Physical Distribution

Physical Distribution
“The activities associated with the
movement of material, usually finished
goods or service parts, from the
manufacturer to the customer”
• APICS 12th Edition Dictionary
Physical Distribution
• Physical Supply
– goods moving from supplier to manufacturer
– “inbound”
• Physical Distribution
– goods moving from manufacturer to
– “outbound”
Physical Distribution
Figure 13.1 Supply chain (logistics system)
Channels of Distribution
Any series of firms or individuals that
participates in the flow of goods and
services from the raw material supplier and
producer to the final user or consumer.”
• APICS 12th Edition Dictionary
Channels of Distribution
• Company may deliver directly to
• Use other companies or individuals to
deliver goods
• Intermediaries
– wholesalers – agents
– transportation companies – warehousers

Distribution Channels
• Transaction channel
– negotiate, sell, contract
– concerned with the transfer of ownership (and
• Distribution channel
– concerned with the delivery of goods or
Distribution Channels
Figure 13.2 Separation of distribution and transaction channels
Physical Distribution
• Adds place value
– by delivering goods to customers
• Adds time value
– by delivering goods when customers want
The Way Materials Move
• Depends on:
– the channels of distribution being used
– the types of markets served
• geographic dispersion
• number of customers
– the characteristics of the product
– type of transportation available
Reverse Logistics
“A complete supply chain dedicated to the
reverse flow of products and materials for
the purpose of returns, repair,
remanufacture, and/or recycling.”
• APICS 12th Edition Dictionary
Reverse Logistics
• Can represent major costs to a company
• Amount of goods returned
– up to 50% in the publishing industry
– 90% of automotive starter motors or
Reverse Logistics - Information
• Goods are returned to supplier
• Information is also needed
– reason / approval for the return
– credit information
Reverse Logistics
Supplier Customer
Returned Goods
Reverse Logistics
Green Logisitics
• Return and disposal of packaging
• Return and disposal of environmentally
sensitive materials
– heavy metals
– solvents
• Use of reusable (returnable) packaging
Returned Goods
• quality demands by customers
• damage or defects
• excessive inventories
• seasonal inventories
• out-of-date inventories
• remanufacturing or refurbishment
Returned Goods - Disposition
• Returned to inventory
• Refurbished for resale
• Sold into alternate markets
• Disassembled to retrieve components
• Sorted for material recovery

Physical Distribution - Activities
1. Transportation
2. Distribution inventory
3. Warehouses
4. Materials handling
5. Protective packaging
6. Order processing
• Movement of goods
• Highest portion of distribution costs
– 30 - 60%
• Adds place value to the product
Distribution Inventory
• Includes all finished goods anywhere in
the distribution system
• Second highest cost of distribution
– 25 - 30%
• Inventories add time value to the product
• Used to store inventory
– improved customer service
– transportation efficiencies
• Warehouse management concerned with:
– site selection, number of warehouses
– layout and methods of receiving, storing and
retrieving goods
Materials Handling
• Movement and storage of goods within a
distribution center
• Type of equipment used affects the costs
of operation
• High capital cost
• Tradeoff between capital cost and
operating (labor) cost
Protective Packaging
• Containment, protection and identification
• Packages must fit in storage spaces and
transportation vehicles
• item
• package
• carton
• pallet
• container
Order Processing
“The activity required to administratively
process a customer’s order and make it
ready for shipment or production.”
• APICS 12th Edition Dictionary
•Represents an element of time in a
customer’s order
•Important part of customer service
•May involve intermediaries
Total Cost Concept
• Provide the required level of customer
service at the least total system cost
• Cost reduction should not involve only one
area of cost
• Changes in one activity will affect other
activities, total system cost and customer
Total Cost Concept - Example Problem
A company normally ships a product by rail. Transport by
rail costs $200, and the transit time is 10 days. However,
the can be moved by air at a cost of $1000 and it will take
one day to deliver. The cost of inventory in transit is $100
per day. What are the costs involved in the decision?
Rail Air
Transportation Cost $ 200 $1000
Inventory Carrying Cost 1000 100
Total $1200 $1100
Total Cost Concept
• Cost trade-off
– a cost decrease in one area may incur a
smaller increase in another area
• Total cost
– consider all of the costs
– increases in one area are offset by reductions
in other areas
• Keep customer service in mind
Global Distribution
• Differences in:
• Further away
– longer transport time
– different time zones
– different working days

• The Internet makes this easier
• Biggest problem - errors in translation

• Use of the Internet
– written transactions
• Need for exchange and fund transfers
• Currency fluctuations
– risks
Measurement Systems
• Metric versus Imperial system

• Units of measure e.g.
– Ton 907 Kg
– Tonne 1000 Kg
– long ton 1016 K6
• ISO (International Organization for
– Geneva Switzerland
• Incoterms (International Commercial
• Standard size containers
3PLs – Third Party Logistics Providers
• Provide a wide range of logistics services
– Delivery
– Warehousing
– Freight Forwarding
– Packaging
3PLs – Third Party Logistics Providers
• Can provide the service at less cost
– They have the equipment and networks
– Can react to seasonal increase
– Reverse logistics
• Examples:
– Fed Ex
– Kuehne and Nagel
• A bridge between:

• Marketing

• Production
• Product
• Promotion
• Place
• Price
Created by
Interface with Marketing
• Marketing is responsible for the transfer
of ownership
– selling, advertising, sales promotion,
merchandising and pricing

• Physical distribution is responsible for
delivering the goods
– contributes to creating demand
• prompt delivery, availability of product, accurate
order filling
Interface with Production
• Production requires a steady flow of raw
materials and components
– interruptions are very expensive
• Factory location may depend on the
transportation cost
– raw materials
– finished goods
• Factory demand is created by
distribution centers
Transportation - Modes
• Rail
• Road
• Air
• Water
• Pipeline

• Vary by flexibility and operating cost
Transportation Costs
• Fixed Costs
– the costs that do not change with the volume
• buildings, equipment, land
• Variable Costs
– the costs that change with the volume moved
• fuel, maintenance, wages
Transportation Costs
• Ways
– road, water, air
• Terminals
– where goods are loaded or unloaded
• Vehicles
– equipment used to move goods

Transportation Costs
• Ways
– land, water, road, space, etc over which
goods are moved
– may be owned by the operator (railroad
tracks), operated by the government (roads,
canals) or mother nature (ocean)
Transportation Costs
• Terminals
– Used to sort, load and unload goods
– connection between line-haul and local
– connection between different modes or
– dispatching, maintenance, administration
Transportation Costs
• Vehicles
– owned or leased by the carrier

• Other (fixed or variable)
– maintenance
– administration
– fuel
– labor
• Provide own ways, terminals and
– large capital investment
– need high volume
– modest flexibility

• Used for bulky commodities over long
• Pay for ways through taxes or tolls
• Provide their own terminals
• Vehicle cost though large, is smaller than
vehicle costs for water or rail
• Door-to-door service (very flexible)
• Used for small volume goods to many
delivery locations
• Uses government provided terminals and
air traffic control systems (ways)
• High variable costs for fuel and operating
• Most expensive mode
• Used for high value, low weight goods
over long distances
• Nature provides ways
– canals are government controlled
• Carrier pays for use of terminals
• Carrier owns the ships
• Operating cost is very low
• Slow and not very flexible
• Used for low value bulk cargo over long
• Very high capital costs
• Operating costs are very low
• Not flexible!

• Used for high volume gases or liquids
moving from point to point
Legal Types of Carriage
• Public
– for hire
– subject to regulations
• rates
• routes
• market served
• Private
– not for hire
For Hire Carriers
• Common carriers
– licensed to carry only certain goods
– available to public
– designated points or areas served
– scheduled service
• Contract carriers
– provides specific service to a shipper
Private Carriers
• Need to buy and operate their own
• Carry their own goods
– licenses are still required
• Very high volume to justify expense
Transportation - Service Capability
• The control the shipper has over the
transportation agency
– very high with private ownership
• Common carriers have established
• Must consider: timing of pickups and
delivery, speed of service, flexibility of
delivery location, other services
Other Transportation Agencies
• Use combinations of modes
• Freight Forwarders
• Post Office
• Couriers

• Agencies make use of load consolidation
Transportation Cost Elements
• Line haul
• Pickup and delivery
• Terminal handling
• Billing and collecting

• Principles are the same for all modes
Transportation Cost Elements
Figure 13.3 Shipping patterns
Line Haul Costs
• Fuel, labor, depreciation
• Approximately the same per mile whether
full or empty

LHC = Total Line-Haul Cost
Distance Travelled
Line-Haul Costs - Example
For example, for a given commodity, the line-haul cost is
$3 per mile and the distance shipped is 100 miles. The total
line-haul cost is therefore, $300. If the shipper sends
50,000 pounds, the total line haul cost is the same as if
10,000 pounds were shipped. However the line-haul cost
per hundred weight (cwt) will vary.
50,000 lbs
= $300 = $.60 per cwt
10,000 lbs
= $300 = $3.00 per cwt
Line-Haul Costs
• Total line-haul cost varies with:
– cost per mile
– distance moved
– weight moved
Line-haul Cost - Example
For a particular commodity, the line-haul cost is $2.50 per
mile. For a trip of 500 miles and a shipment of 600 cwt,
what is the cost of shipping per cwt? If the shipment is
increased to 1000 cwt, what is the savings per cwt?
=($2.50 x 500) / 600 = $2.083 / cwt

Cost1000 = ($2.50 x 500) / 1000 = $1.25 / cwt

Savings = $2.083 - 1.25 = $0.833 / cwt
Increasing Weight Shipped
• Truck will have a weight limitation
• Some products have a low density and the
truck is filled before the weight limitation is

• Therefore, nest products or ship products
unassembled to increase the weight

Shipping un-assembled

Shipping Cost - Example
A company ships barbecues fully assembled. The
average line-haul cost is $12.50 per mile, and the
truck carries 100 assembled barbecues. The
company decides to ship the barbecues
unassembled and can ship 500 barbecues in a
truck. Calculate the line-haul cost per barbecue
assembled and unassembled. If the average trip is
300 miles, calculate the savings per barbecue.
Shipping Cost - Example
Line-haul cost
= $12.50/100 =$0.125 / bbq / mile

Line-haul cost
= $12.50/500 =$0.025/ bbq/mile

Savings per mile = $0.125 - 0.025 = $0.10 / bbq / mile

Trip savings = 300 miles x $0.10 / bbq/mile

=$30 per barbecue
probably worth the
cost of assembly
at the buyer’s
Pickup and Delivery Costs
• Depends on time spent (not distance)
• Charged for each pickup

• Therefore, consolidate multiple shipments
to avoid many trips
Terminal Handling
• Cost depends on how many times the
shipment must be handled
• Full truckloads (TL) go directly to the
• Less than truckloads (LTL) must be sent to
a terminal, sorted and consolidated
• Therefore, consolidate shipments into
fewer parcels
Billing and Collecting
• Costs of paperwork
• Costs of invoicing

• Therefore, reduce the number of pickups
and pieces shipped (consolidating)
Total Transportation Costs
• Line-haul + pickup and delivery + terminal
handling + billing and collecting
• To reduce costs:
– increase the weight shipped (line-haul cost)
– reduce the number of pickups (pickup and delivery
– decrease the number of parcels (terminal handling
– consolidate shipments (billing and collecting costs)
Distance Versus Cost of Carriage


Fixed Cost: pickup, and delivery
terminal handling, billing and collecting
Rate Charged - Other Factors
• Value - to cover carrier’s liability
• Density - can affect the total weight
• Perishability - may require special
equipment i.e. refrigeration
• Packaging - to reduce the risk of damage
and breakage
• Plant warehouses
• Regional warehouses
• Local warehouses
• Wholesalers
• Public warehouses
Warehousing - Services
• General warehouse
– storage and protection of goods
– need to minimize handling and movement
• Distribution warehouse
– goods are received in large volumes
– goods are then sorted and consolidated into
customer orders
– concerned with throughput
Role of Warehouses
• Transportation consolidation
• Product Mixing
• Service
Transportation Consolidation
• Reduces transportation costs
• Truckload (TL) shipments to warehouse
• Less than truckload (LTL) shipments to
local customers
• “Break-bulk”
– breaking down large shipments from factories
into small shipments for local buyers
Product Mixing
• Avoids many small LTL shipments
• Customers want a mix of products often
from different manufacturers or locations
• The distribution center can assemble
many small items into one shipment
• Local distribution centers can improve
customer service by being close to the
• Faster response time
• Improved variety of products
• May add value
– e.g. customer specific labelling
Product Mixing
Figure 13.6 Product mixing
Warehousing and Transportation Costs
• Number of customers
• Geographic distribution of
• Customer order size
• Number and location of
plants and distribution
Warehousing and Transportation Costs
- Example Problem
A plant located in Toronto is serving customers in the
Boston area. If they ship direct to customers most
shipments will be LTL. However if they locate a distribution
center in Boston they can ship TL to the warehouse and
LTL from the warehouse to the local customers. Costs are
as follows:
Plant to customer (LTL) = $100 / cwt
Plant to distribution center (TL) = $50 / cwt
Distribution center = $10 / cwt
Distribution center to customer (LTL) = $20 / cwt
Warehousing and Transportation Costs
- Example Problem
Costs if a distribution center is used:
TL Toronto to Boston = $50 per cwt
Distribution center costs = $10 per cwt
LTL Boston area = $20 per cwt
Total cost = $80 per cwt

Savings per cwt = $100 - $80 = $20 per cwt

Annual savings at 10,000 cwt = $20x10,000 = $200,000
Market Boundaries
• The line between two methods of
distribution where the laid down cost is the

• Deciding which customers should be
served from which location

Laid-down cost (LDC)
“The sum of the product and the
transportation costs. The laid-down cost is
useful in comparing the total cost of a
product shipped from different suppliers
from a customer point of view”
• APICS 12th Edition Dictionary
Laid-down Costs - Example Problem
Syracuse is 300 miles from Toronto. The product cost is
$10 per cwt, and the transportation cost is $0.20 per mile.
What is the laid down cost per cwt?

LDC = Product cost +(trans’n cost per mile x distance)
= $10 + ($0.20 x 300)
= $70 per cwt
Market Boundary - Example Problem
Figure 13.7 Market boundary
Market Boundary - Figure 13.7
In the example, the distance between A and B is 100 miles. If we
let the distance from A to Y be X miles, then the distance from B to
Y is (100 - X) miles. Assume supply A is the factory and B is a
distribution center. Assume the product cost from A is $100 and
from B is $110 which includes inventory and TL costs to the
distribution center. LTL costs are $40 per unit per mile from either
100 + 0.40X = 110 + 0.40(100 - X)
X = 62.5 miles

Customers within 62.5 miles from the factory, ship direct. The rest
of the customers, ship from the distribution center.
Market Boundary - Example Problem
The distance between Toronto and Boston is
about 500 miles. Given the cost structure in the
previous example, calculate the location of the
market boundary between Toronto and Boston.
Assume the product cost at Toronto is $10 per
Product cost at Boston = product cost at Toronto
+ TL transportation
+ handling costs

Market Boundary - Example Problem
Product cost at Boston
= product cost at Toronto + TL transportation + handling
= $10 + $50 + $10 = $70

$10 + $0.20X = $70 + $020(500 - X)
0.4X = 160
X = 400
The market boundary is 400 miles from Toronto or 100
miles from Boston. Ship orders direct within 400 miles from
Toronto. Closer to Boston ship from Distribution Center in
Effect of Adding More Warehouses
• As more distribution centers are added:
– TL shipments to DC’s will increase
– LTL costs to customers will decrease
– Total cost of transportation will decrease
Effect of Adding More Warehouses
Figure 13.8 Transportation cost versus number of warehouses
• Identifies product
– may be part of marketing promotion
– size, description, date of manufacture
• Contains and protects the product
– movement
– environment
• Contributes to distribution efficiency
– handling in larger quantities
• Primary package
– holds the product for the consumer
– e.g. a box of cereal
• Secondary package
– contains small products for distribution
– e.g. a corrugated carton
• Unit load
– e.g. a pallet
“In warehousing, the consolidation of
several units into larger units for fewer
• APICS 12th Edition Dictionary
Box Pallet
• Standard sizes
– e.g. 48”x40”x4” (grocery)
• Sized to fit into further unitized loads
– e.g. railcar, truck, container
• Handled by fork lift trucks
Materials Handling
• Increase the cube utilization
– use as much height as possible
– keep aisles to minimum
• Improve operating efficiency
– increase the load per move
• Improve speed of response
• Conveyors
– move in a fixed route, consume space
– need high volumes
• Industrial trucks
– can move anywhere in the plant
– do not consume fixed space
• Cranes and hoists
– make use of overhead space
Pallet Position Plan
Figure 13.10 Railcar and trailer pallet position plan
Multi-Warehouse System
+ Transportation costs
+ Inventory-carrying cost
+ Warehousing costs
+ Materials handling costs
+ Packaging costs
= Total system cost

• System service capability
Transportation Costs
• TL shipments will be made over long
• LTL shipments to customers will be
• Total costs decrease with more
– diminishing effect as more warehouses are
Inventory-Carrying Cost
• Inventory
– order quantity - stays the same
– safety stock
• increases with the number of warehouses
• varies with the square root of the change

= SS
Previous # of warehouses
New # of warehouses
Inventory Carrying Costs
• A company is considering adding a warehouse. For an
item with an average demand of 1000 units each
warehouse will have a demand of 500 units.
• The safety stock in one warehouse was 100 units for a
service level of 90%. What is the new safety stock?
SS = 100 x 500 = 71 units (in each warehouse)
Warehousing Costs
+ Space for additional inventory
+ Duplication of non-storage space
offices, washrooms, lunchrooms
+ Duplication of support staff
supervisory, clerical, support
Materials Handling Costs
• Number of units handled will remain the
• As number of warehouses increase, the
size of the loads handled will decrease
• Handling of non-unitized loads
increases costs
Packaging Costs
• Per unit costs remain the same

• Total costs increase with inventory
Total System Cost
Figure 13.11 Total system cost
System Service Capability
• Customer service (speed of delivery)
– improves with more distribution centers
– diminishing effect as more DC’s are added
• Must consider cost of service with total
system cost
System Service Capability
Figure 13.12 Estimate of market reached versus number of warehouses
System Service Capability
• 3 distribution centers provide the lowest total
system cost
Figure 13.13 Cost versus number of warehouses

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