DISTRIBUTION / CHANNEL

MANAGEMENT
Session 4 – 6
(Physical Distribution Strategies and
dimensions)
OUTLINE
 The Role of Distribution in the Supply Chain
 Factors Influencing Distribution Network Design

 Design Options for a Distribution Network

 E-Business and the Distribution Network

 Distribution Networks in Practice

 Summary of Learning Objectives

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CHANNELS
 The channel is gatekeeper between the
manufacturer and the end consumer.
 The channel is an important asset in the company’s
overall marketing and positioning strategy
 Differentiation strategic asset

 Channel experience – consumer perception – after

sales services
 Benefits of good channel design with good working
relationship.
 Not easy to replicate

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PHYSICAL DISTRIBUTION

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PHYSICAL DISTRIBUTION
 It includes all those activities concerned with the
efficient movement of goods from the place of
production to the place of consumption
 It involves the handling of raw material
fabricates parts, supplies & finished goods from
producers to consumers via intermediaries

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THE ROLE OF DISTRIBUTION
IN THE SUPPLY CHAIN

 Distribution: the steps taken to move and store

a product from the supplier stage to the customer
stage in a supply chain
 Distribution directly affects cost and the
customer experience and therefore drives
profitability
 Choice of distribution network can achieve
supply chain objectives from low cost to high
responsiveness
 Examples: Wal-Mart, Dell, Proctor & Gamble,
Grainger

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 LOGISTICS & SUPPLY CHAIN
Logistics

Component parts
& Raw material In-process inventory Finished goods

Supply Chain
FACTORS INFLUENCING
DISTRIBUTION NETWORK DESIGN
 Distribution network performance evaluated
along two dimensions at the highest level:
 Customer needs that are met
 Cost of meeting customer needs

 Distribution network design options must

therefore be compared according to their
impact on customer service and the cost to
provide this level of service

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FACTORS INFLUENCING
DISTRIBUTION NETWORK DESIGN
 Elements of customer service influenced by network
structure:
 Response time
 Product variety
 Product availability
 Customer experience
 Order visibility
 Returnability
 Supply chain costs affected by network structure:
 Inventories
 Transportation
 Facilities and handling
 Information

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SERVICE AND NUMBER OF FACILITIES
(FIG. 4.1)

Number of
Facilities

Response Time

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 INVENTORY COSTS AND NUMBER
OF FACILITIES (FIG. 4.2)

Inventory
Costs

Number of facilities

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 TRANSPORTATION COSTS AND
NUMBER OF FACILITIES (FIG. 4.3)

Transportation
Costs

Number of facilities

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FACILITY COSTS AND NUMBER
OF FACILITIES (FIG. 4.4)

Facility
Costs

Number of facilities

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 Total Costs Related to
Number of Facilities
Total Costs

4-14
Total Costs

Facilities
Inventory
Transportat
ion

Number of Facilities
Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Response Time

4-15
Total Logistics Costs

Number of Facilities
DESIGN OPTIONS FOR A
DISTRIBUTION NETWORK
 Manufacturer Storage with Direct Shipping
 Manufacturer Storage with Direct Shipping and
In-Transit Merge
 Distributor Storage with Carrier Delivery

 Distributor Storage with Last Mile Delivery

 Manufacturer or Distributor Storage with

Consumer Pickup
 Retail Storage with Consumer Pickup

 Selecting a Distribution Network Design

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MANUFACTURER STORAGE WITH
DIRECT SHIPPING (FIG. 4.6)

Manufacturer

Retailer

Customers

Product Flow
Information Flow
 IN-TRANSIT MERGE NETWORK (FIG. 4.7)

Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
DISTRIBUTOR STORAGE WITH
CARRIER DELIVERY (FIG. 4.8)

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
DISTRIBUTOR STORAGE WITH
LAST MILE DELIVERY (FIG. 4.9)

4-20
Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
 MANUFACTURER OR DISTRIBUTOR
STORAGE WITH CUSTOMER PICKUP (FIG.
4.10)
Factories

4-21
Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow
 COMPARATIVE PERFORMANCE OF DELIVERY
NETWORK DESIGNS (TABLE 4.7)
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor Manufacturer
with Customer Storage with Direct Storage with In- with Package storage with last storage with pickup
Pickup Shipping Transit Merge Carrier Delivery mile delivery

Response Time 1 4 4 3 2 4

Product Variety
4 1 1 2 3 1
Product Availability 2 3
4 1 1 1
Customer Experience
5 4 3 2 1 5

Order Visibility 1 5 4 3 2 6

Returnability 1 5 5 4 3 2

Inventory 4 1 1 2 3 1

Transportation 1 4 3 2 5 1

Facility & Handling 6 1 2 3 4 5

Information 1 4 4 3 2 5
E-BUSINESS AND THE DISTRIBUTION
NETWORK
 Impact of E-Business on Customer Service
 Impact of E-Business on Cost

 Using E-Business: Dell, Amazon, Peapod,

Grainger

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DISTRIBUTION NETWORKS IN PRACTICE
 The ownership structure of the distribution
network can have as big as an impact as the type
of distribution network
 The choice of a distribution network has very
long-term consequences
 Consider whether an exclusive distribution
strategy is advantageous
 Product, price, commoditization, and criticality
have an impact on the type of distribution system
preferred by customers

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HUB & SPOKE DISTRIBUTION PARADIGM
 The spoke-hub distribution
paradigm (or model or network) is a system of
connections arranged like a wire wheel, in which all
traffic moves along spokes connected to the hub at
the center. The model is commonly used in
industry, in particular in transport,
telecommunications and freight, as well as
in distributed computing, where it is known as
a star network.

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HUB & SPOKE DISTRIBUTION PARADIGM

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HUB & SPOKE DISTRIBUTION PARADIGM

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POINT-TO-POINT TRANSIT
 Point-to-point transit refers to a
transportation system in which a
plane, bus, or train travels directly
to a destination, rather than going
through a central hub.
 It eliminates the need for connections.
 It considerably reduces travel time.
 It considerably reduces risk of baggage
loss or baggage arriving much later than
the passenger (due to baggage not
transferred as fast as passengers)
 Less prone to delays. i.e. missing
connection or delayed due to connection
 Less handling

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 LOGISTICS IN MARKETING CHANNELS
 Logistics (or physical
distribution) is the planning,
implementing, and controlling of the
physical flows of materials and final
products from points of origin to
points of use to meet customer’s
needs at a profit.

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OBJECTIVE OF PHYSICAL DISTRIBUTION
 Meetings standards of customer service for
 Timeliness of order fulfillment

 Accuracy of order fulfillment

 Reducing total distribution costs

 Inventory levels against warehousing costs

 Materials costs versus transportation costs

 Distribution costs against customer service standards

 Overall goal is to achieve the lowest total distribution

cost compatible with the firm’s customer service
objectives.
 Reducing cycle (process completion) time
 Faster processes for increased customer service

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OPTIMIZATION QUIZ
Distribution Model (solver)
LOGISTICS IN MARKETING CHANNELS
 A system perspective
 A total-cost approach in logistics
 Basic components
 Transportation Management
 Materials handling
 Location Analysis
 Order processing
 Inventory control
 Warehousing
 Management of Information flow
 Packaging
 Output: customer service
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DEFINITION OF CUSTOMER SERVICE

 ,,,a process which takes place between the buyer and

seller, and third party. The process results in a value
added to the product or service exchanged. ,,,

(Lambert et al. (1998). P41)

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TASKS IN PHYSICAL DISTRIBUTION
MANAGEMENT
 Physical distribution refers to the actual physical flow of
products
 Physical distribution management is the development
and operation of processes resulting in the effective and
efficient physical flow of products
 Function of Physical distribution
 Effective physical distribution management requires careful
attention to following interrelated activities
1. Transportation Management Transportation Management
Functions
Legal Forms ofofTransportation
inventories
2. Inventory Control Types
Modes & classes of Inventories
of Transportation
3. Inventory Location (Warehousing) Cost of Types inventories
of Warehousing
Mechanics of Inventory Control
4. Order processing Ware housing functions
Methods ofOrder Acquisition
controlling stock
Size and number of warehouses
5. Material Handling levels Factors effecting order
Warehousing location
processing
Selective Inventory Control
6. Industrial Packaging Legal forms of warehouse
Customer Service
Types of MHE
7. Management of Information Flow Warehouse management
Integration

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TOTAL COST PERSPECTIVE

Transportation
Cost

+ Facilities Cost

Total
Distribution
= + Communication
Cost
Cost
+ Inventory Cost

+ Protective
packaging Cost

+ Distribution
management Cost

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TRANSPORTATION
TRANSPORTATION MANAGEMENT
 Legal Forms of Transportation
 Common carrier
 Contract carrier
 Exempt carrier
 Private carrier

 Modes of Transportation

 Transportation Management System

Transportation management systems (TMS), plans,
executes, and manages transport and movement functions
Parties involved include: Shipper, Carrier, and Consignee
(recipient)

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 Transportation and Supply Chain Links

Supply Chain Consideration

Inbound Network Distribution Network

Vendors Production Distribution Customers

Center Center

Transportation Consideration

Infrastructure Assets

Logistics Airports, Warehouse Fleet size and Equipment Drivers

operation rail, ports, depots composition
environment roads

Source: Chat terjee (2000).

FUNCTIONS OF TMS
 Carrier Selection
 Carrier Scheduling

 Dispatching

 Document preparation/ Freight payment

 Performance Measurement

 Shipment consolidation and routing shipment

rating
 Shipment scheduling

 Shipment tracing and expediting vehicle loading

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LOAD PLANNING

 Determine capacity of load

 What is the size of individual shipments?

 Delivery sequences

 Almost all large companies use TMS software to

help in load planning

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CARRIER ADMINISTRATION
 Administer the performance of for-hire and
private transportation
 Implement core carrier strategy

 Determine to use integrated service providers

(ISPs)
 Identify most economical mode

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CALCULATING THE BEST ROUTE

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FACILITIES
INVENTORY LOCATION (WAREHOUSING)
 Benefits of Warehousing
 Consolidation
 Break bulk
 Processing/ Postponement
 Stock pilling

 Warehousing Types (Strategy)

(1) Private warehouses,
(2) Public warehouses, and
(3) Contract warehouses.

 Warehousing Management System (WMS)

Warehouse management systems (WMS), incorporate processes to guide physical
activities, including product receipt, material movement and storage, and order
selection
Warehousing has been recently defined as mixing inventory assortments to
meet customer requirements. Associated transactions of warehousing include
shipping, receiving, put away, and picking.

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BENEFITS OF WAREHOUSING
Consolidation
 Shipment consolidation is an economic benefit of
warehousing.
 With this arrangement, the consolidating
warehouse receives and consolidated materials
from a number of manufacturing plants destined
to a specific customer on a single transportation
shipment.
 The benefits are the realization of the lowest
possible transportation rate and reduced
congestion at a customer's receiving dock.

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CONSOLIDATION WAREHOUSES

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BREAK BULK WAREHOUSES
 Break bulk warehouse operations are similar to
consolidation except that no storage is performed.
 A break bulk operation receives combined
customer orders from manufacturers and ships
them to individual customers.
 The break bulk warehouse sorts or splits
individual orders and arranges for local
delivery.
 Because the long-distance transportation
movement is a large shipment, transport costs
are lower and there is less difficulty in tracking.

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BREAK BULK WAREHOUSES…

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PROCESSING/POSTPONEMENT
 Warehouses can also be used to postpone, or
delay, production by performing processing and
light manufacturing activities.

 A warehouse with packaging or labeling

capability allows postponement of final
production until actual demand is known.

 For example, vegetables can be processed and

canned in "brights" at the manufacturer.

 Brights are cans with no pre-attached labels.

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PROCESSING/POSTPONEMENT…
 Processing and postponement provide two
economic benefits:

 First, risk is minimized because final packaging

is not completed until an order for a specific label
and package has been received.

 Second, the required level of total inventory can

be reduced by using the basic product (brights)
for a variety of labeling and packaging
configurations.

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STOCKPILING
 The economic benefit of stockpiling comes from
the need of seasonal storage.
 For example, lawn furniture and toys are
produced year-round and primarily sold during a
very short marketing period.
 In contrast, agricultural products are harvested
at specific times with subsequent consumption
occurring throughout the year.
 Both situations require warehouse stockpiling to
support marketing efforts.
 Stockpiling provides an inventory buffer, which
allows production efficiencies within the
constraints imposed by material sources and the
customer.
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SERVICE BENEFITS
 Five basic service benefits are achieved
through warehousing:
 spot stock, (for continuity of supply)
 assortment, (Variety)
 mixing,
 production support, and
 market presence.

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ALTERNATIVE WAREHOUSE STRATEGIES
 Warehouse alternatives include:
(1) Private warehouses,
(2) Public warehouses, and
(3) Contract warehouses.

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PRIVATE WAREHOUSES
 A private warehouse is operated by the firm
owning the product.

 The actual facility, however, may be owned or

leased.

 The decision as to which strategy best fits an

individual firm is essentially financial.

 Often it is not possible to find a warehouse for

lease that fits the exact requirements of a firm.

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PUBLIC WAREHOUSES
 On the basis of the range of specialized
operations performed, public warehouses are
classified as

 (1) general merchandise,

 (2) refrigerated,
 (3) special commodity,
 (4) bonded, and
 (5) household goods and furniture.

 Each warehouse type differs in its material

handling and storage technology as a result of
the product and environmental characteristics.
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CONTRACT WAREHOUSES
 Contract warehousing combines the best
characteristics of both private and public
operations.

 The long-term relationship and shared risk result

in lower cost than typical public warehouse
arrangements.

 Contract warehouse operations can provide

benefits of expertise, flexibility, and economies of
scale by sharing management, labor, equipment,
and information resources across a number of
clients.
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FUNCTIONS OF WMS

 Assign and track storage locations

 Inventory cycle counting
 Labor scheduling
 Equipment scheduling
 Lot control
 Order selection, location, and replenishment
 Receiving
 Put away
 Storage
 Performance measurement

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WMS TOOLS
 Auto ID data capture
 Barcode scanners

 Mobile computers

 Wireless lans

 RFID
WHY IS TMS AND WMS
IMPORTANT TO BUSINESSES?
 Helps optimize systems and approaches.
 Eliminates waste of resources and non-value
added steps.
 Improves customer satisfaction

 Reduces unnecessary inventory

 Reduces overall cost.

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ORDER PROCESSING
ORDER PROCESSING
 Series of logical steps from receiving orders to
dispatch –
there should be a standard procedure for
receiving the orders, handling orders, granting of
credit, invoicing, dispatching, collecting the bills
and post dispatch adjustments

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COMPONENTS OF PHYSICAL DISTRIBUTION
 Order Processing
 The receipt and transmission of sales order
information
 Order entry
 Order handling
 Order delivery
 Electronic data
interchange
 A computerized means
of integrating order
processing with production,
inventory, accounting, and transportation

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 STEPS IN ORDER PROCESSING
 Communication of orders – Verbal or
written
 Credit check

 Inventory check

 Order of dispatch

 Intimation to customer

 Dispatch of goods

 Collection of payments

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ELEMENTS OF CUSTOMER SERVICE
1. Order cycle time- the time taken between
placing the order and receipt of delivery
2. Order cycle consistency- the extent to which
order cycle time varies
3. Order accuracy- the degree to which items
shipped meet order specifications
4. Order completeness- the extent the items
ordered are totally filled when the order is
assembled for shipment
5. Order condition- damage level at the time of
receipt
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Order Processing and Information Systems
65
ORDER MANAGEMENT PROCESS

Notify Customer

Customer
Place Order Customer
Update database

Order
Processing
System

Update
Update Order
Order
Database
Create
ORDER PROCESS (EXAMPLE)
ORDER PROCESS (EXAMPLE)
ORDER PROCESSING (SUMMARY)
Grouping them into four basic
activities
1. Order acquisition
2. Order entry
3. Order document processing
4. Order status reporting

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MATERIAL HANDLING
MATERIAL HANDLING
MH OPERATIONS PERFORMED IN
FOLLOWING STAGES
 Unloading incoming material from transport
vehicles
 Moving unloaded material to assigned
warehouses
 Lifting the mat. from warehouses during order
picking
 Moving the material for inspection & packing

 Loading packages/boxes to transport vehicles

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MH EQUIPMENTS & SYSTEMS
 Manual – Use of man power & animal
 Mechanised system – wheeled trolleys, forklift
trucks, side loaders, mobile cranes, conveyors –
wheel, roller, belt, chain
 Semiautomatic system – sorting device robotics

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MATERIAL HANDLING CONSIDERATIONS
 PLANNING
 STANDARDIZATION

 WORK

 ERGONOMIC

 UNIT LOAD

 SPACE UTILIZATION

 SYSTEM

 AUTOMATION

 ENVIRONMENTAL

 LIFE CYCLE COST

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INDUSTRIAL PACKAGING
INDUSTRIAL PACKAGING

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INVENTORY CONTROL
INVENTORY CONTROL

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MANAGEMENT OF INFORMATION
FLOW
MANAGEMENT OF INFORMATION FLOW

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FACTORS EFFECTING CHOICE OF
DISTRIBUTION CHANNELS
Market Considerations
 Type of Market
 Number of Potential customers
 Geographic concentration of the
market
 Order size
Product Consideration
 Unit Value
 Perishability
 Technical Nature
 Other Considerations
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 Middlemen Considerations
 Services provided by
middlemen
 Availability of desired
middlemen
 Attitude of middlemen towards
producer’s policies
 Company Considerations
 Desire or Channel control
 Service provided by seller
 Ability of management
 Financial resources
 FUNCTIONS AND FLOWS IN MARKETING
CHANNELS*
A. Functions in Marketing Channels
 Carrying of Inventory
 Demand generation
 Physical distribution
 After-sale service
 Extending credit to customers

B. Flows in Marketing Channels

- Physical Possession - Ownership
- Promotion - Negotiation
- Financing - Risking
- Ordering - Payment

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SUMMARY OF LEARNING OBJECTIVES
 What are the key factors to be considered when
designing the distribution network?
 What are the strengths and weaknesses of
various distribution options?
 What roles do distributors play in the supply
chain?

Waqar Ahmed - SCM 4-84