PHYSICAL DISTRIBUTION + CUSTOMER HANDLING

Company Products & Services

PHYSICAL DISTRIBUTION + CUSTOMER HANDLING

CONTENTS

PHYSICAL DISTRIBUTION + CUSTOMER HANDLING

Just as the marketing concept is receiving increasing recognition by the industry there needs to be a similar awareness of the physical distribution concept. When managers of various departments make decisions only with reference to their own framework, they affect each other's costs and demand creation influences but do not take them into consideration. The physical distribution concept calls for treating all these decisions within a unified total systems framework. Then the important task becomes that of designing physical distribution arrangements that minimize the cost of providing a given level of customer service.

To improve performance the industry can choose from a number of alternative physical distribution strategies, ranging from direct customer handling to local and remote outlets, to local sub-processing to local complete customer processing. It must develop product supply policies that reconcile the value of a high level of customer service with the need to economies on product carrying costs. It must find more accurate ways to evaluate alternative general areas and specific sites for marketing expansion. It must review the whole question of organizational responsibility for physical distribution, particularly how to co-ordinate the various decisions and where leadership should be located in the organization.

In this part of the report one must deliberately emphasize the planning rather than the operations aspects of physical distribution. Physical distribution is an area where good systems design counts for as much as or more than good operations management. Nevertheless, many of the potential economies come from improved management of the existing system.

In the industry, the term "marketing" has connoted two different but related processes, the first dealing with the search for and stimulation of buyers and the second with the physical distribution of the product. With the increased competition for markets, marketing executives in the company have devoted the bulk of their time to the search and stimulation function. Their attention has been given over to developing a mix of products, prices, promotion, and channels that would keep demand high and growing. They have viewed physical distribution, or the logistics of getting products to the buyers, as a supportive and subsidiary activity.

More recently, several developments have awakened the company management's interest in the logistics problem and led them to wonder whether they were not overlooking many opportunities, not only for cost saving but also for improved demand stimulation.

One of the alerting factors is the increase in the cost for such physical distribution services as transport, storage & handling and customer servicing. Transport, storage and handling bills are rising as a result of increased labor and equipment costs. The customer servicing bill is rising because buyers are tending to place smaller orders more frequently, and suppliers are tending to expand the width and depth of their lines. Many company executives have been shocked to learn that the total costs of storing, handling, and moving their products are anywhere between 5 and 30 percent of sales.

Increasing numbers of company managers argue that substantial savings can usually be effected in the physical-distribution area, which has been accurately described as "the last frontier for cost economies". There is much evidence of un-coordinated physical-distribution decisions resulting in sub-optimization. Not enough use is being made of modern decision tools for determining economic levels of customer service, efficient modes of handling, and sound process, handling, and storage locations.

Furthermore, physical distribution is a potent instrument in the demand-stimulation process. Companies can gain by offering more in the way of service or by cutting prices through successfully reducing physical-distribution costs.

PHYSICAL DISTRIBUTION SYSTEM FLOW CHART

DISTRIBUTION SCOPE

There is a broad and narrow view of the scope of physical distribution.

In the Broad View, physical distribution starts with the location of original materials and labor inputs required in the productive process and stretches to the location of final consumer markets.

This perspective is particularly pertinent to the Company when planning to enter a new-product market. Having as yet no investment in suppliers, processes, handling & storage, distributors, or final markets, they are in a position to consider all of them as variables in designing its physical-distribution system.

Final markets are generally the best starting point for planning the new system. The company selects its final target markets and then works backward to an appropriate set of distributors, handling and process locations.

In most instances the industry must adopt a Narrow View of physical distribution which recognizes that the company is already established in the marketplace and has commitments to a set of processes, suppliers, distributors and final markets.

The company's problem is to find efficient arrangements for locating, stocking and handling its products to meet the service requirements of the marketplace. This is the point of view taken in this manual.

A useful conception of the component activities of the physical distribution can be seen as a flow-chart (above). Ten different activity blocks make up the physical-distribution system.

The whole system centers on the inventory-management block.

Inventory is the link between the customers' orders and the company's process activity. Customers' orders draw down the product supply, and the process builds it up.

Process activity requires an inflow of raw materials into the company, and this involves inbound freight and receiving operations.

Finished products then flow off the process line, involving packaging, in-house storage, handling activities, outbound transportation, field warehousing, and customer delivery and service.

	DISTRIBUTION EFFICIENCY
	Distribution Planning & Accounting
	Process Management & Handling
	Physical Distribution Efficiency
	Point of Sale & Customer Service Efficiency
	Order Handling & Processing

H68      Grid Definition

PHYSICAL DISTRIBUTION OBJECTIVES

The industry will 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 such policies as large product availability, premium transportation and handling, and many location points, all of which raise distribution cost. Minimum distribution cost implies such policies as slow, cheap transportation and handling, limited product availability and few location points.

The physical-distribution objective can be defined more carefully by introducing the notion of an efficient system.

System efficiency is a matter of the ratio of a system's output to its input. By clarifying what the outputs and inputs are in a physical-distribution system, one can come closer to defining a clear objective for such a system.


1. Level of Service

A basic output of a physical distribution system is the level of customer service. Customer service represents one of the key competitive benefits that a company can offer potential customers in order to attract their business.

From the customer's view, customer service takes several forms :

1. The speed of filling and delivering normal orders

2. The supplier's willingness to meet emergency product needs of the customer

3. The care with which products are delivered

4. The supplier's readiness to rectify complaints

5. The availability of after-sales services

6. The number of options on order handling

7. The supplier's willingness to improve product availability

8. The additional charges, or prices, policy

From the company’s point of view, they set certain service-level goals. The service level should set minimum standards and time limits, for order delivery - or at least - define the level of service as the "percentage of customers who should get their orders processed in x days". Companies thinking in terms of a system that holds down backorders to a certain level will not survive in the long-term.

    How can the industry determine a desirable level of customer service?

In many cases one uses the standard set by competitors. If the company offers a lower level of service than the prevailing one, it is in danger of losing patronage unless there is some compensatory element in its marketing mix. If the company offers a higher level of service than the prevailing one, the competitors may increase their service level in self-defence, and all companies would be stuck with higher costs. Any advantage will be temporary, especially if it is an effective advantage.

The company decision on the service level must rest ultimately on an analysis of probable customer and competitor response to alternative levels of service. Sometimes a slight increase in customer service can produce a good gain in customer patronage - say 5-15 percent, whereas a major costly increase may produce only a slightly higher gain - say 10-20 percent. The value customers place on service is admittedly one of the hardest things to evaluate in marketing. Nevertheless, it can sometimes be measured with a little ingenuity.

    For example, one might try to correlate the levels of customer complaints with the length of delay in order processing.

Even where the estimates are rough, one can use sensitivity analysis to find out how much difference any estimate would make in the choice between physical-distribution alternatives.

DISTRIBUTION & MARKETING COSTS

F_H - FIN_MKTG.HTM  HISTORIC MARKETING DATA 

FIN_DEFI.HTM FINANCIAL DEFINITIONS

 

Base Forecast: Median Market Scenario

F0M|     MEDIAN  FORECAST : Financials

G0M|     MEDIAN  FORECAST : Margins & Ratios

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2. Cost of service

The industry bears certain costs, of which transport, product availability and handling are the main ones, in providing its present level of customer service. Often the total bill is not known because the company may typically lack centralized management and accounting of their physical distribution activities. These costs, however, must be measured as a prerequisite for distribution planning and control.

The present system can be said to be efficient if no reorganization of logistical inputs could reduce the costs while maintaining the present service level.

The industry may think their physical-distribution system is efficient because each decision centre - product availability, handling, and traffic - appears to do a good job of keeping down its own costs. However, this is an area where the sum of distributional costs is not necessarily minimized by a set of un-coordinated efforts to minimize the separate costs.

It may well be that pressures are applied by top management which encourage the separate functional units to control and reduce their costs of operation. Cost reduction becomes the primary way for these functional units to call attention to themselves and as a result, when decisions are made about handling, storage, packaging, product availability levels, et cetera, they are based on an analysis of alternatives within that specific function, without regard for the possible effects upon other closely related functions.

Functional costs are considered, but the all-important total cost of the related functions is ignored.

Various physical distribution costs interact, often in an inverse way:

A functional manager might favor one method of transport over another because this reduces that department's transport bill; however, because cheaper methods of transport are usually slower and less reliable, this ties up company capital longer, delays customer payment, and may cause customers to buy from competitors offering more rapid service.

Similarly a decision to use cheap packaging to minimize supplies costs will lead to a high damage rate of products in transit, the perception of a lesser quality product and thus the loss of customer goodwill.

The importance of these points are that since physical distribution activities are highly interrelated, decisions must be made on a total system basis.


3. Service objective

One can now define the objective of physical distribution design.

A physical-distribution system consists of a set of decisions on the number, location, and size of handling facilities; transport policies; and product availability policies.

Each possible physical distribution system implies a total distribution cost, as given by the expression :


             D = T + FW + VW + S

where,

            D = total distribution costs

            T = total transport costs

            FW = total fixed handling costs

            VW = total variable handling costs

            S = total cost of lost sales due to average delivery delay

The choice of a physical distribution system calls for examining the total distribution cost associated with different proposed systems and selecting the system that minimizes total distribution cost.

	LEVEL + COST OF SERVICE
	Level of Service: Responsiveness
	Level of Service: Problem Solving
	Level of Service: Product / Price / Service Factors
	Cost of Service: Functional Costs
	Cost of Service: Physical Handling Costs

H69

	DISTRIBUTION COSTS
	Distribution & Storage Fixed Costs
	Distribution & Storage Variable Costs
	Physical Handling & Process Fixed Costs
	Physical Handling & Process Variable Costs
	Total Distribution Costs

H70      Grid Definition

ALTERNATIVES IN PHYSICAL DISTRIBUTION

The industry face a large number of alternatives in the designing or redesigning of its physical distribution system. The variety increases in number and complexity as one goes from an operation with a single process location serving a single market to an operation with multiple process locations and multiple markets.


1. Single Location, Single Market

The vast majority of companies are single location firms doing business in single markets. The single markets served may be a small city, as in the case of small service firms, or a region, as in the case of local suppliers of consumable products.

Does the single location firm generally locate in the midst of its market?

It often does, for the cost of serving a market increases with the distance. The distant firm has to absorb higher customer handling costs and is normally at a competitive disadvantage.

Yet in some cases there are offsetting economies in locating a plant at some distance from the market. The higher market customer handling cost may be offset by lower costs of property, labor, energy, or supplies.

The merits of locating process facilities near the market or near its sources depend mainly on relative transfer or processing costs. A substantial change in certain costs could upset the balance of advantages. The firm choosing between two alternative process sites must carefully weigh not only present alternative costs but forecast alternative costs.


2. Single Location, Multiple Markets

An operation having a single process location and selling in a dispersed set of markets has a choice of several physical distribution strategies.

In this scenario there are at least four alternatives:

i. Direct Handling of customers

ii. Bulk Handling of customers via a local handling facility

iii. Part processing at a local or remote location

iv. Full processing at a local or remote location.

i. Direct handling of customers
Any proposed system of physical distribution must be evaluated in terms of customer service and cost. The direct handling scenario leaves the impression that it would score poorly on both of these counts. In the first place, direct handling would seem to imply a slower service than the handling of the customer from a local facility. Further, direct handling would seem to imply more cost because the typical customer order may be relatively small.

Whether direct handling does involve these disadvantages depends upon a number of things. It is conceivable that direct handling from a distant process location could effect faster delivery than handling from a nearby service location. Furthermore, direct handling of small value orders must be measured against the cost of maintaining local or remote locations. The decision on whether to use direct handling depends on such factors as the nature of the product (its unit value, perishability and seasonality), the required speed & cost of delivery, the physical characteristics of the typical customer order, the physical distance and direction.

This analysis is incomplete because each handling alternative implies a different average delivery time and one can assume a higher cost of lost sales for longer delivery delays. Thus the slower modes of customer handling cost less - but adversely effect sales revenue.

These two diverging cost functions of delivery time are shown below:

By adding the two cost curves vertically, we can find a total-cost curve. The total-cost curve tends to be U-shaped, and by projecting its minimum point down to the Handling Delay axis, we can estimate the optimum handling delay. This delay has the property that the marginal savings in costs from a slightly longer delay would just equal the marginal cost of lost patronage.

ii. Bulk handling of customers from a local handling facility
The company may find it less expensive to do bulk handling of customers via a local handling facility.

The savings would arise mainly because of the substantial difference between bulk handling costs and small value order costs. From this, one has to subtract the cost of local customer handling from the location to the customer and the cost of premises.

To this possible handling savings should be added another advantage accruing from the use of a market-located customer handling point which is likely to increase the attractiveness of the product and thereby increase customer patronage. In general, the optimizing rule for adding regional locations is simple enough. A regional location should be added if the handling savings and increased patronage resulting from faster delivery exceed the incremental costs of operating the warehouse.

But an extensive regional system raises a number of new problems:

    What is the best number of points? Where should they be located?

    What is the best level of service to supply at each ?

Paper-and-pencil analysis is exceedingly inadequate to answer these questions and thus one needs to turn to computer models.

iii. Part processing at a local or remote location
A third alternative is to establish a process location near the market. The presence of a regional plant also stimulates the increased interest of local distribution channels and the community at large.

Against this the company must consider the fixed investment cost in additional facilities.

iv. Full processing at a local or remote location
The decision to acquire a regional process facility requires the most detailed factual information and analysis of the local scene.

Many factors are involved, including the availability and costs of manpower, energy, land, transportation and, not the least important, the legal and political environment.

One of the most important factors is the nature of economies of scale . In operations requiring a relatively heavy fixed investment, a location has to be quite large in order to achieve cost economies. If the unit costs of process decrease continuously with the scale of plant, then one plant could logically supply the entire company volume at minimum process costs; however, it would be fallacious to ignore distribution costs, because they tend to be higher at higher volumes.


3. Multiple Locations, Multiple Markets

Many of the large operations that do not require extremely large processes to achieve economies of scale utilize a physical distribution system consisting of many process locations and many handling points.

These companies face two optimization tasks:

i. The first is to set a process-to-point of sale shipping pattern that minimizes total handling costs, given the present process and handling locations.

ii. The second is to determine the number and location of facilities that will minimize total distribution costs.

Here system simulation is a potent technique.

The physical distribution system must be designed not for maximum economy for the present so much as maximum flexibility for the future, even if present costs must be a little higher in order to gain this flexibility. The company's plans for entering new product markets, for introducing new product revisions, and for changing the number of distributors should all count in designing the system.

The system should be planned with an awareness of environmental developments, particularly in the areas of communications, transportation, and automation. Such innovations as automated handling, joint venture transportation, electronic hookups between computers in different locations, containerization, and rapid handling are all factors to consider.

	PHYSICAL DISTRIBUTION
	Single Location / Single Markets
	Single Location / Multiple Markets: Direct Handling
	Single Location / Multiple Markets: Bulk Handling
	Single Location / Multiple Markets: Split Processing
	Multiple Location / Multiple Markets

H71      Grid Definition

PRODUCT AVAILABILITY DECISIONS

While a company’s marketing management generally does not have control over product availability policy, it is inclined to seek a strong voice in the making of product supply policy. The marketing management’s chief concern lies in providing a high level of service for his customers. Product supply policy is viewed by him as an instrument in the demand creation and demand satisfaction process.

However, it is not realistic from a cost point of view for a company to increase product availability to a level that would guarantee complete supply to all customers. A major reason is that product supply cost increases at an increasing rate as the customer service level approaches 100 percent.

The acceleration of product supply cost does not mean that increases in customer service are never warranted. Increases in service, results in increases in patronage and sales. One needs to know whether sales and profits will increase enough to justify the higher investment.


1. Types of Product Supply & Availability decisions

Product Supply & Availability decision making can be thought of as a two-step decision process:

               i.  Supply Timing
               ii. Supply Quantity

i. Supply Timing
The basic characteristic of Product Supply is that it is consumed over time.

This calls for a determination of the level at which the remaining product availability justifies the placement of product supply capacity.

The determination of the product supply capacity replacement point depends upon the process lead time, the usage rate and the service standard.

The higher the process lead time, the customer usage rate and the company service standard, the higher the replacement point.

Furthermore, if the process lead time and customer usage rate are variable, the replacement point would have to be higher by a safety margin. The final order point is set on the basis of balancing the risks of being unable to supply against the costs of oversupply.

ii. Supply Quantity
The decision the company makes on Supply Quantity directly influences Supply Timing. The larger the Supply Quantity, the less (usually) the Supply Timing.

Order processing costs are somewhat different for the distributor and the supplier. The distributor's processing costs consist of whatever materials, computer time and labor are used up every time an order is placed, received and checked.

Order processing costs for a supplier consist of setup costs and running costs for the product. If setup costs are very low, the supplier can process the product often and the cost per order is pretty constant and equal to the running costs. However, if setup costs are high, the supplier can reduce the average cost per unit order by producing a long process run and carrying more supply availability.

Order processing costs must be compared with the costs of maintaining the Supply Quantity, called carrying costs. The larger the average product availability carried, the higher the supply carrying costs. These carrying costs fall into four major categories:

               a. Handling and Storage charges
               b. Cost of capital
               c. Taxes and insurance
               d. Depreciation and obsolescence

Carrying costs may run as high as 25% of the product value. This may be higher than the estimate used by many managers, but there is growing recognition that the cost is very high. This means that managers who want their companies to carry larger product availability must be able to convince top management that the higher product supply will yield new sales with an incremental gross profit that would more than cover the incremental carrying costs.

The optimal supply quantity can be determined by observing how order processing costs and carrying costs sum up at different possible order levels.

Order processing costs per product unit can be shown to fall with the number of units ordered, as the order costs are spread over more units. Carrying charges per unit are shown to rise with the product units ordered, because each unit remains longer unsold.

LOCATION DECISIONS

Marketing management in the industry has a keen interest in location decisions made by the firm. Point of Sale outlets must be carefully located near the greatest number of potential customers, because of the importance of convenience. Even handling locations should be located near the customer concentration points to ensure faster and cheaper delivery to customers.


1. Types of Location Decisions

Location decision making can be thought of as two-step decision process:

               i.  Selecting a general area
               ii. Selecting a specific site


i. Selecting the area
It is usually a distribution management responsibility to identify and evaluate the profit potential of various areas in each of the countries in which the company operates. The areas might be cities, standard metropolitan areas, or some other geographical unit.

Suppose a set of  ⁿ  areas  (1,2,3,..., i, ...., ⁿ)  is to be evaluated.

        Let  Z _i  represent the expected profit potential of the i th area.

        Let X _i  be a proposed company investment in developing area i.

        The expected profit potential will vary with development expenses. That is,  Z_i  =  f(X_i )

A larger outlet, a better distributor, or a larger promotion budget invested in a particular area would create higher profits, although the rate of profit increase can be expected to diminish beyond some level investment.

The company has the task to estimate, for each candidate area, how profits would behave at different levels of investment. Once it derives a set of area profit functions, it can allocate its total "new locations" budget to these areas in such a way that the marginal profits is the same in all areas.

Although the area investment problem turns out to be simple to solve in principle, everything hinges on being able to estimate expected profits as a function of investment:

Area profits are a complex function of area cost and area characteristics. The relevant cost characteristics of an area, such as premises costs and advertising rates, are fairly easy to determine. It is the area's demand potential that is usually hard to determine.

One can initially identify several hundred variables that could influence area sales. On closer examination of the logical rationale for each variable, one is able to reduce the set to perhaps fifty.

One needs to use such a formula for both existing locations as well as proposed new locations.

ii. Selecting the site
After determining the areas of high potential, the firm must decide how many outlets to maintain and/or establish and where they should be specifically situated. If one city or region appears to be a high-potential market, the firm could establish, for about the same investment one large outlet in a central location or a few smaller outlets in separate parts of the city. The perception of the customer about the relative positioning of the product or service will affect consumer behavior; for example if customers believed the product to be a specialty, they would be willing to travel longer distances, and this would favor one large, centrally located location. If customers regarded products as convenience products or services, this would favor establishing a few smaller outlets.

A location’s trading area or reach is affected by a number of other factors besides the type of product. One is the number of different products or services carried by the location.

One model develops an analysis in which one can visualize each consumer as calculating his net gain from patronizing a location with N items at a distance D.

One assumed that increases in N more than compensated for increases in D up to a point.

Beyond this point, the cost of traveling to the location became dominant.

The utility expected by a customer in location i of buying at an outlet in location j is affected by many variables in addition to N and D.

Included are such factors as image, delivery, credit, service policies, promotion, parking facilities, et cetera. If consumer utility as a function of these variables could be measured, the choice of the best site and outlet size from a list of alternatives is solvable in principle.

Suppose there are three alternative proposed sites - 1, 2, and 3 - offering utilities 40, 30, and 10, respectively, to a customer in location i.

The probability that this customer would buy at site 1 is the ration of the utility of site 1 to the total utility, in this case .50 ( = 40/80).

If there are 1,000 similar customers clustered at location i, then half of them, or 500, can be expected to patronize proposed site 1.

In a more advanced analysis, it would be desirable to distinguish major socioeconomic types or buyer profiles of customers at location i, because there are strong interaction of customer type and outlet type.

In practice, firms vary considerably in how analytically they investigate the trade potential of proposed sites. Small firms rely on basic customer data and on simple traffic counts. Large firms carry out expensive surveys of customer buying habits and make extensive calculations of expected sales volume.

The expanding firm often develops explicit criteria to guide its search for sites and cut down its search time.

For example typical criteria for the location of sites may include:

  a. Annual sales volume target per location
  b. Site and support infrastructure
  c. Demographic data
  d. Customer profiles and growth prospects
  e. Geographic siting in relation to company's other sites
  f. Ownership and terms of location
  g. Trading area data and growth prospects

While these heuristic principles may lead the company to overlook a very good site, they save the company the expense of considering a great number of potentially poor sites.

In undertaking a detailed commercial analysis for a proposed site, the firm must first prepare area maps indicating density and the location of competitive intercepting facilities. An overlay on this map indicates major arteries to pinpoint traffic flows.

One can then determine the availability and cost of potential sites within the general area. The trade potential of each site is then evaluated. A series of circles is drawn around each site at varying distances to indicate the primary trading area, the secondary trading area, and the fringe trading area. The secondary and fringe areas are further away from the new site and closer to competitive sites; they can be expected to contribute a progressively smaller amount of per capita sales. - Use can be made of a formula which supplies a means for estimating the sales volume drawn by competing sites as a function of location size and customer access and time taken.

where,

   Bi = the proportion of trade from the immediate town attracted by city i

   Pi = the population of city i

   Di = the distance from the intermediate town to city i

   a, b = the particular cities being compared

One may develop and utilize elaborate site location checklists in their evaluation of sites. The checklist would contain factors, each of which has to be rated excellent, good, fair, or poor in evaluating a proposed site. These factors relate to the site's trading area potential accessibility, growth potential, competitive interception and site economics.

DISTRIBUTION RESPONSIBILITY

1. Divided Authority

It should be abundantly clear that decisions on transport, handling, product availability and location require the highest degree of co-ordination. Yet it may be the case that in a company’s, physical distribution responsibilities tend to be divided in an ill-coordinated and often arbitrary way among several company departments. Furthermore, each department tends to adopt a narrow view of the company's physical distribution objective.

One manager may seek to minimize one departmental bill at the cost of another department. One operational unit may adopt physical distribution objectives and policies which will disadvantage other units up-stream or down-stream. Each operational manager jealously guards his prerogatives and this inevitably results in system sub-optimization.


2. Organizational Alternatives

Companies are increasingly recognizing the potential benefits of developing some coordinating mechanism and have generally chosen one of two forms; firstly, the establishment of a team composed of personnel responsible for different physical distribution activities, that meets periodically to work out policies for increasing the efficiency of the overall distribution system; or secondly, the centralization of their physical distribution activities in the hands of a single department or manager.

When a company establishes a separate department with responsibility for physical distribution, the major issue is whether the new department should have separate status or be placed within one of the major existing departments. For example, a company might create a new department of co-ordinate stature with Marketing and Production which was headed by a Director of Distribution; thereby hoping that this arrangement would guarantee respect for the department, develop a greater degree of professionalism and objectivity, and avoid partisan domination by Marketing or Production.

On the other hand, a company may place its new Distribution Service Department within the Marketing Department. By this move, expressing the great importance it attached to good customer service relative to the costs of providing it. Wherever marketing is the crucial factor in competitive success, physical distribution is usually placed under the marketing department. This is especially true in very competitive markets where marketing and physical distribution must be coordinated not only to minimize costs but also to harmonies with frequent advertising campaigns and customer and distributor promotions.

The location of the department, or even its creation, is a secondary concern. The important thing is the recognition by the company that if it does not co-ordinate the planning and operation of its physical distribution activities, it is missing the opportunity for often sizable cost savings and service improvements. When this fundamental awareness takes place, each company can then make a determination of what would constitute the most appropriate coordinative mechanism.

	DISTRIBUTION DECISIONS
	Product Availability Timing Efficiency
	Product Availability Quantity Efficiency
	Locations Efficiency
	Organizational Efficiency
	Organizational & Decision Flexibility

H72      Grid Definition

DISTRIBUTION CHANNEL INVESTMENT EFFECT FORECASTS

This section analyses the effects of a Distribution Channel Improvement programme and its inferred expenditure in terms of the industry's Financial and Operational results.

Distribution Channel Investments can bring almost immediate results in terms of turnover and profitability and in general terms the investment involves both short-term tactical projects as well as medium-term expenditure on equipment and capital projects.

The Financial and Operational Distribution Channel Investment Scenario Data forecasts given make the following assumptions:-

1. Forecasts are based on all external factors:

  a. Market Growth (Medium + Long Term)
  b. Competitive Market Factors
  c. Competitor + Industry Environment Factors


2. Forecasts assume ceteris paribus in terms of internal factors with the exception of a Distribution Channel Improvement programme and its expenditure which is assumed to increase by a rate equivalent to 5% greater than the competitor average

3. Forecasts assume changes in Market Competitors. The forecast assumptions use Competitor databases to forecast changes in competitive situations which will affect the Company and includes the Competitor response (in Distribution Channel Terms) to the scenario shown.

Distribution Channel Improvement Scenario

F06|     DISTRIBUTION CHANNEL IMPROVEMENT : Financials

G06|     DISTRIBUTION CHANNEL IMPROVEMENT : Margins & Ratios

 Financial Definitions

HISTORIC FINANCIAL DATA

PHYSICAL DISTRIBUTION + CUSTOMER HANDLING FINANCIAL ISSUES

F_H - FIN_HIST.HTM   HISTORIC FINANCIAL DATA

 Financial Definitions

 

PHYSICAL DISTRIBUTION + CUSTOMER HANDLING FINANCIAL SCENARIOS
FINANCIAL DATA FORECAST

 

PHYSICAL DISTRIBUTION + CUSTOMER HANDLING FINANCIAL SCENARIOS BASED BALANCE SHEET FORECASTS

The PHYSICAL DISTRIBUTION + CUSTOMER HANDLING FINANCIAL SCENARIOS BALANCE SHEET FORECASTS section gives a series of Balance Sheet Forecasts for the industry using a number of assumptions relating to the distribution and customer handling decisions available to the management of the industry.

The Balance sheet forecast given shows the effects of distribution and customer handling improvements which Management is likely to recommend:


PHYSICAL DISTRIBUTION + CUSTOMER HANDLING FINANCIAL SCENARIOS

- Fixed Marketing Cost Objectives
- Distribution & Product Delivery Cost Objectives
- Order Taking Improvements
- Customer / Order Processing Systems Investment
- Systems Investment
- Profit Impact From Distribution Cost Reduction
- Profit Impact From Customer Handling Cost Reduction
- Capital Investments Options: Distribution / Handling
- Capital Investments Options: Customer Handling Systems
- Customer Handling Improvements

Managers in the industry will, in both the short-term and the long-term, have vital decisions to make regarding the distribution and customer handling improvements, margins and profitability and these decisions will need to be evaluated in light of the customers, markets, competitors, products, industry and internal factors. The scenarios given isolate a number of the most important factors and provide balance sheet forecasts for each of the scenarios.

The data provides a short and medium term forecast covering the next 6 years for each of the Forecast Financial and Operational items. The Financial and Operational Data sections show each of the items listed below in terms of forecast data and covers a period of the next 6 years.

Fixed Marketing Cost Objectives

F25|     FIXED MARKETING COST OBJECTIVES : Financials

G25|     FIXED MARKETING COST OBJECTIVES : Margins & Ratios

Distribution & Product Delivery Cost Objectives

F28|     DISTRIBUTION & PRODUCT DELIVERY COST OBJECTIVES : Financials

G28|     DISTRIBUTION & PRODUCT DELIVERY COST OBJECTIVES : Margins & Ratios

Order Taking Improvements

F42|     ORDER TAKING IMPROVEMENTS : Financials

G42|     ORDER TAKING IMPROVEMENTS : Margins & Ratios

Customer / Order Processing Systems Investment

F45|     CUSTOMER / ORDER PROCESSING SYSTEMS INVESTMENT : Financials

G45|     CUSTOMER / ORDER PROCESSING SYSTEMS INVESTMENT : Margins & Ratios

Systems Investment

F46|     SYSTEMS INVESTMENT : Financials

G46|     SYSTEMS INVESTMENT : Margins & Ratios

Profit Impact From Distribution Cost Reduction

F64|     PROFIT IMPACT FROM DISTRIBUTION COST REDUCTION : Financials

G64|     PROFIT IMPACT FROM DISTRIBUTION COST REDUCTION : Margins & Ratios

Profit Impact From Customer Handling Cost Reduction

F65|     PROFIT IMPACT FROM CUSTOMER HANDLING COST REDUCTION : Financials

G65|     PROFIT IMPACT FROM CUSTOMER HANDLING COST REDUCTION : Margins & Ratios

Capital Investments Options: Distribution / Handling

F68|     CAPITAL INVESTMENTS OPTIONS: DISTRIBUTION / HANDLING : Financials

G68|     CAPITAL INVESTMENTS OPTIONS: DISTRIBUTION / HANDLING : Margins & Ratios

Capital Investments Options: Customer Handling Systems

F69|     CAPITAL INVESTMENTS OPTIONS: CUSTOMER HANDLING SYSTEMS : Financials

G69|     CAPITAL INVESTMENTS OPTIONS: CUSTOMER HANDLING SYSTEMS : Margins & Ratios

Customer Handling Improvements

F72|     CUSTOMER HANDLING IMPROVEMENTS : Financials

G72|     CUSTOMER HANDLING IMPROVEMENTS : Margins & Ratios

FIN_DEFI.HTM Financial Definitions

INDEX

Additional charges, 7
ADVERTISING COSTS, 8
ADVERTISING COSTS FORECAST, 10
After-sales, 7
AFTER-SALES COSTS, 8
AFTER-SALES COSTS FORECAST, 10
ALTERNATIVES IN PHYSICAL DISTRIBUTION, 21

Balance Sheet Capital Investments Options: Customer Handling, 80
Balance Sheet Capital Investments Options: Distribution, 76
Balance Sheet Customer Handling Improvements, 84
Balance Sheet Customer / Order Processing Systems, 60
Balance Sheet Distribution Channel Improvement Scenario, 36
Balance Sheet Distribution & Product Delivery Costs, 52
Balance Sheet Fixed Marketing Cost Objectives, 48
Balance Sheet Historic, 42
Balance Sheet Order Taking Improvements, 56
Balance Sheet Profit Impact From Customer Handling, 72
Balance Sheet Profit Impact From Distribution Costs, 68
Balance Sheet Systems Investment, 64
Broad View, 2
Bulk handling - local facility, 22

Care, 7
Carrying costs, 27
Cost of capital, 27
Cost of Handling, 21
Cost of service, 12
Cost of Service: Functional Costs, 13
Cost of Service: Physical Handling Costs, 13
Costs & Margins Historic, 43
Customer service, 7

Delivering normal orders, 7
Depreciation and obsolescence, 27
Direct handling of customers, 21
DISTRIBUTION CHANNEL INVESTMENT EFFECT FORECASTS, 35
DISTRIBUTION COSTS, 17
DISTRIBUTION DECISIONS, 31
DISTRIBUTION EFFICIENCY, 3
Distribution Planning & Accounting, 3
DISTRIBUTION RESPONSIBILITY, 30
DISTRIBUTION SCOPE, 2
Distribution & Storage Fixed Costs, 17
Distribution & Storage Variable Costs, 17
DISTRIBUTION + CUSTOMER HANDLING FINANCIAL FORECASTS, 47
DISTRIBUTION + HANDLING COSTS, 8
DISTRIBUTION + HANDLING COSTS FORECAST, 10
Divided Authority, 30

Emergency product needs, 7

Financial data definitions, 89
Financial forecast notes, 40, 46
Financial Ratios Capital Investments: Customer Handling, 82
Financial Ratios Capital Investments Options: Distribution, 78
Financial Ratios Customer Handling Improvements, 86
Financial Ratios Customer / Order Processing System, 62
Financial Ratios Distribution Channel Improvement, 38
Financial Ratios Distribution & Product Delivery Costs, 54
Financial Ratios Fixed Marketing Cost Objectives, 50
Financial Ratios Order Taking Improvements, 58
Financial Ratios Profit Impact From Customer Handling, 74
Financial Ratios Profit Impact From Distribution Costs, 70
Financial Ratios Systems Investment, 66
Financial Ratios & Margins Historic, 44
Full processing -local or remote, 22

Handling and Storage charges, 27
Handling Delay, 21
HISTORIC FINANCIAL DATA, 41
HISTORIC MARKETING COST RATIOS & MARGINS, 9
HISTORIC MARKETING COSTS & MARGINS, 8

Improve product availability, 7

Level of Service, 7
Level of Service: Problem Solving, 13
Level of Service: Product / Price / Service Factor, 13
Level of Service: Responsiveness, 13
LEVEL + COST OF SERVICE, 13
LOCATION DECISIONS, 28
Location of sites, 29
Locations Efficiency, 31

MARKETING COSTS, 9
MARKETING COSTS FORECAST, 10
MARKETING FACTORS FORECAST, 11
MARKETING MARGINS + RATIOS FORECAST, 11
MARKETING OPERATIONAL RATIOS, 9
MARKETING OPERATIONAL RATIOS FORECAST, 11
MARKETING RATIO, 9
MARKETING RATIOS FORECAST, 11
Multiple Location / Multiple Markets, 23
Multiple Locations -Multiple Markets, 22

Narrow View, 2

Operational Costs Capital Investments: Customer Handling, 81
Operational Costs Capital Investments: Distribution, 77
Operational Costs Customer Handling Improvements, 85
Operational Costs Customer / Order Processing Systems, 61
Operational Costs Distribution Channel Improvement, 37
Operational Costs Distribution & Product Delivery, 53
Operational Costs Fixed Marketing Cost Objectives, 49
Operational Costs Order Taking Improvements, 57
Operational Costs Profit Impact: Customer Handling Improvement, 73
Operational Costs Profit Impact: Distribution Improvement, 69
Operational Costs Systems Investment, 65
Operational Margins Capital Investments: Customers, 83
Operational Margins Capital Investments: Distribution, 79
Operational Margins Customer Handling Improvements, 87
Operational Margins Customer / Order Processing Systems, 63
Operational Margins Distribution Channel Improvements, 39
Operational Margins Distribution & Product Delivery, 55
Operational Margins Fixed Marketing Cost Objectives, 51
Operational Margins Order Taking Improvements, 59
Operational Margins Profit Impact From Customer Handling, 75
Operational Margins Profit Impact From Distribution, 71
Operational Margins Systems Investment, 67
Operational Ratios & Margins Historic, 45
Optimal supply quantity, 27
Optimum Handling Delay, 21
Options, 7
Order Handling & Processing, 3
Order processing costs, 27
Organizational Alternatives, 30
Organizational Efficiency, 31
Organizational & Decision Flexibility, 31

Part processing - local or remote, 22
PHYSICAL DISTRIBUTION, 23
Physical Distribution Efficiency, 3
PHYSICAL DISTRIBUTION OBJECTIVES, 7
PHYSICAL DISTRIBUTION SYSTEM FLOW CHART, 2
PHYSICAL DISTRIBUTION + CUSTOMER HANDLING, 1
Physical Handling & Process Fixed Costs, 17
Physical Handling & Process Variable Costs, 17
Point of Sale & Customer Service Efficiency, 3
Potential accessibility, 29
Process Management & Handling, 3
PRODUCT AVAILABILITY DECISIONS, 27
Product Availability Quantity Efficiency, 31
Product Availability Timing Efficiency, 31
Product Supply, 27
Product Supply & Availability, 27
PROFIT RATIOS, 9
PROFIT RATIOS FORECAST, 11

Rectify complaints, 7
Relative positioning, 28

SALES COSTS, 8
SALES COSTS FORECAST, 10
Selecting the area, 28
Selecting the site, 28
Service objective, 12
Single Location / Multiple Markets: Bulk Handling, 23
Single Location / Multiple Markets: Direct Handling, 23
Single Location / Multiple Markets: Split Processing, 23
Single Location / Single Markets, 23
Single Location - Multiple Markets, 21
Single Location - Single Market, 21
Site economics, 29
Speed, 7
Supplier's willingness, 7
Supply Quantity, 27
Supply Timing, 27

Taxes and insurance, 27
Total Distribution Costs, 17
TOTAL MARKETING COSTS, 8
TOTAL MARKETING COSTS FORECAST, 10
Total-cost curve, 21
Trading area, 28
Types of Location Decisions, 28

CONTENTS

additional charges
after-sales
ALTERNATIVES IN PHYSICAL DISTRIBUTION
Base Forecast: Median Market Scenario
Broad View
Bulk handling - local facility
Capital Investments Options: Customer Handling Systems
Capital Investments Options: Distribution / Handling
care
carrying costs
Cost of capital
Cost of Handling
Cost of Service: Functional Costs
Cost of Service: Physical Handling Costs
Cost of service
customer service
Customer / Order Processing Systems Investment
Customer Handling Improvements
delivering normal orders
Depreciation and obsolescence
Direct handling of customers
Distribution & Product Delivery Cost Objectives
Distribution & Storage Fixed Costs
Distribution & Storage Variable Costs
DISTRIBUTION + CUSTOMER HANDLING FINANCIAL FORECASTS
Distribution Channel Improvement Scenario
DISTRIBUTION CHANNEL INVESTMENT EFFECT FORECASTS
DISTRIBUTION COSTS
DISTRIBUTION DECISIONS
DISTRIBUTION EFFICIENCY
Distribution Planning & Accounting
DISTRIBUTION RESPONSIBILITY
DISTRIBUTION SCOPE
Divided Authority
emergency product needs
Fixed Marketing Cost Objectives
Full processing - local or remote
Handling and Storage charges
Handling Delay
HISTORIC FINANCIAL DATA
improve product availability
LEVEL + COST OF SERVICE
Level of Service: Problem Solving
Level of Service: Product / Price / Service Factors
Level of Service: Responsiveness
Level of Service
LOCATION DECISIONS
location of sites
Locations Efficiency
Multiple Location / Multiple Markets
Multiple Locations - Multiple Markets
Narrow View
optimal supply quantity
Optimum Handling Delay
options
Order Handling & Processing
Order processing costs
Order Taking Improvements
Organizational & Decision Flexibility
Organizational Alternatives
Organizational Efficiency
Part processing - local or remote
PHYSICAL DISTRIBUTION + CUSTOMER HANDLING
Physical Distribution Efficiency
PHYSICAL DISTRIBUTION OBJECTIVES
PHYSICAL DISTRIBUTION SYSTEM FLOW CHART
PHYSICAL DISTRIBUTION
Physical Handling & Process Fixed Costs
Physical Handling & Process Variable Costs
Point of Sale & Customer Service Efficiency
potential accessibility
Process Management & Handling
Product Supply
PRODUCT AVAILABILITY DECISIONS
Product Availability Quantity Efficiency
Product Availability Timing Efficiency
Product Supply & Availability
Profit Impact From Customer Handling Cost Reduction
Profit Impact From Distribution Cost Reduction
rectify complaints
relative
Selecting the area
Selecting the site
Service objective
Single Location - Multiple Markets
Single Location - Single Market
Single Location / Multiple Markets: Bulk Handling
Single Location / Multiple Markets: Direct Handling
Single Location / Multiple Markets: Split Processing
Single Location / Single Markets
site economics Types of Location Decisions
speed
supplier's willingness
Supply Quantity
Supply Timing
Systems Investment
Taxes and insurance
Total Distribution Costs
total-cost curve
trading area

PHYSICAL DISTRIBUTION + CUSTOMER HANDLING
PHYSICAL DISTRIBUTION SYSTEM FLOW CHART
DISTRIBUTION SCOPE
PHYSICAL DISTRIBUTION OBJECTIVES
Level of Service
Cost of service
Service objective
ALTERNATIVES IN PHYSICAL DISTRIBUTION
Single Location - Single Market
Single Location - Multiple Markets
Direct handling of customers
Bulk handling - local facility
Part processing - local or remote
Full processing - local or remote
Multiple Locations - Multiple Markets
PRODUCT AVAILABILITY DECISIONS
Product Supply & Availability
Supply Timing
Supply Quantity
LOCATION DECISIONS
Types of Location Decisions
Selecting the area
Selecting the site
DISTRIBUTION RESPONSIBILITY
Divided Authority
Organizational Alternatives
DISTRIBUTION CHANNEL INVESTMENT EFFECT FORECASTS
HISTORIC FINANCIAL DATA
DISTRIBUTION + CUSTOMER HANDLING FINANCIAL FORECASTS
DISTRIBUTION EFFICIENCY
Distribution Planning & Accounting
Process Management & Handling
Physical Distribution Efficiency
Point of Sale & Customer Service Efficiency
Order Handling & Processing
Base Forecast: Median Market Scenario
LEVEL + COST OF SERVICE
Level of Service: Responsiveness
Level of Service: Problem Solving
Level of Service: Product / Price / Service Factors
Cost of Service: Functional Costs
Cost of Service: Physical Handling Costs
DISTRIBUTION COSTS
Distribution & Storage Fixed Costs
Distribution & Storage Variable Costs
Physical Handling & Process Fixed Costs
Physical Handling & Process Variable Costs
Total Distribution Costs
PHYSICAL DISTRIBUTION
Single Location / Single Markets
Single Location / Multiple Markets: Direct Handling
Single Location / Multiple Markets: Bulk Handling
Single Location / Multiple Markets: Split Processing
Multiple Location / Multiple Markets
DISTRIBUTION DECISIONS
Product Availability Timing Efficiency
Product Availability Quantity Efficiency
Locations Efficiency
Organizational Efficiency
Organizational & Decision Flexibility
Distribution Channel Improvement Scenario
Fixed Marketing Cost Objectives
Distribution & Product Delivery Cost Objectives
Order Taking Improvements
Customer / Order Processing Systems Investment
Systems Investment
Profit Impact From Distribution Cost Reduction
Profit Impact From Customer Handling Cost Reduction
Capital Investments Options: Distribution / Handling
Capital Investments Options: Customer Handling Systems
Customer Handling Improvements