natural gas and crude oil.

Which Mode of Transportation?

• 10,000 flatscreen TVs from China to Future Shops across Canada: Likely a combination of ships (for the international portion) and trucks (for delivery within Canada).
• 20 tons of grain from Regina to the Weston Bakery in Toronto: Most likely a train due to the large quantity and long distance.
• 10 lbs of Otoro (tuna) from Tokyo to MHK Sushi in Ottawa: Air transport is ideal for this perishable item to ensure freshness and speed of delivery.
• 10 cases of maple syrup bottles from Gatineau to Montreal: Trucks would be a suitable choice for this relatively short distance and smaller quantity.

Inventory Management

• Integral part of the supply chain
• Determines how much of a product a business needs and when
• Controls overstocks, out-of-stocks, shrinkage and turnover

Overstock

• Having more stock than you can sell in a reasonable period of time
• Storing inventory costs money, uses space, ties up capital
• Old stock can depreciate quickly

Out-of-Stock

• Running out of inventory means you lose sales
• Can make customers angry, costing you future sales

Shrinkage

• Inventory that is lost due to breakage, damage and theft
• Effective inventory management prevents these things from happening
• Records when they do happen

Turnover

• The number of times a business sells its inventory in one year
• Shows how fast inventory is moving
• Different industries have standard turnover rates
• Formula: Cost of inventory Sold in 12 months / Average Inventory Investment for 12 months
• Low turnover = overstock
• High turnover = frequent out-of-stock