Asset cost analysis

Physical distribution has been variously described as the frontier for cost economies, the economy’s Dark Continent, the last place where truly significant savings can be achieved, a potent instrument in demand stimulation, a critical device for maximizing the company’s marketing effort.

Importance of physical distribution


This has been a neglected area of marketing management till recent times. For nearly half century, marketing managers and scholars have not paid much attention to physical distribution. It has been looked upon only as a supportive service. But since then, it has become possible to achieve tremendous improvements in a firms performance through a total cost approach. The reasons for the current concern with control of distribution are as follows...


(a) Lessons have been learnt from cost control in production and these have been extended to distribution
(b) In the U.S.A some laws made a through knowledge of all costs virtually mandatory for distributors.
(c) It has been found that distribution cost usually comprises a substantial part of the price of a product ranging from 15% to 30% frequently greater than the manufacturing cost and consequently represent an area of significant potential economies.
(d) The realization that the surest way to increase profits i.e., through cost control and not price increases because price increase meets with government anger and consumer resistance.
(e) There is accumulated evidence that uncoordinated physical distribution decisions result in suboptimisation of a firms resources

Having listed the reasons for the growing concerns with distribution and its cost let us try to define physical distribution.


Definition and Meaning


Bower sox defines it as those business activities concerned with transporting finished goods and or raw material assortments so that they arrive at the designated place when needed and in a usable condition. This refers to the movement and handling of goods from the point of production to the point of consumption or use.


The various functions in the distribution of manufactured products are looked upon as a system. It covers all movement from the shipment of raw materials to the manufacturer to the delivery of the finished goods to the consumers. One author defines it as the operation which creates time, place and from utility through the movement of goods and persons from one location to another, including the physical arrangement for storage and the technical properties necessary to equalize demand and supply with respect to the size of shipment rights of away, movement equipment storage facilities, retail stores and other terminal properties are thus all part of the distribution system.


Physical distribution starts at the location of raw materials and labour inputs and stretches to the location of the ultimate consumer. In this way it is co-extensive with the marketing task. It bridges the gap between supplies and the needs of man. This is the broad view of physical distribution and this is the way to look at the problem. It will be a very narrow view if physical distribution is considered only from the point of company’s problem of dispatching goods to various markets.


Elements of Physical Distribution system


The following activities have been identified in physical distribution. Inventory management is central to all of them

The activities are : a) Distribution planning b) Inventory management c) Other processing d) Receiving e) Internal transportation f) Packaging g) International warehousing h) Dispatching or shipping i) External transportation J) External warehousing k) Customer service.


Objective of Physical distribution management


It has been repeated that the objective of physical distribution system is getting the right goods to the right places at the right time for the least cost. However this statement is not entirely true. If customer service is to be improved a larger stock of more varied goods are to be stocked at more places, which means more storage cost is to be incurred. Storage costs can be cut only if fewer inventories are stocked at less number of points which means lowered customer service. Thus no physical distribution system can at the same time maximize customer service and minimize distribution cost. Better customer service naturally involves larger inventories more transportation and many warehouses all of which increase distribution costs. Linking the associated activities of transportation, warehousing material handling, inventory control, packing order processing, warehouse site location and customer service is known as physical distribution management.


Nature of Physical Distribution


Physical distribution involves planning, implementing and controlling the physical flows of materials and final goods from points of origin to points of use to meet customer needs at a profit. A large number of tasks are involved in physical distribution. The first task is sales forecasting on the basis of which the company schedules production and inventory levels. The production plans indicate the materials that the purchasing department must order.

These materials arrive through inbound transportation, enter the receiving area, and are stored in raw material inventory. Raw materials are converted into finished goods. Finished-goods inventory is the link between the customer’s orders and the companies manufacturing activity. Customer’s orders draw down the finished-goods inventory level and manufacturing activity builds it up. Finished goods flow off the assembly line and pass through packing, in-plant warehousing, shipping-room processing, outbound transportation, field warehousing, and customer delivery and servicing.


Major activities involved in physical distribution


Physical distribution is not only a cost, it is a potent tool in demand creation. Companies can attract additional customers by offering better service or lower prices through physical-distribution improvements. Companies lose customers when they fail to supply goods on time. In the summer of 1976 Kodak launched its national advertising campaign for its new instant camera before it had delivered enough cameras to the stores. Customers found that it was not available and bought a Polaroid instead.


Many companies state their physical-distribution objective as getting the right goods to the right places at the right time for the least cost. Unfortunately, this provides little actual guidance. No physical-distribution system can simultaneously maximize customer service and minimize distribution cost. Maximum customer service implies large inventories, premium transportation, and multiple warehouses, all of which raise distribution cost. Minimum distribution cost implies cheap transportation, low stocks and few warehouses.

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