Multimedia Marketing/Marketing.iso/market/chapter6.7p

Text File | 1996-08-22 | 14KB | 326 lines

SECTION 6.7  The Physical distribution System

INSTRUCTIONS Define, in your own words, what a physical distribution system is
used for. Then go into this section for further insights.

EXAMPLE

A carrier of bulk natural gas and petroleum products--a pipeline
company--is one of the strongest contenders in the industry. It
has assembled an impressive 37,000 mile coast-to-coast pipeline
network, one of the industry's largest. Equally important is its
access to the nation's fastest growing gas markets--California
and Florida. When coupled with the company availability to cheap
unregulated Texas natural gas, the firm is well-positioned to
stave off any future competitive threats.



DETAILS

Many laymen equate marketing with promotional activities. They are
familiar with advertising, personal selling, and sales promotion.
On the other hand, physical distribution remains an unknown
quantity. Yet, this is a vital aspect of marketing. Following is
a list of examples illustrating physical distribution activities and
providing a general idea of the nature and importance of this
function:

1. A producer of electronic components for computers learns that
it can reduce total transportation costs by using an airline,
rather than a railroad, to move the components to customers.

2. A supermarket chain purchases a fleet of medium-duty trucks because
the price is competitive, the trucks do not require extensive
servicing, ande the wheel turning diameter is up to 45 degrees.

3. A German steel company builds oil-storage tanks in Belgium
for an American oil company.

4. A university installs off-campus branches in five cities.

5. A sporting good store decides to increase its inventory of
roller blades and accessories.

Physical distsribution (PD), also called logistics, is an important
function that is closely related to channel management. PD refers to
a broad range of activities involving the efficient and effective
movement of products. PD also involves the many ways to move items,
from trains to ships, from planes to pipelines.

PD itself relates to the flow of products across space and time from
producers to consumers. In contrast, PD management involves the
design and implementation of systems to control this flow. PD management
is related to but distinct from channel management. On the one hand,
channel management is concerned with who is to participate in a
channel structure as well as the flow relationships between the
participants. On the other hand, PD management focuses on the
efficient and effective movement, storage, and handling of items.

PROBLEM 1

A lumber distributor uses a PD management system. This involves the
__________ to control this flow.

A. Creation of efficient channels of distribution.
B. Design and implementation of systems.
C. Development of policies.
D. Creation of forecasts.

WORKED

A lumber distributor uses a PD management system. This involves the
design and creation of systems to control this flow. The essence
of PD mangement is not to be continually contending with problems
as they arise. Rather, it is to set up a well-conceived and smoothly-
running system in the first place and then take steps to insure that
the system is operating properly. The system has a number of
components, such as transportation and warehousing. These must be
coordinated with each other so that they all are moving toward
achievement of company goals. It is possible to set up PD management
systems that achieve both high customer service and low costs.

ANSWER  B
INSTRUCTIONS Define, in your own words, what a physical distribution system is
used for. Then go into this section for further insights.

EXAMPLE

A carrier of bulk natural gas and petroleum products--a pipeline
company--is one of the strongest contenders in the industry. It
has assembled an impressive 37,000 mile coast-to-coast pipeline
network, one of the industry's largest. Equally important is its
access to the nation's fastest growing gas markets--California
and Florida. When coupled with the company availability to cheap
unregulated Texas natural gas, the firm is well-positioned to
stave off any future competitive threats.

DETAILS

PD management seeks to gain efficiencies in the mechanical
problems of:

1. Warehousing and storing--how much inventory should be stored and
   where.
2. Transportation and handling--what is the best means of moving
   goods from one point to another.
3. Order processing--what is the most efficient and effective
   means of processing and placing orders.
4. Location selecting--where should warehouses, stores, inventory
   stocks, and other elements be located.

Historically, marketers have not granted as much attention to PD
as they have to the activities of locating customers and motivating
them to buy. But today this is changing. With rapidly rising
transportation, storage, and handling costs, marketers are increasingly
treating PD as a last frontier for gaining efficiency. PD functions
historically have accounted for nearly half of a firm's total
marketing costs or about 14 to 30 percent of sales. Consequently,
a relatively modest improvement can bring about startling rewards.

A large wholesaler has automated and computerized systems in all 72
of its chemical warehouses. This allows the firm to streamline
ordering, delivering, invoicing, and developing customer profile
data. The system makes it possible for one warehouse to serve an
entire region rather than only one local market.

A charity raises funds by the sale of gifts and cards through catalogs.
Buyers receive both the material they order and the knowledge that
they have made a contribution to the needy. The charity has utilized
sophisticated computerized inventory control methodologies borrowed
from industry, allowing it to cut inventory costs substantially.

Advanced computer analytic techniques showed a manufacturer of
electronic equipment that an annual savings of nearly three million
dollars was possible by redesigning the PD system of just one
subsidiary with sales of fifty million dollars--a profit improvement
of six percent of sales. To appreciate the size of this savings,
consider the fact that business profits often average five to ten
percent of sales. Thus, business profitability could even double
if all firms could gain the same relative improvement by carefully
controlling PD activities.

PROBLEM 2

A physical distribution manager for a marketer of laminated plastic
is likely to have control over all of the following activities except:

A. Transportation and handling.
B. Warehousing and storing.
C. Selecting channel members.
D. Location selecting.

WORKED

A physical distribution manager for a marketer of laminated plastic
is likely to have control over transportation and handling, warehousing
and storing, and location selecting. All of these relate to the
physical movement of goods from producer to consumer. Transportation
and handling involve the actual movement of the goods. Warehousing
and storing have to do with the bringing together and holding of
goods. Location selecting refers to the placement of physical
handling facilities and stocks of goods after they have been produced.

ANSWER  C
INSTRUCTIONS Define, in your own words, what a physical distribution system is
used for. Then go into this section for further insights.

EXAMPLE

A carrier of bulk natural gas and petroleum products--a pipeline
company--is one of the strongest contenders in the industry. It
has assembled an impressive 37,000 mile coast-to-coast pipeline
network, one of the industry's largest. Equally important is its
access to the nation's fastest growing gas markets--California
and Florida. When coupled with the company availability to cheap
unregulated Texas natural gas, the firm is well-positioned to
stave off any future competitive threats.

DETAILS

Most people are confronted by systems throughout the day. Our
bodies are dependent upon respiratory, circulatory, and other
systems. We work and make purchases in an economic system. And
we make governmental decisions, through elected representatives,
by using a political system.

It is useful when making PD decisions to think of the function as
a system. In turn, a system is an entity made up of interdependent
parts that absorbs inputs and emits outputs. When one part of the
system is altered, this tends to have an impact on other parts.


If, for instance, management takes steps to speed up transportation,
this will affect inventory levels. If it lowers inventory levels, this
can impact upon how the transportation function is carried out.
Decision making in the PD area should always take the systems nature
of this function into consideration.

The systems approach to physical distribution is especially useful
when making decisions about various physical movement alternatives.
The overriding objective is to minimize total PD costs while maintaining
a desired level of service.

When making PD decisions, management should first establish the
level of service that it seeks to offer customers to attract their
business. Some firms define their delivery goals as "third morning
delivery anywhere in the U.S." Others define their goals as a percentage
of customers who should get their order in a certain number of days.
Stil others think of holding out-of-stock conditions down to a certain
level. To customers, service takes several forms.

1. Time from order receipt to order shipment.
2. Order size and assortment restrictions.
3. Percentage of items out of stock.
4. Percentage of orders filled.
5. Percentage of orders filled accurately.
6. Percentage of orders filled within a reasonable number of days.
7. Percentage of orders that arrive in good condition.
8. Time from order placement to order delivery.
9. Ease and flexibility of order placement.
10.Consistency of delivery times.

In general, the greater the service level the higher the PD costs.
Conversely, lower service levels involve smaller PD costs, but sales
tend to drop as the service level falls, so management should not
lower the level of service too far.

PROBLEM 3

A wholesaler who handles machinery sold to the printing industry could
have several customer service policies. Which of the following is not
one of these?

A. To fill 90 percent of orders received within 4 days.
B. To deliver 99 percent of orders in good condition.
C. To not have more than 5 percent of goods out of stock.
D. To receive orders from 40 percent of past customers.

WORKED

Customer service policies in physical distribution refer to
accomplishments in transportation and handling, warehousing and
storage, order processing, and selecting locations. Examples are
to fill 90 percent of orders within 4 days, to deliver 99 percent
of orders in good condition,f and to not have more than 5 percent
of goods out of stock. All of these policies relate to benefits
that customers will receive. They do not necessarily reflect benefits
to the seller, although benefits such as improved sales and profits
should be derived from achievement of the customer service standards.

ANSWER  D
INSTRUCTIONS Define, in your own words, what a physical distribution system is
used for. Then go into this section for further insights.

EXAMPLE

A carrier of bulk natural gas and petroleum products--a pipeline
company--is one of the strongest contenders in the industry. It
has assembled an impressive 37,000 mile coast-to-coast pipeline
network, one of the industry's largest. Equally important is its
access to the nation's fastest growing gas markets--California
and Florida. When coupled with the company availability to cheap
unregulated Texas natural gas, the firm is well-positioned to
stave off any future competitive threats.

DETAILS

Determining the level of service to offer is one of the most difficult
tasks in marketing. Each situation is unique. In essence, the
appropriate level of service should reflect current competitors'
services as well as estimated customer and competitor reactions to
alternative levels of service. Even rough estimates are useful in
leaning the impact of PD alternatives.

The costs of a PD system include warehousing and storage, order
processing, transportation, handling, and operating the facilities
in given locations. The objective is to minimize the total of these
costs, while providing a desired level of service.

All of a PD system's components are interactive, meaning that
management must make tradeoffs when attempting to minimize costs.Adding
another warehouse means  larger associated costs but could also
result in a less-expensive means of shipping goods and fewer lost
sales due to out-of stock conditions. Because PD should be thought of
as a system, total costs and their overall implications on channel
effectiveness are the important evaluative criteria, not the
individual costs of any single component.

It may be cheaper to ship goods by barge than by
truck, but this will increase inventory costs because barges are
slower than trucks and this slow transportation is the same as
tying goods up in inventory. Because PD should be thought of as a
system, total costs and their overall implications on channel
effectiveness are the important evaluative criteria, not the
individual costs of any single component.

PROBLEM 4

Using the systems approach to PD, what is the likely effect on
cost of changing from rail to air transportation for a wholesaler?

A. A decrease in inventory costs.
B. A decrease in transportation costs.
C. An increase in order processing costs.
D. An increase in handling costs.

WORKED

Using the systems approach to PD, the likely effect on a wholesaler's
cost of changing from rail to air transportation is a decrease in
inventory costs. The change will increase transportation costs. But
it will reduce inventory costs, since the goods will be in transit
for a shorter period of time. If the decrease in inventory costs more
than offsets the increase in transportation costs, the change was
successful. The systems approach calls for making tradeoffs of this
kind.

ANSWER  A