Multimedia Marketing/Marketing.iso/market/chapter6.8p

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SECTION 6.8  The Components of a Physical Distribution System

INSTRUCTIONS Attempt to list the major parts of the physical distribution
system. Then pursue this section for details regarding the components.

EXAMPLE

Some firms experience difficulty in coping with physical distribution
problems. An automobile accessory producer makes spark plugs for
new automobiles, trucks, and other vehicles and replacement parts
(the aftermarket). In recent years its  physical distribution
problems have increased dramatically.

Aftermarket parts remain in stock for a long time. The Model T Ford
has not been made since 1927, for instance, yet in recent years the
manufacturer has produced over 17,000 Model T spark plugs. Recently
the number of new spark plugs needed to keep in inventory has
increased substantially because of the number of older vehicles
still on the road.

DETAILS

The components of physical distribution that are most critical to
marketing managers are inventory decisions, warehousing decisions,
and transportation decisions. These are the focus of this section.

Inventories are held for two major reasons: to enable relatively
even production levels over time despite sales fluctuations and to
take advantage of the most economical means of transportation,
which usually means bulk shipments.

If sales were always constant, say 1,000 units per day, and if
transportation, ordering, and handling costs were the same per unit,
regardless of the size of the batch, then maintaining inventories
would be economically wasteful. Production would be set at 1,000
units per day and inventories would be eliminated.

But these costs do vary per unit, with larger quantities usually
resulting in lower average ordering costs. And if sales are lost
because of not having an adequate stock on hand, termed a "stock out"
condition, the customer may be lost forever. Firms generally try
to maintain some inventory level in reserve, called "safety stock,
to enable them to meet unexpected demand. Thus, inventories facilitate
sales and enable efficiencies in shipping, handling, and ordering.

Many firms produce goods until they have accumulated what is called
an "optimal shipment level", which permits efficient transportation.
Then they arrange for a shipment and inventory falls to zero. This
process is repeated over time, permitting both even production runs
and low cost transportation.

Holding inventory is costly because of:

1. The cost of capital (interest costs from tying up funds).
2. Opportunity costs (inability to use funds for other purposes).
3. Theft, spoilage, obsolescence, and breakage of items stored.

But not holding adequate inventory is also costly because of:


1. Lost sales due to stock-outs.
2. Excessive overhead caused by placing and filling small orders.
3. Not being able to take advantage of quantity discounts, both for
   purchases and for reduced lot size transportation rates.

Properly managing an inventory consists of attempting to minimize
total inventory costs--balancing the costs of holding inventory
against the costs of not holding adequate inventory. The complexities
can be great. Keeping track of hundreds, even thousands of different
types of items is common.

Technological advances in computers, software, and complex
mathematical models have greatly expanded management's ability to
manage inventories and determine optimal stock levels for even
extensive product lines. The resulting cost and efficiency
improvements can be remarkable. Even smaller firms can gain
efficiencies through the computer software that is widely available
at reasonable prices.

PROBLEM 1

A furniture retailer will find that the costs of not holding adequate
inventory include:

A. The cost of capital.
B. Lost sales due to stock-outs.
C. Opportunity costs.
D. Theft, spoilage, and obsolescence.

WORKED

A furniture retailer will find that the costs of not holding adequate
inventory include lost sales due to stock-outs. Some customers will
come to the store, discover that the products they want are not
available, and will go to other stores to buy them. Or they may
change their minds and forget about buying the products. Some of
these consumers may even become hostile toward the store, because
it did not fulfill their needs, and not return to buy other items
in the future. Further, they may voice their complaints to friends
and other acquaintances, further damaging the store. It is evident
that stock-outs can be very costly.

ANSWER  B
INSTRUCTIONS Attempt to list the major parts of the physical distribution
system. Then pursue this section for details regarding the components.

EXAMPLE

Some firms experience difficulty in coping with physical distribution
problems. An automobile accessory producer makes spark plugs for
new automobiles, trucks, and other vehicles and replacement parts
(the aftermarket). In recent years its  physical distribution
problems have increased dramatically.

Aftermarket parts remain in stock for a long time. The Model T Ford
has not been made since 1927, for instance, yet in recent years the
manufacturer has produced over 17,000 Model T spark plugs. Recently
the number of new spark plugs needed to keep in inventory has
increased substantially because of the number of older vehicles
still on the road.

DETAILS

Inventory and warehousing decisions are closely related. Warehousing
is the storing, housing, and handling of goods from the time they
are produced to the time they are sold. Included are all activities
from the time items arrive at a warehouse until they leave for
shipment to customers. Warehousing is required for accumulating
and storing items in assortments and breaking large quantities
into smaller ones for allocation to customers at the appropriate
time. Two types of decisions are needed: determining the number of
warehouses and selecting their locations.

Maintaining a large number of warehouses can make very effective
servicing of customers possible, especially if the warehouses are
situated near clusters of customers. When inventories are located
nearby, stock-out conditions are less likely to occur. Further a
larger number of warehouses may reduce shipping costs, since part of
an item's movement can be in large batches from the point of production
toward final buyers, Conversely, a greater number of warehouses
drives up inventory costs, as larger total inventories and more
handling is usually required. As a result, deciding on the appropriate
number of warehouses to use involves making a cost tradeoff.

Locating warehouses is another decision area. Companies have two
choices when deciding where to house inventories. First they may
hold an inventory at a central point in or near the firm's production
facilities. Loads are then shipped to customers as orders are received.
The second choice is to transport goods to storage points near customers
and then reship them to fill orders.

Centrally located storage has the advantage of tying up less capital
in inventory since the firm requires fewer items to be held.
Random fluctuations in sales within regions tend to offset each
other, thus necessitating smaller safety stocks. However, centrally
located inventories may result in higher transport costs if
shipments to customers are so small that the firm incurs costly
transportation rates. Further, central storage may result in a longer
time being required to fill orders, which can produce stock-outs
and lost sales.

Regionally located inventories, on the other hand, usally permit
rapid servicing of customers and efficient transportation, at
least to the point of storage. But a firm's total inventory level
can be substantial, resulting in large holding costs. Consequently,
management's deliberations on which, if any, locations to select
as storage points are based on tradeoffs between costs of central
versus regional storage.

A common arrangement is to utilize regional warehouses that are located
near clusters of customers. Large shipments are transported to the
regional warehouses and then re-transported to invididual customers.
This is called "break bulk" and has two advantages to the producer.
First it is less costly than direct shipment of orders to customers
from a central warehouse because transportation carriers such as
railroads charge lower per-unit rates for large than for small
shipments.The break bulk alternative allows the producer to ship
large quantities of goods at low rates to the warehouse. The
shipments at higher freight rates in smaller volume units from
the warehouse to customers are for short distances. This lowers
total costs.

Also regional warehouses allow the producer to serve customers
rapidly. Since the warehouses are located near customers, orders
can be quickly transported over short distances. This can be
important if customers demand quick delivery.

PROBLEM 2

A lumber mill maintains a large number of warehouses to serve
customers. An advantage of this arrangement is:

A. Total inventory costs will be lower than if it uses only a few
   warehouses.
B. Order processing costs are less than if it uses only a few
   warehouses.
C. Stock-out conditions are less likely to occur than if it uses
   only a few warehouses.
D. The cost of maintaining a sales forces is less than if it uses
   only a few warehouses.

WORKED

If a lumber mill uses a large number of warehouses to serve customers,
stock-out conditions are less likely to occur than if it uses only
a few warehouses. Each regional warehouse can carry an assortment
of goods that fits the merchandise requirements of the area that it
is assigned. If a regional warehouse runs out of inventory for a
particulr item, the central warehouse can ship that item to the
regional warehouse, allowing it to fill in the assortment deficiency.
If the company has a small number of warehouses, this is more
difficult to achieve.

ANSWER  C
INSTRUCTIONS Attempt to list the major parts of the physical distribution
system. Then pursue this section for details regarding the components.

EXAMPLE

Some firms experience difficulty in coping with physical distribution
problems. An automobile accessory producer makes spark plugs for
new automobiles, trucks, and other vehicles and replacement parts
(the aftermarket). In recent years its  physical distribution
problems have increased dramatically.

Aftermarket parts remain in stock for a long time. The Model T Ford
has not been made since 1927, for instance, yet in recent years the
manufacturer has produced over 17,000 Model T spark plugs. Recently
the number of new spark plugs needed to keep in inventory has
increased substantially because of the number of older vehicles
still on the road.

DETAILS

Transportation management is another very important component of
PD. This is the administration of the physical movement of goods
from point of origin to point of destination. Managers are faced
with two major decisions: when to ship and what mode to use.

Should marketers send goods to customers as soon as they receive
orders? Sales managers are tempted to say "Yes". They know that
stock-outs can lead to lost sales and therefore seek to make rapid
shipments. However, cost-oriented managers are tempted to answer:
"Wait until we can assemble a large enough lot for shipment to the
same destination at lower rates." They know that handling costs are
smaller with large orders and that transportation rates are lower too.

PROBLEM 3

A cement producer has a policy of combining orders for shipment
to customers. The major advantage to this company is:

A. Faster service to customers.
B. Lower inventory cost.
C. Lower advertising costs.
D. Lower transportation costs.

WORKED

A cement producer has a policy of combining orders for shipment to
customers. The major advantage to the company is lower transportation
costs. The company can combine orders to make larger shipments. Rail
carriers charge less for carloads (normally more than 40,000pounds)
than for less than carloads. The difference in the two rates is often
very large--carload rates may be as small as one fifth of less than
carload. Further, truck carriers have truckload and less than truckload
rates. The cement producer can move the large shipments to a warehouse
located near the customers and take advantage of these volume discounts
that the carriers provide.

ANSWER  D
INSTRUCTIONS Attempt to list the major parts of the physical distribution
system. Then pursue this section for details regarding the components.

EXAMPLE

Some firms experience difficulty in coping with physical distribution
problems. An automobile accessory producer makes spark plugs for
new automobiles, trucks, and other vehicles and replacement parts
(the aftermarket). In recent years its  physical distribution
problems have increased dramatically.

Aftermarket parts remain in stock for a long time. The Model T Ford
has not been made since 1927, for instance, yet in recent years the
manufacturer has produced over 17,000 Model T spark plugs. Recently
the number of new spark plugs needed to keep in inventory has
increased substantially because of the number of older vehicles
still on the road.

DETAILS

All physical distribution decisions are characterized by the necessity
for cost trade-offs. Thus knowing when to ship depends on the
characteristics surrounding a particular firm: factors relating to
its customers and the nature of the product and upon management's
strategies. Management should make an attempt to minimize both
direct transportation costs and lost-customer costs.

A decision must be made as to the mode of transportation to use.
The major choices are railroads, motor carriers, airlines, water
carriers and pipelines.

Railroads are very competitive in the movement of bulky and heavy
commodities over long distances. Most shippers find that if they
ship goods by truck, rather than by rail, the unit costs of
transportation for smaller shipments tend to be lower. As shippers
increase the load size they eventually reach a point where rail
transport is less than truck rates. Shippers of such commodities
as cement, bulk salt, lumber, coal, grain, and quarried rock use
rail freight.

There are a number of disadvantages associated with rail shipment.
It is slower than air and many truck carriers, and some railroads
have spotty records for damaging goods in transit and for unreliable
delivery. In addition, service is available only in those areas
where tracks exist.

Motor transportation is superior to rail shipping under certain
conditions. Trucks have a competitive rate advantage in conveying
small shipments over short distances. They can reach areas that
are not accessible to rail, such as rural sites, and can pick up
goods at loading docks and transport them to receiving docks without
the necessity of reloading. For short distances, trucks are faster
than railroads. Damage in transit is less of a problem than it is
with rail freight.

Speed is the major advantage that airlines enjoy. For many shippers,
this advantage more than compensates for the high freight charges.
They can achieve inventory reductions and consequent savings on
warehousing costs as a result of rapid transportation. Generally,
airlines have good records for minimal damage in transit. In
addition, they can reach difficult-to-access areas in foreign
countries.

Water carraige is a slow and low cost method of conveying heavy
and bulky commodities, such as lumber and sand. One obstacle is
that ice closes some passages during winter periods; shippers must
transport their goods while the harbors are open or utilize other
modes during the winter. Also, many destinations are not located
near seaports or navigable waters.

Pipelines are very specialized carriers that move natural gas and
liquid petroleum. They transport crude oil from individual wells
to treatment and storage centers. From here, pipelines carry the
liquids from large trunk lines to various refineries.

The pipelines are a reliable and low-cost mode of transportation
that can move large quantities of liquid or gas from one location
to another. Oil producers own and operate most of the larger
pipelines.

Each shipper must review the advantages and disadvantages of the
various modes and decide which is best for the particular firm.
The nature of the product, customer needs, and the strategy of
the marketer are all determinants of the optimum mode.

PROBLEM 4

An automobile producer is considering the use of either rail or truck
transportation of cars from the plant to dealers. An advantage of
truck transportation is:

A. It is competitive in moving the shipments over long distances.
B. Damage in transit is less of a problem than with rail freight.
C. It is competitive in moving heavy items such as automobiles.
D. It is competitive in moving bulky items, such as automobiles.

WORKED

An automobile producer is considering the use of either rail or
truck trasportation of cars from the plant to dealers. An advantage
of truck transportation is damage in transit is less of a problem
than with rail freight. Railroads subject their freight to
considerable turbulence while in transit. Railroad cars are less
stable than trucks and vibrate and move about on the tracks in a
manner that can damage shipments. Also the process of loading and
unloading cars subjects cargo to damage. Some railroad employees
have been found to be not overly concerned with damaging shipments,
and this is a major problem to railroad managers.

ANSWER  B