Physical Distribution PDF

Physical Distribution 1) Concept & Introduction to Physical Distribution 2) Total Distribution Cost 3) Distribution – Channel design & Participants 4) Types of Distribution channel 5) Unconventional Channels 6) Vertical & Horizontal Mktg Channels Characteristics of Physical Distribu...

Physical Distribution 1) Concept & Introduction to Physical Distribution 2) Total Distribution Cost 3) Distribution – Channel design & Participants 4) Types of Distribution channel 5) Unconventional Channels 6) Vertical & Horizontal Mktg Channels Characteristics of Physical Distribution Physical distribution concerns with the total activities involved in distributing products to ultimate users. It joins two ends, producers and sellers. Careful analysis of elements, activities and effects of physical distribution necessarily reveals following features: 1. Meaning 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 is the sum of a firm’s W/H location decisions, inventory control processes, order handling and transportation decisions. The goal for a firm is to manage all these aspects so as to minimize its total physical distribution costs. 2. Parties Physical distribution involves various parties, such as; : Producers, Middlemen (wholesalers, retailers, agents, etc.), Owners of warehouses, Bankers, Insurance Companies, Transporters, Communication Service providers, and many other similar parties, who can facilitate a smooth flow to goods from producers to consumers. 3. Activities/Functi (i) Order processing (ii)Handling products ons: (iii) Sorting and packing (iv)Warehousing (v) Transportation (vi)Insurance & Banking (vii) Inventory control (viii) Customer service, etc. 4. Costs: According to one estimate, physical distribution costs constitute as much 60% of the total marketing cost and range according to industries, from 10% to 30% of sales revenues; for machinery these were 9.8% ; wood products 16.1% ; paper and allied products 16.7% ; chemicals, petroleum and rubber 23.1% and primary and fabricated metals, 26.5%. Main components of costs involve grading or processing, storing, moving, charging, insuring, damage or loss during movement, delivering to customers, and clearing bills. These all costs can be reduced to a great extent by a suitable distributing system. 5. Utility Creation: Physical distribution creates time and place utility. Products manufactured at a particular point can be made available to different destinations in time. Consumers have more ease and freedom to buy the required quantity of products as and when they need. The right distribution can add to the total consumer satisfaction. Wide availability at all the times can help buyers and sellers. 6. Role: Physical distribution plays a decisive role in determining overall success of any product. Just by establishing a suitable distribution system, a company can offer additional benefits to buyers. Availing products regularly and at reasonable price where and when consumers demand depends largely on physical distribution. It is treated as an important tool for survival and growth. 7. Flexibilit Physical distribution is flexible in nature. How a product can be distributed is dependent upon various factors. So, distribution decision is the individual decision of y:the firm and it depends on Nature of product, (Perishable/Non-Perishable) Management philosophy, Financial and Human resource abilities of the firm, Availability of Quality and Quantity of auxiliary services, Demand of products, Government rules and restrictions, and likewise. Every company designs its distribution network as per its needs and forces of external environment. Objectives/Importance of Physical Distribution: Physical distribution is aimed at availing the products to consumers smoothly at low cost. It stresses on achieving the righteousness in all the significant aspects of physical distribution, i.e., the right product, at the right time, at the right place, in the right manner, for the right people, and at the right price/cost. It balances between the price and the services. 1. To Ensure Consumer Convenience: It is the primary objective of physical distribution. The right kind of distribution can increase consumer convenience. They can buy the product as per their needs at any time from the convenient place, even at reasonable price. Similarly, middlemen involved in physical distribution, who sell products of various companies, can offer consumers a chance to select the most suitable products. Smooth and continuous flow of goods can add to total consumer satisfaction. 2. To Facilitate Continuous Production: Distribution is directly beneficial to producers. Continuous production contributes a lot to distributors, consumers, and society at large. An efficient distribution network facilitates continuous production because of sophisticated storing facility, rapid means of transportation and communication, access to global market, advance ordering, buying incentives to sell in off-seasons, rapid ordering and executing, etc. 3.To A chieve Economy: To economize distribution is one of the objectives of physical distribution. A suitable distribution system results into lowering overall costs in a number of ways. 1)Speedy order processing, 2)Availabilityof the latest transportation  and communication, (carts to drones/Verbal to GPS) 3)Benefits of scale of economy, 4)Rapid sales turnover, 5)Insuring the products, and 6)Many other similarbenefits lead to low costs,and ultimately low selling price. 4. To Reduced Degree of Damage/Wastage: A company can reduce product damage that takes place during storage, transportation, and handling. Also, availability of insurance at a lower premium can reduce considerable risk during storage and transportation. Use of cold storage, rapid and safe means of transportation, and other facilities relating to distribution can reduce damage or wastage of product. Reduced damage and better quality significantly contribute to success of product. 5. To Increase Competitiveness: Today’s market is characterized by competition. All sellers are fighting cut-throat for better offers to their consumers. A company can increase its competitive strengths by a systematic distribution network. Many companies can distinguish their offers by availing products differently than competitors. Effective distribution affects positively to services, availability, timing, price, and similar benefits. Undoubtedly, if all the components of distribution work effectively, physical distribution can be a powerful means to fight with competitors. 6. To Lower Idle Stocks: This objective relates with control. inventory Producers and distributors can minimize reordering size or safety margin by effective distribution system. Due to speed and precision in placing and executing orders, and advanced ordering by distributors, they are not required to maintain more stock of the finished products. This facility can reduce overall inventory costs and need of working capital. 7. To Achieve Rapid Turnover of Stock: Physical distribution is also targeted to speed up turnover of stocks. From investment of cash in raw materials to realization of cash through the sales of finished can be speeded up. Stocks can be speedily converted into cash. So, the duration of working capital cycle can be reduced, and need of working can be minimized. 8. To Enhance Sales: By making sure that basic products in regular demand are always available, and having contingency plans for quick order processing of items. 9. By To Decrease intelligently Cost: organizing the distribution system and determining the physical optimum number and location of warehouses, improving materials handling, increasing stock turnover, and using sealed containers to ship products. 10. Bigger Share in the National Wealth: It represents large share in the national wealth in the form of facilities—rail, road, trucks, highways, aircrafts, ship, docking facilities, pipelines, storage facilities and equipment. 11. Facilitates Geographic Specialization. Each area produces goods that its natural resources, climate or pool of manpower resources enable it to produce more efficiently. (Handi-crafts) 12. Determines Standard Of Living: This is so because proper distribution of products makes them available to a large number of people, at a relatively lower cost. Thus it can be said that physical distribution directly affects sales, customer service and satisfaction, and costs. 5 Direct and Indirect Losses Resulting from Physical Distribution of Goods 1. Storage Goods kept in storage for too long incur unnecessary costs. : Iflong the merchandise is kept in storage for a time, the greater is the cost in (a) Obsolescence and deterioration, (b) (c) Lost use of money tied up in Taxes, inventory, (d) (f)Theft, (e)space Costs of Insurance, storage facilities unsuited to product and inappropriate location of warehouses are other important potential losses. 2. Materials Handling: Improper materials results handling costly problems such as- in Damaged merchandise; Loosing products by placing them in wrong location in the warehouse; Excessive product damage. 3. Inventory Management: Ineffective inventory management results in losses such as— (a) Inaccurate records of what products and in what location, quantity, and condition are available and (b) Too much or too little merchandise being available in relation to demand. 4. Order Processing: Ineffective order processing can result in losses such as— (a) taking too long to fill; (b) being shipped to the wrong customers; (c) being inaccurately filled (qty); and (d) not being billed properly. 5. Transportati Mal -performance of transportation can produce a variety of losses, such as— on: (a) shipment of products to the wrong location ; (b) selection of less efficient modes or combination of modes; (c) excessive time used to deliver products, and (d) damage of products in transit.  Making appropriate and balanced decisions on warehousing, transportation, inventory levels as well as location-call for the highest degree of co-ordination among the various staff and their executives who are heading these departments. It is suicidal to allow slackness in this regard. Understanding Distribution Cost Distribution cost is a major bottleneck. Distribution expenses – The individual expenses made by the company for various reasons is known as Distribution expenses. These are individual or repeated transactions happening over time. An example may include – Rent, Salaries, Administrative expenses etc. All these are individual transactions or repeat transactions and these transactions can be called distribution expenses. Distribution cost – The combination of all distribution expenses made by a company is known as Distribution cost. So continuing the above example – the total of rent, salaries, and administrative expenses will be considered as distribution cost. In terms of Formula [The sum of all Distribution Expenses] = Distribution cost 11 types of Distribution 1)Direct expensesSelling Expenses Any expense made towards selling the product to the target customer is a direct selling. Many manufacturers, wholesalers, and distributors carry out direct selling in the regions that they want to expand. They also would like to know the distribution cost of that region. Thus, they consider all direct selling expenses as the primary expense made by the firm. Such Expenses will include – Salary of Field Salespeople (only for target customer sales), Travel of salespeople, Entertainment for sub-dealers, Training costs, Postage or office supplies needed for sales etc. All these different headers are categorized as direct selling expenses. They are one of the major contributors to distribution cost. The more you spend in sales, ultimately the more profit you will have. 2) Advertising & Sales Promotion Expenses If a company wants to establish itself in a new region, it needs to have OOH advertising, it needs to run in-store branding, it needs to run ads in local newspapers or local channels. Thus, the company will be spending a lot towards advertising and promotions which are various forms of distribution expenses. Example – Spends in Hoardings, Banners, Standees, ATL marketing, Advertising agencies, In-store branding and any administrative expense towards advertising and sales promotion will fall under that header only. 3) Product and Packaging Expenses  If the product packaging is good but not strong would result in a huge wear and tear by the time it reached the customer and the customers (may) return the product. This can cause a huge loss to the company and they ultimately will come up with a plan to have a different and sturdy form of packaging. Such packaging is obviously a cost to the company and should be added as one of the distribution expenses. Besides this, some other forms of product costs include raw materials, depreciation of the product in stock, salaries for employees involved in product development or related to product and packaging. 4) Trade Discounts Besides sales promotion exercises like advertising and marketing, a company launches several trade promotional exercises as well. This includes giving discounts to retailers, distributors, and suppliers on achieving certain targets. Other type includes discounts on picking certain quantities of products (example picking a bulk of 1000 units will give 2% additional discount). Thus, Quantity discounts, sales allowances, and other such trade discounts are considered as distribution expenses and ultimately distribution cost. 5) Credit, Outstanding and Overdue A distributor who operates in a regional market needs the huge amount of money to conduct business. To arrange this money, the distributor takes a loan from the banks. This is known as an Overdue account. Hypothetically, If the distributor takes 1 lakh from the bank, within 30 days he should give back 1 lakh + ??% interest. Thus, a dealer suffers a loss when his money does not come back from the market in time. As a result, Overdue accounts, Market outstanding and credit are given in the market to contribute to the distribution cost. The more credit given in the market, the higher is the value of interest applied. There are also expenses towards collecting the outstanding from the market and to close all bad debt. Thus, all these distribution expenses related to credits, outstanding and overdue contribute to distribution cost and must be taken into account. 6) Market Research When reputed companies like Samsung, LG or Sony want to establish themselves in a new market, they buy market research reports from the likes of IMRB or Nielson. These reports may cost hundreds or thousands of dollars. Not only in a new market, even in an old market, a company might want to conduct a satisfaction survey or a survey of new ideas regarding distribution. The company might find in this survey that the time taken for delivery is quite high. Or it may find that other companies are giving higher credit, therefore resulting in loss of sale for a parent company. In all this, the market research costs are generally kept up to a percentage of the total profits or revenue of the company. So market research cost for a branded company might be 1% of revenue. 7) W arehousing and Handling within Warehouse Warehousing is a major cost of distribution. When a company expands to newer markets, it needs to have new warehouses in each new territory. Domino’s or McDonald’s practically have warehouses for every 3-4 towns so that they can supply to local retail outlets very fast. Because of Domino’s and McDonald’s handle frozen goods (burgers or fries), their expenses are even higher because they need cold rooms and cold chains to deliver the products. Thus, the various warehousing costs include rent of the warehouse, salaries of warehouse managers and material handlers, electricity expenses, administrative expenses for warehouse management, supplies and utilities, specialized equipment etc. NOTE – Warehousing cost is different from transportation and delivery cost which is calculated separately. 8) Shipping and Delivery Shipping and delivery are important to the firm and hence companies ensure they are operating above capacity. Companies can choose to use their own transportation and company-owned trucks or they can use outsourced transportation.  Retail chains generally use their own transportation within warehouses due to regular movements of goods. Consumer durables and FMCG use outsourced transportation because the movement of goods is erratic. Costs of transportation include – freight charges, manpower for loading and unloading, utilities, insurance of product, repairs and maintenance, salaries of truck and vehicle driver, management of records etc. With the rise of E-commerce, delivery is a huge focus area for all manufacturers. The stock must be in the market – whether it is on an E- commerce portal or in a retail outlet or with the distributor. Everyone knows that if there is no stock on display, the sale will not happen and this creates friction between the different distribution channels. 9) C ommercials & Accountancy Government requirement to present all your sales and purchases as well as balance and profit sheets to the government to determine profit earned by your firm. These statements are also important for the firm itself to note the growth year on year as well as to determine the performance and future potential. Thus, commercials and accounts are documented precisely in any firm. The distribution expenses towards commercials and accountancy include – Processing of orders and maintaining accounts receivables, sales invoices, payment proof’s, clerical jobs, invoicing and accountancy software, printing and stationery expenses, utility expenses. All these expenses together form the distribution cost of commercials and accountancy. 10) Customer Service In the industrial segment, there exist industrial distributors who take care of both – Sales and service of the product. In such cases, it is the distributor who must take care of the service of the product as well. The running of a customer service centre, the salaries of customer service executives, the utilities and tools required, specialized equipment, rent, electricity, administrative and clerical expenses are all various distribution expenses filed under customer service. 11) Sales Returns If a dealer or a retailer rejects a material, then the material comes back to the manufacturer provided it is in the returns policy of the company. This returned material may have come back due to cosmetic conditions (it was damaged or dented) or it may have come back due to performance issues. In any condition, the returned product is a cost to the company. The company can either repair the cosmetic damage, reutilize the product again or sell it off at a discounted rate. In case of performance issues too, the product can be repaired or recycled or sold off. The distribution expenses of sales returns include freight of bringing damaged products back, repairing of the product, loss due to discounted sale, loss due to recycling of the product, bad inventory in stock, clerical or other administrative expenses towards handling sales return.