Physical Distribution

Physical distribution is the set of activities concerned with efficient movement of finished goods from the end of the production operation to the consumer. Physical distribution takes place within numerous wholesaling and retailing distribution channels, and includes such important decision areas as customer service, inventory control, materials handling, protective packaging, order procession, transportation, warehouse site selection, and warehousing. Physical distribution is part of a larger process called “Distribution,” which includes wholesale and retail marketing, as well the physical movement of products.

Logistics is coordinating the flow of goods, services, and information among members of the supply chain. A major focus of logistics is 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.

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.

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 co­ordinated 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:

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.

• 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 products 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 narrow 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.

• 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.

Market Factors/Considerations:

• 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.

• 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. The frequency of purchase influences purchase deliberations. Products, which are purchased frequently by consumers, have more buyer-seller contacts and middlemen are suggested.

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.

• 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.

Institutional Factors/Considerations:

The channel members also influence the choice of the channel to be selected.

They are briefly discussed as follows:

• 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.

• 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.

• 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.

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:

• 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.

• 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.

• 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.

• 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], chooses a longer channel.

Environmental Factors/Considerations:

• 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.

• 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.