Role and importance of physical distribution for effective marketing
Physical Distribution – Meaning
Physical distribution is an important marketing function describing the marketing activities relating to the flow of raw materials from the suppliers to the factory and the movement of finished goods from the end of production line to the final consumer or user. Marketing agencies such as dealers, merchants and mercantile agents manage the flow of goods and perform the function of physical supply-right up to the consumer’s homes and stores. Physical distribution function is responsible for completing the marketing transaction once the function of exchange is completed, i.e., buyer and seller come to terms and enter into a contract of sale. It should be noted that before the sale can be completed, the product must be available at the place the buyer wants it, at the time he wants it and in the quantity he wants. In general, the function of physical supply attempts to accomplish the delivery of goods at the right place, at the right time and in the right quantity.
According to Philip Kotler, physical distribution “involves planning. implementing and controlling the physical flows of materials and final goods from place of production to the place of end use to satisfy buyers’ needs.”
Physical distribution is all about moving and storing the products and finally making them available to the consumers. Distribution is the process of making the products/services available to the consumer. It involves movement of the products/services from the manufacturers to the end user.
Physical distribution requires a distribution infrastructure that includes transportation, warehousing, material handling, inventory control, processing. customer services, which facilitate the movement of goods. Physical distribution includes both the marketing channels and these facilitators.
Physical distribution is purported to delivery of goods in right quantity, time and at right place. The scholars have defined the physical distribution as related to material handling, transportation, store, keeping, packaging.
Physical Distribution – Definition
Some important definitions of physical distribution are as under : According to Wendell M. Smith – “Physical distribution is the science of Business Logistics where by the proper amount of the right kind of product is made available at the place where demand for its exists. Viewed in this light, physical distribution is key link between manufacturing and demand creation.”
According to W. J. Stanton – “Physical distribution involves the management of the physical flow of products and the establishment and operation of flow system.”
According to Cundiff and Still – “Physical distribution involves the actual movement and storage of goods after they are produced and before they are consumed”.
It is concluded from the definitions that:
(i) Physical distribution is science of logistics.
(ii) Physical distribution is the main mid-look between manufactual and creation of demand.
(iii) Physical distribution is a management of flow of commodity and flow arrangement simultaneous to distribution channel of the commodities of company and inside the firm/company.
(iv) Physical distribution is related to the receipt of proposed and manufactured commodities, collection and material handling storage, transportation, packaging and inventory control etc., functions.
Physical Distribution-Importance
Planned and integrated management of all physical distribution activities (particularly transport, storage, inventory control and order processing) has assumed unique importance in the process of marketing since 1960. It can offer a feasible solution striking an optimum balance between physical distribution costs (costs of transport, storage, inventory and order processing) and the customer service level that will be satisfactory to the buyer and also profitable to the seller.
Marketers now feel that physical distribution costs can be minimised without adversely affecting the level of customer service and satisfaction. The marketing functions of warehousing, inventory control, transportation, physical handling, order processing, etc. are now managed as an integrated whole. All these activities are co-ordinated properly and an effective physical distribution package is evolved to give customers the service they expect and insist and at the same time to assure the marketer profitable sales.
Marketers have realised that there is a definite connection between merchandising programme and physical distribution services e.g., delivery service and order processing service. Customers often give more importance to physical distribution rather than price and promotion services. They consider physical distribution second in importance to product quality as a reason for buying from a certain firm. Better physical distribution services give higher overall customer satisfaction.
The main objective of physical distribution is better customer services an important selling point. For instance, promises such as “Third morning rail or truck delivery anywhere in the state of Karnataka/Tamil Nadu,” “Prompt availability of installation, repair services and parts from the supplier,” and so on can generate accelerated sales and profits. In short, effective physical distribution services give customers the service they expect, i.e., putting the products within an arm’s length of customer demand or desire.
Physical Distribution-Factors Affecting
Every producer has to find a way to distribute his products to their final users. To distribute, various channels are available in today’s economy. How does a producer select one or more channels of distribution to ensure smooth functioning and minimized cost ?
This is understood by studying the factors that influence the choice of distribution channels, which are described below:
1. Product Factors/Considerations
The first and most important factor that influences on the choice of the channel of distribution is the nature of goods. Perishable goods like cakes and breads that are required to be sold quickly, are sold directly by the manufacturers to the consumers through retail outlets. Goods that last longer can be handled by more intermediaries to insure a larger market.
(i) Physical and Technical Nature: Products which are of low unit value and have common use amongst consumers are generally sold through middle men; whereas the sale of expensive and elite consumer goods and industrial products is conducted directly by the producer himself.
Products that are perishable, i.e., products which are subjected to frequent changes in fashion or style or trend, as well as those products which are heavy and bulky, go through relatively shorter routes and are often distributed directly in order to minimize costs and damage.
Industrial products that need demonstration, installation and after sale services are often sold directly to the consumers; while, retailers generally sell consumer products which are of technical nature.
Certain technical or complex produucts need installation and advice of product use including demonstration, service visits, etc. For this, having exclusive trained personnel is essential. Some companies prefer exclusive dealership in such cases.
In case of an entrepreneur who produces a large number of products, he may find it economical to set up his own retail outlets and sell his products directly to the consumers. At the same time, companies which have a narrov range of products may make their sale through wholesalers and retailers. A new product needs greater promotional effort in the initial stages and hence, few middlemen or intermediaries may be required.
(ii) The Market Position: Here, the focus is on the reputation of the manufacturer. A product promoted by an established and reputed manufacturer has a higher degree of market acceptance and therefore, can be sold through various channels with little effort. A new product, thus, has quick sales based on the producer’s reputation. This may, however, have long-term risks.
2. Market Factors/Considerations
(i) The Existing Market Structure and Size : Producers may have to study the existing market structure. It can be geographically concentrated or wide spread. For example, industrial markets are usually concentrated in a few large cities involving only large customers. Producers or channel commanders can have difficulty in changing that.
However, consumer goods market has a different structure, as; it is directly related to, the masses. Consumer preferences dictate channel selection. For example, baby food manufacturers changed their channel of distribution to supermarkets, as; research revealed that mothers preferred super markets over drug stores.
(ii) Consumer Behavior and Nature of the Purchase Deliberation : Purchase decisions are made differently for different products. Consumers spend more time and effort on durables such as washing machine and mobile phone than on a pack of biscuits or toothpaste. Pre frequency of purchase influences purchase deliberations. Products, which are purchased frequently by consumers, have more buyer-seller contacts and middlemen are suggested.
(iii) Availability of the Channel: Availability of a channel refers to the willingness of channel members to accept a brand. For this, the channel commander or the producer has the task of winning over the cooperation of the channel members. The producer may adopt push or pull strategy. In push strategy, the producer resorts to regular activities of convincing the existing channel members to accept the product and passes it through various points to reach the retailer and then the final consumer.
In the pull strategy, the producer resorts to aggressive promotional activities on the final consumer, relying on the fact that strong consumer demand will force middlemen to accept the product in order to cater to the consumer satisfaction.
(iv) Competitor’s Channels : A new firm always studies the existing distribution pattern and this, necessarily, includes identifying the distribution channels employed by competitors. Every business has certain established norms and practices and this may, even, apply to channels of distribution. If the existing pattern has given success to the competitors, a new firm may adopt the same channel as long as it is suitable and logical. As a matter of fact, finding new avenues may prove to be costlier and cumbersome.
3. Institutional Factors/Considerations:
The channel members also influence the choice of the channel to be selected. They are briefly discussed as follows:
(i) Financial Ability of Channel Members: In the process of sending the goods through the channels of distribution, it is found that manufacturers need to aid the retail dealers financially, either through, interest free loans or other credit terms. Credit terms being competitive the willingness to extend credit is a determinant in channel acceptance. Retailers also sometimes finance their suppliers either directly or by investing in the company. Usually, government agencies are restricted from making advance payments.
(ii) The Promotional Strengths of Channel Members: Every producer, i.e., the channel commander, wants his product to be promoted. For national brands, producers themselves take up the responsibility. However, for others, distributors promote jointly with the producer. In case of certain private brands, the job is taken up by wholesalers or retailers who establish the brand name.
(iii) The Post-Sale Service Ability: Many products carry a warranty and this is used by the consumer post purchase. The responsibility of serving the warranty has to be well established. It can be the manufacturer himself or a channel member.
Since the retailer-distributor is the closest in touch with the consumer, the consumer may expect this service from them itself. In certain cases, the product may be returned to the manufacturer for servicing or services may be performed by an independent service outlet established for this purpose.
4. Unit or Firm Specific Factors/Considerations:
Every firm has its own strengths and weaknesses, which influence channel decisions.
Among them, important ones are discussed below:
(i) The Company’s Financial Position: Huge companies, which have the financial and human resource capability may not only produce the goods but also may have the ability to set up their own retail outlets thereby creating a lot of visibility for themselves. On the other hand, smaller companies which do not have either the financial capability or manpower resources might just concentrate on production and leave the marketing of goods to others.
(ii) The Extent of Market Control Desired: Market control refers to the ability of a firm to influence the behavior of channel members according to the will of the management.
Here, the entire distribution network is served by factors such as resale price maintenance, territorial restrictions, quotas and the like. The channel commander, i.e., the producer or the manufacturer, may desire to exercise such command from time to time. The extent to which they want the control is the question to be answered, as, higher the control, higher will be the channel directness.
(iii) The Company’s Reputation : Popular companies, known for their products or services, have little or no problem in settling with a particular channel. This is because reputed companies do not go in search of intermediaries. Instead, the intermediaries come in search of them.
Reputation is reflected through higher sales, timely and quick replenishment of stocks, low levels of inventory, easy settlement of claims, competitive margins granted etc. The selected channel turns out to be cheaper and dependable due to the willingness and cooperation extended by channel members.
(iv) The Company’s Marketing Policies: A company’s marketing strategy lays down the method of distribution. Important factors such as advertising, sales promotion, pricing, delivery and after sale services influence the channel selection the most.
For instance, a company that invests heavily in advertising and sales promotion makes the selected channel direct, as, little effort is required to push the product through the chosen line. Alternatively, a company adopting a price penetration policy, [comes with a low margin], channel.
5. Environmental Factors/Considerations
(1) Economic and Legal Factors: Due to the economic disparity prevalent in the economy, the government promotes public distribution system through fair price shops to reach out to the economically weak sector. This constitutes the public distribution system, which primarily focuses on the distribution of necessities.
The private distribution system also needs a certain amount of regulation. Much legislation has been passed from time to time to regulate the functioning of the various channels of distribution. One such important legislation is the MRTP Act of 1969.
The provisions of this Act aim at preventing exclusive dealership.
regulating territorial restrictions, reselling price maintenance, full line forcing. etc. The companies Act, 1956, forbids sole selling agency arrangements in industries like paper, cement, vanaspati, etc. Such provisions keep away cut throat competition: prevent creation of monopoly and the like which are objectionable to public interests. (ii) Fiscal Factors: Sales tax rates vary from state to state as it is a state fiscal matter. Although such sales tax is part of the retail price set for a product, it is actually borne by the final consumer; it has its role to play in channel arrangements.
For example, let us say, sales tax rate in Karnataka is higher when compared to Kerala, a producer may, therefore, take advantage of this benefit, prefer to open his office in Kerala and pass on the reduced tax benefit in the form of reduced price. This can also become a competitive advantage to the product.
Physical Distribution-Components
The process of physical distribution involves co-ordination and integration of five components:
1. Order processing.
2. Inventory Control,
3. Warehousing.
4. Material Handling and
5. Transport.
Most important components are warehousing, inventory and transport.
1. Order Processing: We should have standard procedure for handling and execution of orders. Order processing time must be reasonable. Any delay in order execution creates ill-will and may lead to loss of business.
Customer demands assured delivery within a fixed period always. The speed in order execution reflects the degree of customer service. Even a slight increase in customer service can increase your business to the extent of 20 percent. Order serving time can act as a selling point in our marketing programme.
2. Inventory Control: In fact the entire physical distribution management, size, location, handling and transporting of inventories assume unique role in physical distribution. Inventories are reservoirs of goods held in anticipation of sales. The inventory inter-connects production activity (purchase activity) and the customers’ orders (sales activity). Inventory cost increases at an accelerated rate the customer service level approaches 100 per cent. We must reconcile and balance the inventory cost and the customer service level.
We must have a balanced assortment of merchandise for sale to meet the expected customer demand. Too small inventory will mean stock outs and lost sales. Too large inventory means huge capital investment, lower turnover and higher inventory operating cost. The main objective of inventory control is to secuure minimum capital investment and fluctuations in inventories as well as prompt order execution as per customer demand.
3. Warehousing: Storage is the process of holding and preserving goods. It can equalise supply time-wise. The selection and proper location of warehouses is of special importance in the process of marketing. The distribution centres are now located around the markets rather than around transport facilities.
Distribution centre (a special kind of warehouse facility, strongly market related) enables order processing and delivery of goods directly to customers under one roof. We can have better and quicker customer service at lower cost of distribution under distribution centres.
We can also have a few warehouses and normal inventory stock. The new system of distribution reduces delivery time and also storage time. Emphasis is given on selling and not on storing. Many companies are shifting from storage warehouses to distribution centres. One distribution centre is set up in one region around the market and not around transport facilities merely.
Distribution centres use the latest equipment for data processing, material handling and inventory control. The range of services a distribution centre offers can be matched with those offered by a wholesaler. However, a wholesaler is the merchant middleman, whereas a distribution centre is an agent middleman.
4. Material Handling System: Instead of manhandling, we have automated material handling equipment in modern warehouses. New concepts of packaging, containerisation and palletization have brought about remarkable reduction in the cost of physical distribution. We have now conveyor system and forklift trucks. Material handling is now almost mechanised in the Western countries.
Standard size containers to pack and transport goods can be stored on pallets or small platforms which can then be moved by mechanical transport. Modern mechanised handling of goods and protective packaging have improved customer service, lowered distribution cost, and have also speeded up order execution.
5. Transport: Physical distribution is nothing but a network of activities consisting of storage at many locations interconnected by a series of transport links in the process of distribution. Transport is called the Gordian Knot, if not the snake pit, of physical distribution management. The costs of transport are ever-rising since 1970. Let us now describe the various means of transport, their relative advantages and disadvantages and the criteria for choice of mode of transport.
