9. Distribution Policy 1. The nature of distribution channels. 2. Channel behaviour and channel organization. 3.Channel design decisions. 4.

Channel management decisions. 5. Physical distribution decisions. Kotler Ph., Armstrong G. - Marketing an introduction, Prentice Hall, 1990 (324-349) Pride W. Marketing concepts and strategies, Boston, Houghton Mifflin Company, 1991 (306-398) Florescu C. Marketing, Bucureti, 1992, (355-380) 1. The nature of distribution channels. Most producers use middlemen to bring their products to market. They try to forge a distribution channel. A distribution channel is the set of firms and individuals that take title, or assist in transferring title, to a good or service as it moves from the producer to the consumer or industrial user. Why Are Middlemen Used? Why do producers give some of the selling job to middlemen? This means giving up some control over how and to whom products are sold. The use of middlemen largely boils down to their greater efficiency in making goods available to target markets. Through their contacts, experience, specialization, and scales of operation, middlemen usually offer a firm more than it can achieve on its own. Figure 1 shows one way that using middlemen can provide economies. Part A shows three producers each using direct marketing to reach three customers. This system requires nine different contacts. Part B shows the three producers working through one distributor, who contacts the three customers. This system requires only six contacts. In this way, middlemen reduce the amount of work that must be done by both producers and consumers. From the economic system's point of view, the role of middlemen is to transform the assortment of products made by producers into the assortments wanted by consumers. Producers make narrow assortments of products in large quantities. But consumers want broad assortments of products in small quantities. In the distribution channels, middlemen buy the large quantities of many producers and break them down into the smaller quantities and broader assortments wanted by consumers. Thus, middlemen play an important role in matching supply and demand.

M M M A

C C C

M M M B D

C C C

Distribution Channel Functions A distribution channel moves goods from producers to consumers. It overcomes the major time, place, and possession gaps that separate goods and services from those who would use them. Members of the marketing channel perform many key functions:

Researchgathering information needed for planning and aiding exchange Promotiondeveloping and spreading persuasive communications about an offer Contactfinding and communicating with prospective buyers Matchingshaping and fitting the offer to the buyer's needs, including such activities as manufacturing, grading, assembling, and packaging

Negotiationreaching an agreement on price and other terms of an offer so that ownership or possession can be transferred Physical distributiontransporting and storing goods Financingacquiring and using funds to cover the costs of the channel work Risk takingassuming the risks of carrying out the channel work

The first five functions help to complete transactions; the last three help fulfill the completed transactions. The question is not whether these functions need to be performedthey must bebut rather who is to perform them. All the functions have three things in commonthey use up scarce resources, they can often be performed better through specialization, and they can be shifted among channel members. To the extent that the manufacturer performs them, its costs go up and its prices have to be higher. At the same time, when some functions are shifted to middlemen, the producer's costs and prices are lower, but the middlemen must add a charge to cover their work. In dividing up the work of the channel, the various functions should be assigned to the channel members who can perform them most efficiently and effectively to provide satisfactory assortments of goods to target consumers. Number of Channel Levels Distribution channels can be described by the number of channel levels. Each layer of middlemen that performs some work in bringing the product and its ownership closer to the final buyer is a channel level. Because the producer and the final consumer both perform some work, they are part of every channel. We will use the number of intermediary levels to indicate the length of a channel. Figure 2 shows several consumer distribution channels of different lengths.
Level 0

Manufacturer Manufacturer
Level 1

Consumer Consumer Retailer

Level 2

Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Wholesaler

Level 3

Consumer Consumer Consumer Consumer Consumer Consumer

Retailer Jobber Retailer

Wholesaler

Channel 1, called a direct-marketing channel, has no intermediary levels. It consists of a manufacturer selling directly to consumers. For example, Avon and World Book Encyclopedia sell their products door-todoor; Franklin Mint sells collectables through mail order; Singer sells its sewing machines through its own stores. Channel 2 contains one middleman level. In consumer markets, this level is typically a retailer. For example, large retailers such as Sears and K mart sell televisions, cameras, tires, furniture, major appliances, and many other products that they buy directly from manufacturers. Channel 3 contains two middleman levels. In consumer markets, these levels are typically a wholesaler and a retailer. This channel is often used by small manufacturers of food, drug, hardware, and other products. Channel 4 contains three middleman levels. In the meatpacking industry, for example, jobbers usually come between wholesalers and retailers. The jobber buys from wholesalers and sells to smaller retailers who are not generally served by larger wholesalers. Distribution channels with more levels are sometimes found, but less often. From the producer's point of view, a greater number of levels means less control. And, of course, the more levels, the greater the channel's complexity. Figure 3 shows some common industrial distribution channels. The industrial-goods producer can use its own salesforce to sell directly to industrial customers. It can also sell to industrial distributors who in turn sell to industrial customers. It can sell through manufacturer's representatives or its own sales branches to industrial customers, or use them to sell through industrial distributors. Thus zero-, one-, and two-level distribution channels are common in industrial goods markets.

Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer

Manufacturers reprezentative Manufacturers sales branch

Level 0 Level 1

Industrial Industrial Customer Customer Industrial distributor Industrial distributor Industrial distributor Industrial Industrial Customer Customer Industrial Industrial Customer Customer Industrial Industrial Customer Customer

Level 2 Level 3

All the institutions in the channel are connected by several types of flows. These include the physical flow of products, the flow of ownership, payment flow, information flow, and promotion flow. These flows can make even channels with only one or a few levels very complex. 2. Channel behaviour and channel organization. Distribution channels are more than simple collections of firms tied together by various flows. They are complex behavioural systems in which people and companies interact to accomplish individual, company, and channel goals, Some channel systems consist of only informal interactions among loosely organized firms; others consist of formal interactions guided by strong organizational structures. And channel systems do not stand stillnew types of middlemen surface and whole new channel systems evolve. Here we will look at channel behaviour and at how members organize to do the work of the channel. Channel Behavior A distribution channel is made up of dissimilar firms that have banded together for their common good. Each channel member is dependent on the others, A Ford dealer depends on the Ford Motor Company to design cars that meet consumer needs. In turn, Ford depends on the dealer to attract consumers, persuade them to buy Ford cars, and service cars after the sale. The Ford dealer also depends on other dealers to provide good sales and service that will uphold the reputation of Ford and its dealer body. In fact, the success of individual Ford dealers will depend on how well the entire Ford distribution channel competes with the channels of other auto manufacturers. Each channel member plays a role in the channel and specializes in performing one or more functions. For example, IBM's role is to produce personal computers that consumers will like and to create demand through national advertising. Computerland's role is to display these computers in convenient locations, answer buyers' questions, close sales, and provide service, The channel will be most effective when each member is assigned the tasks it can do best. Ideally, because the success of individual channel members depends on overall channel success, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their goals and activities, and cooperate to attain overall channel goals. By cooperating, they can more effectively sense, serve, and satisfy the target market. But individual channel members rarely take such a broad view. They are usually more concerned with their own short-run goals and their dealings with those firms closest to them in the channel. Cooperating to achieve overall channel goals sometimes means giving up individual company goals. Although channel members are dependent on one another, they often act alone in their own short-run best interests. They often disagree on the roles each should playon who should do what and for what rewards. Such disagreements over goals and roles generate channel conflict. Horizontal conflict is conflict between firms at the same level of the channel. Some Ford dealers in Chicago complain about other dealers in the city stealing sales from them by being too aggressive in their pricing and advertising or by selling outside their assigned territories. Some Pizza Inn franchisees complain about other Pizza Inn franchisees cheating on ingredients, giving poor service, and hurting the overall Pizza Inn image. Vertical conflict is even more common and refers to conflicts between different levels of the same channel. For example. General Motors came into conflict with its dealers some years ago by trying to enforce policies on service, pricing, and advertising. And Coca-Cola came into conflict with some of its bottlers who agreed to bottle Dr Pepper. A large chain saw company caused conflict when it decided to bypass its wholesale

distributors and sell directly to large retailers such as J. C. Penney and K mart, which then competed directly with its smaller retailers. Some conflict in the channel takes the form of healthy competition. This competition can be good for the channelwithout it, the channel could become passive and noninnovative. But sometimes, conflict can damage the channel. For the channel as a whole to perform well, each channel member's role must be specified and channel conflict must be managed. Cooperation, assigning roles, and conflict management in the channel are attained through strong channel leadership. The channel will perform better if it contains a firm, agency, or mechanism that has the power to assign roles and manage conflict. In a large company, the formal organization structure assigns roles and provides needed leadership. But in a distribution channel made up of independent firms, leadership and power are not formally set. Traditionally, distribution channels have lacked the leadership needed to assign roles and manage conflict. In recent years, however, new types of channel organizations have appeared that provide stronger leadership and improved performance. We will now look at these organizations. Channel Organization Historically, distribution channels have been loose collections of independent companies, each showing little concern for overall channel performance. These conventional distribution channels have lacked strong leadership and have been troubled by damaging conflict and poor performance. Growth of Vertical Marketing Systems One of the biggest recent channel developments has been the vertical marketing systems that have emerged to challenge conventional marketing channels. Figure- 4 contrasts the two types of channel arrangements. Conventi onal marketin g channel Vertical marketi ng system

Manufacturer Manufacturer

Wholesaler

Retailer

Consumer Consumer

Retailer 2. Contractual VMS. A contractual Consumer Consumer VMS consists of independent firms at Wholesaler different levels of production and Manufacturer distribution who join together through contracts to obtain more economies or A conventional distribution channel consists of one or more independent producers, wholesalers, and sales impact than they could achieve retailers. Each is a separate business seeking to maximize its own profits, even at the expense of profits for the alone. members, and there have formal system as a whole. No channel member has much control over the other Contractual VMSs are noexpanded means for assigning roles and resolving channel conflict. rapidly in recent years. There are three By contrast, a vertical marketing system (VMS) consists of producers,contractual VMSs. types of wholesalers, and retailers acting as a unified system. Either one channel member owns the others, has contracts with them, or wieldsvoluntary so much Wholesaler-sponsored power that they all cooperate. The vertical marketing system can be dominated by the producer, wholesaler, or chains are systems in which retailer. VMSs came into being to control channel behavior and manage channel conflict. They achieve wholesalers organize voluntary chains economies through size, bargaining power, and elimination of duplicated services. VMSs have become of independent retailers to help them dominant in consumer marketing, serving as much as 64 percent of the total market. compete type large different means for We will examine three major types of VMSs shown in Figure-5. Each with uses achain organizations. setting up leadership and power in the channel. In a corporate VMS, The wholesaler conflict management are coordination and develops a program in which independent retailers standardize attained through common ownership at different levels of the channel. In a contractual VMS, they are attained their selling practices assumed by through contractual agreements among channel members. In an administered VMS, leadership isand achieve one or a few dominant channel members. buying economies that let the group compete effectively with chain 1. Corporate VMS. A corporate VMS combines successive stages of production and distribution under single ownership. For example, Sears obtains over 50 percent of its goods from companies that include or it partly the organizations. Examples wholly owns. Sherwin-Williams makes paint but also owns and operates two thousand retail outlets, Giant Independent cream making plant, and a Food Stores operates an ice-making facility, a soft-drink bottling operation, an ice Grocers Alliance (IGA), bakery that supplies Giant stores with everything from bagels to birthday cakes. In such corporate systems, Western Auto, and Sentry Hardwares.
cooperation and conflict management are handled through regular organizational channels.

Retailer cooperatives are systems in which retailers organize a new, jointly owned business to carry on wholesaling and possibly production. Members buy most of their goods through the retailer co-op and plan their advertising jointly. Profits are passed back to members in proportion to their purchases. Non-member retailers may also buy through the co-op but do not share in the profits. Examples include Certified Grocers, Associated Grocers, and True Value Hardware. In franchise organizations, a channel member called a franchiser links several stages in the production-distribution process. Franchising has been the fastest-growing retailing form in recent years. Franchised businesses now account for about one-third of retail sales in the U.S. Almost every kind of business has been franchised from motels and fast-food restaurants to dentists and dating services, from wedding consultants and maid services to funeral homes and tub and tile refinishers. Although the basic idea is an old one, some forms of franchising are quite new. There are three forms of franchises. The first form is the manufacturer-sponsored retailer franchise system, as found in the automobile industry. Ford, for example, licenses dealers to sell its carsthe dealers are independent businesspeople who agree to meet various conditions of sales and service. The second type of franchise is the manufacturer-sponsored wholesaler franchise system, as found in the soft-drink industry. Coca-Cola, for example, licenses bottlers (wholesalers) in various markets who buy its syrup concentrate and then carbonate, bottle, and sell the finished product to retailers in local markets. The third franchise form is the service firm-sponsored retailer franchise system. Here, a service firm licenses a system of retailers to bring its service to consumers. Examples are found in the auto rental business (Hertz, Avis), fast-food service business (McDonald's, Burger King), and motel business (Holiday Inn, Ramada Inn). The fact that most consumers cannot tell the difference between contractual and corporate VMSs shows how successful contractual organizations have been in competing with corporate chains. 3. Administered VMS. An administered VMS coordinates successive stages of production and distribution not through common ownership or contractual ties but through the size and power of one of the parties. Manufacturers of a top brand can obtain strong trade cooperation and support from resellers. Thus, General

Electric, Procter & Gamble, Kraft, and Campbell Soup can command unusual cooperation from resellers regarding displays, shelf space, promotions, and price policies. Types of Middlemen A firm should identify the types of middlemen available to carry on its channel work. For example, suppose a manufacturer of test equipment has developed an audio device that detects poor mechanical connections in any machine with moving parts. Company executives feel that this product would have a market in all industries where electric, combustion, or steam engines are made or used. This market would include such industries as aviation, automobile, railroad, food canning, construction, and oil. The company's current salesforce is small, and the problem is how best to reach these different industries. The following channel alternatives might emerge from management discussion: Company salesforce. Expand the company's direct salesforce. Assign salespeople to territories and have them contact all prospects in the area. Or develop separate company salesforces for different industries.

Manufacturer's agency. Hire manufacturer's agenciesindependent firms whose salesforces handle related products from many companiesin different regions or industries to sell the new test equipment. Industrial distributors. Find distributors in the different regions or industries who will buy and carry the new line. Give them exclusive distribution, good margins, product training, and promotional support.

Sometimes, a company has to develop a channel other than the one it prefers because of the difficulty or cost of using the preferred channel. Still, the decision sometimes turns out extremely well. For example, the U.S. Time Company first tried to sell its inexpensive Timex watches through regular jewellery stores. But most jewellery stores refused to carry them. The company then managed to get its watches into massmerchandise outlets. This turned out to be a wise decision because of the rapid growth of mass merchandising. Number of Middlemen Companies also have to decide on the number of middlemen to use at each level. Three strategies are available. Intensive Distribution. Producers of convenience goods and common raw materials typically seek intensive distributionstocking their product in as many outlets as possible. These goods must be available where and when consumers want them. For example, toothpaste, candy, and other similar items are sold in millions of outlets to provide maximum brand exposure and consumer convenience. Exclusive Distribution. By contrast, some producers purposely limit the number of middlemen handling their products. The extreme form of this practice is exclusive distribution, whereby a limited number of dealers are given the exclusive right to distribute the company's products in their territories. Exclusive distribution is often found in the distribution of new automobiles and prestige women's clothing. By granting exclusive distribution, the manufacturer hopes for stronger distributor selling support and more control over middlemen's prices, promotion, credit, and services. Exclusive distribution often enhances the product's image and allows higher mark-ups. Selective Distribution. Between intensive and exclusive distribution lies selective distributionthe use of more than one but less than all the middlemen who are willing to carry a company's products. The company does not have to spread its efforts over many outlets, including many marginal ones. It can develop a good working relationship with selected middlemen and expect a better-than-average selling effort. Selective distribution lets the producer gain good market coverage with more control and less cost than intensive distribution. Most television, furniture, and small appliance brands are distributed selectively. Responsibilities of Channel Members The producer and middlemen need to agree on the terms and responsibilities of each channel member. They should agree on price policies, conditions of sale, territorial rights, and specific services to be performed by each party. The producer should set up a list price and a fair set of discounts for middlemen. It must define each middleman's territory and be careful where it places new resellers. Mutual services and duties need to be carefully spelled out, especially in franchise and exclusive distribution channels. For example, McDonald's provides franchisees promotional support, a record-keeping system, training, and general management assistance. In turn, franchisees must meet company standards for physical facilities, cooperate with new promotion programs, provide requested information, and buy specified food products.

4. Evaluating the Major Channel Alternatives Suppose a producer has identified several possible channels and wants to select the one that will best satisfy the firm's long-run objectives. Each alternative should be evaluated against economic, control, and adaptive criteria. Using economic criteria, a company compares the likely profitability of different channel alternatives. It estimates the sales that each channel would produce and the costs of selling different volumes through each channel. The company must also consider control issues. Using middlemen usually means giving them some control over the marketing of the product, and some middlemen take more control than others. Other things being equal, the company prefers to keep as much control as possible. Finally, the company must apply adaptive criteria. Channels often involve long-term commitments to other firms, making it hard to adapt the channel to the changing marketing environment. The company wants to keep the channel as flexible as possible. Thus, to be considered, a channel involving a long commitment should be greatly superior on economic or control grounds. 5. Physical distribution decisions. We are now ready to look at physical distributionhow companies store, handle, and move goods so that they will be available to customers at the right time and place. Here, we will consider the nature, objectives, systems, and organizational aspects of physical distribution. 1. Nature of Physical Distribution The main elements of the physical distribution mix are shown in Figure -6. Physical distribution involves planning, implementing, and controlling the physical flow of materials and final goods from points of origin to points of use order to meet the needs of customers at a profit. The major physical distribution cost is transportation, followed by inventory carrying, warehousing, and order processing/customer service.

Costs of physical distribution elements as a percentage of total physical distribution costs

Management has become concerned about the total cost of physical distribution, and experts believe that large savings can be gained in the physical distribution area. Poor physical distribution decisions result in high costs. Even large companies sometimes make too little use of modern decision tools for coordinating inventory levels, transportation modes, and plant, warehouse, and store locations. For example, at least part of the blame for Sears's slow sales growth and sinking earnings over the past several years goes to its antiquated and costly distribution system. Outmoded multistory warehouses and nonautomated equipment have made Sears much less efficient than its competitors. Distribution costs amount to 8 percent of sales at Sears, compared with less than 3 percent at close competitors K mart and Wal-Mart. Moreover, physical distribution is more than a costit is a potent tool in demand creation. Companies can attract more customers by giving better service or lower prices through better physical distribution. On the other hand, companies lose customers when they fail to supply goods on time.

2. The Physical Distribution Objective Many companies state their objective as getting the right goods to the right places at the right time for the least cost. Unfortunately, no physical distribution system can both maximize customer service and minimize distribution costs. Maximum customer service implies large inventories, the best transportation, and many warehousesall of which raise distribution costs. Minimum distribution cost implies cheap transportation, low inventories, and few warehouses. The company cannot simply let each physical distribution manager keep down his or her costs. Transportation, warehousing, and order-processing costs interact, often in an inverse way. For example, low inventory levels reduce inventory-carrying costs. But they also increase costs from stockouts, back orders, paperwork, special production runs, and high-cost fast-freight shipments. Because physical distribution costs and activities involve strong tradeoffs, decisions must be made on a total system basis.

The starting point for designing the system is to study what customers want and what competitors are offering. Customers want several things from suppliers: on-time delivery, sufficiently large inventories, ability to meet emergency needs, careful handling of merchandise, good after-sale service, and willingness to take back or replace defective goods. A company has to research the importance of these services to customers. For example, service-repair time is very important to buyers of copying equipment. So Xerox developed a servicedelivery standard that can "put a disabled machine anywhere in the continental United States back into operation within three hours after receiving the service request." Xerox runs a service division with 12,000 service and parts personnel. The company must also look at competitors' service standards in setting its own. It will normally want to offer at least the same level of service as competitors. But the objective is to maximize profits, not sales. The company has to look at the costs of providing higher levels of service. Some companies offer less service and charge a lower price. Other companies offer more service than competitors and charge higher prices to cover higher costs. The company must ultimately set physical distribution objectives to guide its planning. For example, Coca-Cola wants "to put Coke within an arm's length of desire." Companies go further and define standards for each service factor. One appliance manufacturer has set the following service standards: to deliver at least 95 percent of the dealer's orders within seven days of order receipt, to fill the dealer's order with 99 percent accuracy, to answer dealer questions on order status within three hours, and to ensure that damage to merchandise in transit does not exceed 1 percent. Given a set of objectives, the company is ready to design a physical distribution system that will minimize the cost of attaining these objectives. The major decision issues are: How should orders be handled (order processing)? Where should stocks be located (warehousing)? How much stock should be kept on hand (inventory)? And how should goods be shipped (transportation)? 3. Order Processing Physical distribution begins with a customer order. The order department prepares invoices and sends them to various departments. Items out of stock are back-ordered. Shipped items are accompanied by shipping and billing documents, with copies going to various departments. The company and customers benefit when the steps in order processing are carried out quickly and accurately. Ideally, salespeople send in their orders daily, often using online computers. The order department quickly processes orders and the warehouse sends the goods out on time. Bills go out as soon as possible. The computer is often used to speed up the order-shipping-billing cycle. For example, General Electric operates a computer-based system that, upon receipt of a customer's order, checks the customer's credit standing and whether and where the items are in stock. The computer then issues an order to ship, bills the customer, updates the inventory records, sends a production order for new stock, and relays the message back to the salesperson that the customer's order is on its wayall in less than 15 seconds. 4. Warehousing Every company has to store its goods while they wait to be sold. A storage function is needed because production and consumption cycles rarely match. For example, Snapper, Toro, and other lawn mower makers must produce all year long and store up their product for the heavy spring and summer buying season. The storage function overcomes differences in needed quantities and timing. A company must decide on the best number of stocking locations. The more stocking locations, the more quickly goods can be delivered to customers. However, warehousing costs go up. In making its decision about the number of its stocking locations, the company must balance the level of customer service against distribution costs. Companies may use either storage warehouses or distribution centres. Storage warehouses store goods for moderate to long periods of time until they are needed. Distribution centres are designed to move goods rather than just store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill them efficiently, and deliver goods to customers as quickly as possible. For example, Wal-Mart Stores, a regional discount chain, operates four distribution centres. One center, which serves the daily needs of 165 Wal-Mart stores, contains some 28 acres of space under a single roof. Laser scanners route up to 190,000 cases of goods per day along 11 miles of conveyor belts, and the centres 1,000 workers load or unload 310 trucks daily. Warehousing facilities and equipment technology have improved greatly in recent years. Older multistory warehouses with slow elevators and outdated materials-handling methods are facing competition from newer single-story automated warehouses with advanced materials-handling systems under the control of a central computer. In these warehouses, only a few employees are necessary. The computer reads orders and directs lift trucks, electric hoists, or robots to gather goods, move them to loading docks, and issue invoices. These warehouses have reduced worker injuries, labor costs, theft, and breakage and have improved inventory control.

5. Inventory Inventory levels also affect customer satisfaction. Marketers would like their companies to carry enough stock to fill all customer orders right away. However, it costs too much for a company to carry this much inventory. Inventory costs increase at an increasing rate as the customer-service level approaches 100 percent. To justify larger inventories, management needs to know whether sales and profits will increase accordingly. Inventory decisions involve knowing when to order and how much to order. In deciding when to order, the company balances the risks of running out of stock against the costs of carrying too much. In deciding how much to order, the company needs to balance order-processing costs against inventory-carrying costs. Larger average-order size means fewer orders and lower order processing costs, but it also means larger inventorycarrying costs. 6. Transportation Marketers need to take an interest in their company's transportation decisions. The choice of transportation carriers affects the pricing of the products, delivery performance, and condition of the goods when they arriveall of which will affect customer satisfaction. In shipping goods to its warehouses, dealers, and customers, the company can choose among five transportation modes: rail, truck, water, pipeline, and air. Railroads are one of the most cost-effective modes for shipping large amounts of bulk productscoal, sand, minerals, farm and forest productsover long distances. In addition, railroads have recently begun to increase their customer services. They have designed new equipment to handle special categories of goods, provided flatcars for carrying truck trailers by rail (piggyback), and provided such in-transit services as the diversion of shipped goods to other destinations en route and the processing of goods en route. Trucks account for the largest portion of transportation within cities as opposed to between cities. They are highly flexible in their routing and time schedules. They can move goods door to door, saving shippers the need to transfer goods from truck to rail and back again at a loss of time and risk of theft or damage. Trucks are efficient for short hauls of high-value merchandise. In many cases, their rates are competitive with railway rates, and trucks can usually offer faster service. The cost of water transportation is very low for shipping bulky, low-value, nonperishable products such as sand, coal, grain, oil, and metallic ores. On the other hand, water transportation is the slowest transportation mode and is sometimes affected by the weather. Pipelines are a specialized means of shipping petroleum, natural gas, and chemicals from sources to markets. Pipeline shipment of petroleum products costs less than rail shipment but more than water shipment. Most pipelines are used by their owners to ship their own products. Although air carriers transport a small percent of the nation's goods, they are becoming more important as a transportation mode. Air freight rates are much higher than rail or truck rates, but air freight is ideal when speed is needed or distant markets have to be reached. Among the most frequently air-freighted products are perishables (fresh fish, cut flowers) and high-value, low-bulk items (technical instruments, jewelry). Companies find that air freight reduces inventory levels, warehouse numbers, and packaging costs. 7. Choosing Transportation Modes In choosing a transportation mode for a product, shippers consider as many as five criteria. Table - 1 ranks the various modes on these criteria. Thus, if a shipper needs speed, air and truck are the prime choices. If the goal is low cost, then water and pipeline might be best. Trucks appear to offer the most advantagesa fact that explains their growing share of the transportation market. TABLE - 1 Rankings of Transportation Modes (1 = Highest Rank)
Transportation Mode Rail Truck Water Pipeline Air Speed (door to-door delivery time) 3 4 2 5 1 Dependability (meeting schedules on time) 4 5 2 1 3 Capability (ability to handle various products) 2 1 3 5 4 Availability (No of geographic points served) 2 4 1 5 3 Cost (per ton mile) 3 1 4 2 5

Thanks to containerization, shippers are increasingly combining two or more modes of transportation. Containerization consists of putting goods in boxes or trailers that are easy to transfer between two transportation modes. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship,

water and rail; and airtruck, air and trucks. Each combination offers advantages to the shipper. For example, piggyback not only is cheaper than trucking alone but also provides flexibility and convenience. 8. Organizational Responsibility for Physical Distribution We see that decisions on warehousing, inventory, and transportation require much coordination. A growing number of companies have set up permanent committees made up of managers responsible for different physical distribution activities. These committees meet often to set policies for improving overall distribution efficiency. Some companies even have a vice-president of physical distribution who reports to the marketing vice-president, the manufacturing vice-president, or even the president. The location of the physical distribution department within the company is a secondary concern. The important thing is that the company coordinate its physical distribution and marketing activities in order to create high market satisfaction at a reasonable cost.