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Physical Distribution System

Physical distribution is concerned with the physical movement of the goods from the producer to the consumer.

It includes all those activities which help in efficient movement of goods from producer to consumers, such as trans­portation, warehousing, material handling, inventory control, order processing, market forecasting, packaging, plant and warehouse location, and customer ser­vice.

Objectives of Physical Distribution:

Physical distribution has two broad objectives viz. consumer satisfaction and profit maximization.

Apart from these two broad objectives, the other objectives are:

  • To make available the right goods in the right quantity at the right time and right place at the least cost.
  • To achieve minimum inventory level and speedier transportation.
  • To establish the price of products.
  • To gain a competitive advantage over rivals by performing customer service more effectively.

Importance of Physical Distribution System:

Creating Time and Place Utility:

The transportation system creates place utility as it makes available the goods at the right place where they are required. Warehousing creates time utility by storing the goods and releasing them when they are required.

Helps in Reducing Distribution Cost:

Proper and systematic planning of transportation schedules and routes, warehousing location and operation, material handling, order processing, etc. can easily bring in cost economies.

Helps in Stabilisation of Price:

Proper use of transportation and warehousing facilities can help in matching demand with supply and thus ensure stabilization of price.

Improved Consumer Services:

Consumer service in physical distribution means making products in the right quantity available at the right time and right place i.e. place where the customer needs.

Elements of Physical Distribution System

1. Transportation

The term “transportation system” is used to refer to the equipment and logistics of transporting passengers and goods.

The different modes of transport are air, water, and land transport, which includes Rails or railways, roads, and off-road transport. Other modes also exist, including pipelines, cable transport, and space transport.

Importance of a good transportation system includes

  • Extensive market reach
  • Mobility of Labour and Capital
  • Economies of Large Scale Production
  • Stability in Prices
  • Increase in the National Income
  • Discouragement to Monopoly
  • Ability to face natural calamities

2. Warehousing

Warehousing is the act of storing goods that will be sold or distributed later. The basic types of warehouse include

Retail warehouses: These displayed goods for the home trade. This would be finished goods- such as the latest fashion items.

Cool warehouses and cold storage: Cold storage preserves agricultural products. Edible products are generally not stored for more than one year. Several perishable products require a storage temperature as low as −25 °C

Overseas warehouses: These catered for the overseas trade. They became the meeting places for overseas wholesale buyers.

Packing warehouses: The main purpose of packing warehouses was the picking, checking, labeling and packing of goods for export.

Railway warehouses: Warehouses were built close to the major stations in railway hubs.

Canal warehouses: Canal warehouses were transshipment warehouses, holding goods until they could be shipped out to their next recipient.

Importance of warehousing:

  • Better Inventory Management.
  • More Efficient Packing and Processing.
  • Superior Customer Service.
  • Ensure Price Stabilization.
  • Improved Risk Management.

3. Inventory Control:

The fact or process of ensuring that appropriate amounts of stock are maintained by a business, so as to be able to meet customer demand without delay while keeping the costs associated with holding stock to a minimum. The basic types of inventory control include:

ABC Analysis: It is a type of inventory categorization method in which inventory is divided into three categories, A, B, and C, in descending value. A has the highest value items, B is lower value than A, and C has the lowest value.

Just-in-time method: It is an inventory strategy where materials are only ordered and received as they are needed in the production process. The goal of this method is to reduce costs by saving money on overhead inventory expenses.

Material requirements planning: It is a production planning, scheduling, and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, but it is possible to conduct MRP by hand as well.

Economic order quantity (EOQmodel: It is used in inventory management by calculating the number of units a company should add to its inventory with each batch order to reduce the total costs of its inventory. The costs of its inventory include holding and setup costs.

Safety stock. Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate the risk of stockouts (shortfall in raw material or packaging) caused by uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans.

VED Analysis: The degree of criticality can be stated as whether the material is vital to the process of production, or essential to the process of production or desirable for the process of production. • This classification is known as VED analysis, V stands for vital, E stands for essential and D stands for desirable items.

4. Order Processing:

Order processing is the process or work-flow associated with the picking, packing, and delivery of the packed items to a shipping carrier and is a key element of order fulfillment. 

Why is order processing important?

  • Efficient processing of customer orders leads to increased sales
  • Be known for exceptional customer service
  • Manual processing of orders and inquiries take up time and money; an effective order processing system eliminates time wastage and also reduces overheads
  • Order processing directly affects the bottom-line

5. Material Handling

Material handling is the movement, protection, storage and control of materials and products throughout manufacturing, warehousing, distribution, consumption, and disposal.

Principles of material handling

  1. Planning: All material handling should be the result of a deliberate plan where the needs, performance objectives and functional specification of the proposed methods are completely defined at the outset.
  2. Work: Material handling work should be minimized without sacrificing productivity or the level of service required of the operation.
  3. Standardization: Material handling methods, equipment, controls, and software should be standardized within the limits of achieving overall performance objectives
  4. Ergonomic: Human capabilities and limitations must be recognized and respected in the design of material handling tasks and equipment to ensure safe and effective operations.
  5. Space Utilization: Effective and efficient use must be made of all available space.
  6. Unit Load: Unit loads shall be appropriately sized and configured in a way that achieves the material flow and inventory objectives at each stage in the supply chain.
  7. System: A system is a collection of interacting and/or interdependent entities that form a unified whole.
  8. Environment: Environmental impact and energy consumption should be considered as criteria when designing or selecting alternative equipment and material handling systems.
  9. Automation: Material handling operations should be mechanized and/or automated where feasible to improve operational efficiency, increase responsiveness, improve consistency and predictability
  10. Life Cycle Cost: A thorough economic analysis should account for the entire life cycle of all material handling equipment and resulting systems.

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