In today’s global marketplace, selling a product is sometimes easier
than getting it to customers.
Therefore, physical distribution and logistics management are receiving
increased attention from
strategic planners. The task of physical distribution systems is to
minimize the total cost of
providing a desired level of customer services while bringing those
services to the customer with
the maximum amount of speed. Major logistics functions of order
processing, warehousing,
inventory management, and transportation are discussed and explored in
today’s Lesson.
LOGISTIC MANAGEMENT
A. Push Versus Pull Strategy:
A promotion strategy that calls for using the sales force and trade
promotion to push the product through the channel is called push
strategy. The producer promotes the product to wholesalers, the
wholesalers promote to retailers and the retailers promote to consumers.
While the pull strategy is the promotional strategy that calls for
spending a lot on advertising and consumer promotion to build up
consumer demand; if successful, consumer will ask their retailers for
the product, the retailer will ask the wholesalers and wholesalers will
ask the producers. So these are two strategies through which
availability of products can be created in the market for final
consumers.
B. Physical Distribution and Logistics Management
Companies must decide on the best way to store, handle, and move their
products and services so
that they are available to customers in the right assortments, at the
right time, and in the right
place. Logistics effectiveness has a major impact on both customer
satisfaction and company costs.
Here we consider the nature and importance of marketing logistics,
goals of the logistics system, major logistics
functions, and the need for integrated logistics
management.
a. Nature and Importance of Physical Distribution and Marketing
Logistics
To some managers, physical distribution means only trucks and
warehouses. But modern logistics
is much more than this. Physical distribution—or marketing
logistics—involves planning,
implementing, and controlling the physical flow of materials, final
goods, and related information
from points of origin to points of consumption to meet customer
requirements at a profit. In
short, it involves getting the right product to the right customer in
the right place at the right time.
Traditional physical distribution typically started with products at the
plant and then tried to find
low-cost solutions to get them to customers. However, today's marketers
prefer market logistics
thinking, which starts with the marketplace and works backward to the
factory. Logistics addresses
not only the problem of outbound distribution (moving products from the
factory to customers)
but also the problem of inbound distribution (moving products and
materials from suppliers to the
It involves the management of entire supply chains, value-added
flows from suppliers to final users,
as shown in Figure . Thus, the logistics manager's task is to coordinate
activities of suppliers,
purchasing agents, marketers, channel members, and customers. These
activities include
forecasting, information systems, purchasing, production planning, order
processing, inventory,
warehousing, and transportation planning.
Companies today are placing greater emphasis on logistics for several
reasons. First, customer
service and satisfaction have become the cornerstones of marketing
strategy, and distribution is an
important customer service element. More and more, companies are finding
that they can attract
and keep customers by giving better service or lower prices through
better physical distribution.
Second, logistics is a major cost element for most companies. According
to one study, in a recent
year American companies "spent $670 billion—a gaping 10.5 percent of
gross domestic product—
to wrap, bundle, load, unload, sort, reload, and transport goods." About
15 percent of an average product's price is accounted for by
shipping and transport alone. Poor physical distribution decisions
result in high costs. Improvements in physical distribution efficiency
can yield
tremendous cost savings for both the company and its customers. Third,
the explosion in product variety has created a need for
improved logistics management.
Finally, improvements in information technology have created
opportunities for
major gains in distribution efficiency. The increased use of computers,
point-of-sale scanners,
uniform product codes, satellite tracking, electronic data interchange
(EDI), and electronic funds
transfer (EFT) has allowed companies to create advanced systems for
order processing, inventory
control and handling, and transportation routing and scheduling.
b. Goals of the Logistics System
Some companies state their logistics objective as providing maximum
customer service at the least
cost. Unfortunately, no logistics system can both maximize
customer service and minimize
distribution costs. Maximum customer service implies rapid delivery,
large inventories, flexible
assortments, liberal returns policies, and other services—all of which
raise distribution costs. In
contrast, minimum distribution costs imply slower delivery, smaller
inventories, and larger shipping
lots—which represent a lower level of overall customer service.
The goal of the marketing logistics system should be to provide a
targeted level of customer
service at the least cost. A company must first research the importance
of various distribution
services to its customers and then set desired service levels for each
segment. The company
normally will want to offer at least the same level of service as its
competitors do. But the objective
is to maximize profits, not sales. Therefore, the company must
weigh the benefits of providing
higher levels of service against the costs. Some companies offer less
service than their competitors
and charge a lower price. Other companies offer more service and charge
higher prices to cover
higher costs.
c. Major Logistics Functions
Given a set of logistics objectives, the company is ready to design a
logistics system that will
minimize the cost of attaining these objectives. The major logistics
functions include order processing,
warehousing, inventory management, and transportation.
i. Order Processing
Orders can be submitted in many ways—by mail or telephone, through
salespeople, or via
computer and EDI. In some cases, the suppliers might actually generate
orders for their customers:
Once received, orders must be processed quickly and accurately. Both the
company and its
customers benefit when order processing is carried out efficiently. Most
companies now use
computerized order-processing systems that speed up the
order–shipping–billing cycle. For
example, General Electric operates a computer-based system that, on
receipt of a customer's order,
checks the customer's credit standing as well as whether and where the
items are in stock. The
computer then issues an order to ship, bills the customer, updates the
inventory records, sends a
production order for new stock, and relays the message back to the
salesperson that the customer's
order is on its way—all in less than 15 seconds.
ii. Warehousing
Every company must store its goods while they wait to be sold. A storage
function is needed
because production and consumption cycles rarely match. A company must
decide on how many
and what types of warehouses it needs and where they
will be located. The company might use either
storage warehouses or distribution centers. Storage
warehouses store goods for moderate to long periods.
Distribution centers are designed to move goods rather than just store
them. They are large and
highly automated warehouses designed to receive goods from various
plants and suppliers, take
orders, fill them efficiently, and deliver goods to customers as quickly
as possible.
Warehousing facilities and equipment technology have improved greatly in
recent years. Older,
multistoried warehouses with outdated materials-handling methods are
facing competition from
newer, single-storied automated warehouses with advanced
materials-handling systems under the
control of a central computer. In these warehouses, only a few employees
are necessary.
Computers read orders and direct lift trucks, electric hoists, or robots
to gather goods, move them
to loading docks, and issue invoices. These warehouses have reduced
worker injuries, labor costs,
theft, and breakage and have improved inventory control.
iii. Inventory
Inventory levels also affect customer satisfaction. The major problem is
to maintain the delicate
balance between carrying too much inventory and carrying too little.
Carrying too much inventory
results in higher-than-necessary inventory-carrying costs and stock
obsolescence. Carrying too little
may result in stock outs, costly emergency shipments or production, and
customer dissatisfaction.
In making inventory decisions, management must balance the costs of
carrying larger inventories
against resulting sales and profits.
During the past decade, many companies have greatly reduced their
inventories and related costs
through just-in-time logistics systems. Through such systems,
producers and retailers carry only
small inventories of parts or merchandise, often only enough for a few
days of operations. New
stock arrives exactly when needed, rather than being stored in inventory
until being used. Just-intime
systems require accurate forecasting along with fast, frequent, and
flexible delivery so that
new supplies will be available when needed. However, these systems
result in substantial savings in
inventory-carrying and handling costs.
iv. Transportation
Marketers need to take an interest in their company's transportation
decisions. The choice of
transportation carriers affects the pricing of products, delivery
performance, and condition of the
goods when they arrive—all of which will affect customer satisfaction.
In shipping goods to its
warehouses, dealers, and customers, the company can choose among five
transportation modes:
rail, truck, water, pipeline, and air.
Railroads are the nation's largest carrier, accounting for 26
percent of total cargo ton-miles moved.
They are one of the most cost-effective modes for shipping large amounts
of bulk products—coal,
sand, minerals, farm and forest products—over long distances. In recent
years, railroads have
increased their customer services by designing new equipment to handle
special categories of
goods, providing flatcars for carrying truck trailers by rail
(piggyback), and providing in-transit
services such as the diversion of shipped goods to other destinations en
route and the processing
of goods en route. Thus, after decades of losing out to truckers,
railroads appear ready for a
comeback.
Trucks have increased their share of transportation steadily
and now account for 24 percent of total
cargo ton-miles (over 52 percent of actual tonnage). They account for
the largest portion of
transportation within cities as opposed to between
cities. Trucks are highly flexible in their routing
and time schedules, and they can usually offer faster service than
railroads. They are efficient for
short hauls of high-value merchandise. Trucking firms have added many
services in recent years.
Pipelines are a specialized means of shipping petroleum,
natural gas, and chemicals from sources to
markets. Most pipelines are used by their owners to ship their own
products.
Although air carriers transport less than 1 percent of the
nation's goods, they are becoming more
important as a transportation mode. Air freight rates are much higher
than rail or truck rates, but
air freight is ideal when speed is needed or distant markets have to be
reached. Among the most
frequently air-freighted products are perishables (fresh fish, cut
flowers) and high-value, low-bulk
items (technical instruments, jewelry). Companies find that air freight
also reduces inventory levels,
packaging costs, and the number of warehouses needed.
Shippers increasingly are using intermodal transportation—combining two
or more modes of
transportation. Piggyback describes the use of rail and trucks;
fishyback, water and trucks; trainship,
water and rail; and airtruck, air and trucks. Combining modes
provides advantages that no single
mode can deliver. Each combination offers advantages to the shipper. For
example, not only is
piggyback cheaper than trucking alone but it also provides flexibility
and convenience.
In choosing a transportation mode for a product, shippers must balance
many considerations:
speed, dependability, availability, cost, and others. Thus, if a shipper
needs speed, air and truck are
the prime choices. If the goal is low cost, then water or pipeline might
be best. Shipping costs are
often a significant portion of the marketing costs of a product. It is
often difficult for businesses to
pass on these higher costs to customers when there are active
competitors. One option is to reduce
dependence on the unreliable transportation. However, that may not be
possible for some
businesses. As the case you just read suggests, a company's physical
distribution and transportation
flexibility is an important part of its marketing decisions, a factor
that could make or break its
ability to serve its customers.
d. Integrated Logistics Management
Today, more and more companies are adopting the concept of integrated
logistics management.
This concept recognizes that providing better customer service and
trimming distribution costs
requires teamwork, both inside the company and among all the
marketing channel organizations.
Inside, the company's various functional departments must work closely
together to maximize the
company's own logistics performance. Outside, the company must integrate
its logistics system
with those of its suppliers and customers to maximize the performance of
the entire distribution
system.
Cross-Functional Teamwork Inside the Company
In most companies, responsibility for various logistics activities is
assigned to many different
functional units—marketing, sales, finance, manufacturing, purchasing.
Too often, each function
tries to optimize its own logistics performance without regard for the
activities of the other
functions. However, transportation, inventory, warehousing, and
order-processing activities
interact, often in an inverse way. For example, lower inventory levels
reduce inventory-carrying
costs. But they may also reduce customer service and increase costs from
stock outs, back orders,
special production runs, and costly fast-freight shipments. Because
distribution activities involve
strong trade-offs, decisions by different functions must be coordinated
to achieve superior overall
logistics performance.
The goal of integrated logistics management is to harmonize all of the
company's distribution
decisions. Close working relationships among functions can be achieved
in several ways. Some
companies have created permanent logistics committees made up of
managers responsible for
different physical distribution activities. Companies can also create
management positions that link
the logistics activities of functional areas. Many companies have a vice
president of logistics with
cross-functional authority. The important thing is that the company
coordinate its logistics and
marketing activities to create high market satisfaction at a reasonable
cost.
e. Building Channel Partnerships
The members of a distribution channel are linked closely in delivering
customer satisfaction and
value. One company's distribution system is another company's supply
system. The success of each
channel member depends on the performance of the entire supply chain.
Companies must do
more than improve their own logistics. They must also work with other
channel members to
improve whole-channel distribution. Today, smart companies are
coordinating their logistics
strategies and building strong partnerships with suppliers and customers
to improve customer
service and reduce channel costs.
These channel partnerships can take many forms. Many companies have
created cross-functional,
cross-company teams.
Other companies partner through shared projects. For example,
many larger retailers are working
closely with suppliers on in-store programs. Channel partnerships may
also take the form of
information sharing and continuous inventory replenishment
systems. Companies manage their supply
chains through information. Suppliers link up with customers to share
information and coordinate
their logistics decisions. Here are just two examples:
Today, as a result of such partnerships, many companies have switched
from anticipatory-based
distribution systems to response-based distribution
systems. In anticipatory distribution, the company
produces the amount of goods called for by a sales forecast. It builds
and holds stock at various
supply points, such as the plant, distribution centers, and retail
outlets. A response-based
distribution system, in contrast, is customer triggered. The
producer continuously builds and replaces
stock as orders arrive. It produces what is currently selling.
f. Third-Party Logistics
Companies may use third-party logistics providers for several reasons.
First, because getting the
product to market is their main focus, these providers can often do it
more efficiently and at lower
cost than clients whose strengths lie elsewhere. According to one study,
outsourcing warehousing
alone typically results in 10 percent to 15 percent cost savings.
Another expert estimates that
companies can save 15 percent to 25 percent in their total logistics
costs by outsourcing. Second,
outsourcing logistics frees a company to focus more intensely on its
core business. Finally,
integrated logistics companies understand increasingly complex logistics
environments. This can be
especially helpful to companies attempting to expand their global market
coverage.
KEY TERMS (Lesson # 28-29)
distribution channel
A set of interdependent organizations involved in the process of making
a product or service
available for use or consumption by the consumer or business user.
Channel level
A layer of intermediaries that performs some work in bringing the
product and its ownership
closer to the final buyer.
Direct marketing channel
A marketing channel that has no intermediary levels.
Indirect marketing channel
Channel containing one or more intermediary levels.
Channel conflict
Disagreement among marketing channel members on goals and roles—who
should do what and
for what rewards.
Conventional distribution channel
A channel consisting of one or more independent producers,
wholesalers, and retailers, each a
separate business seeking to maximize its own profits even at the
expense of profits for the system
as a whole.
Vertical Marketing System (VMS)
A distribution channel structure in which producers, wholesales, and
retailers act as a unified
system. One channel member owns the others, has contracts with them, or
has so much power
that they all cooperate
Corporate VMS
A vertical marketing system that combines successive stages of
production and distribution under
single ownership—channel leadership is established through common
ownership.
Contractual VMS
A vertical marketing system in which independent firms at different
levels of production and
distribution join together through contracts to obtain more economies or
sales impact than they
could achieve alone.
Franchise organization
A contractual vertical marketing system in which a channel member,
called a franchiser, links
several stages in the production-distribution process.
Administered VMS
vertical marketing system that coordinates successive stages of
production and distribution, not
through common ownership or contractual ties but through the size and
power of one of the
parties.
Horizontal marketing system
A channel arrangement in which two or more companies at one level
join together to follow a new
marketing opportunity.
Hybrid marketing channel
Multi channel distribution system in which a single firm sets up two
or more marketing channels to
reach one or more customer segments.
Intensive distribution
Stocking the product in as many outlets as possible.
Exclusive distribution
Giving a limited number of dealers the exclusive right to distribute
the company's products in their
territories.
Selective distribution
The use of more than one, but fewer than all, of the intermediaries
who are willing to carry the
company's products.
Physical distribution (or marketing logistics)
The tasks involved in planning, implementing, and controlling the
physical flow of materials, final
goods, and related information from points of origin to points of
consumption to meet customer
requirements at a profit.
Distribution center
A large, highly automated warehouse designed to receive goods from
various plants and suppliers,
take orders, fill them efficiently, and deliver goods to customers as
quickly as possible.
Integrated logistics management
The logistics concept that emphasizes teamwork, both inside the
company and among all the
marketing channel organizations, to maximize the performance of the
entire distribution system.
Third-party logistics provider
An independent logistics provider that performs any or all of the
functions required to get their
clients' product to market.
|
