Basics of Supply Chain Management : BSCM

Ch.8 Physical Distribution

Chapter 8. Physical Distribution

Main Issues :

· Recognize the activities that are part of a physical distribution system.

· Understand the relationship among physical distribution, marketing, and production.

· Understand warehouse activities.

· Recognize the importance of packaging.

· Understand the concept of unitization.

· Appreciate the pull, push, and distribution requirements planning system.

· Know the different transportation modes.

· Understand the basic cost structure in the carriage of goods.

1. Physical Distribution.

□ Physical Distribution System.

Figure 1. Supply Chain (Logistics System)

- Physical distribution is the movement of materials from the producer to the consumer.

- Distribution adds place value and time value by placing goods in markets where they

are available to the consumer at the time the consumer wants them.

- The movement of materials is divided into two functions :

· Physical supply : The movement and storage of goods from suppliers to

manufacturing.

· Physical distribution : The movement and storage of finished goods from the end

of production to the customer.

□ Physical Distribution Activities.

1. Transportation.

· Transportation involves the various methods of moving goods outside the firm's building.

· The single highest cost in distribution, usually accounting for 30% to 60% of

distribution costs.

· Transportation adds place value to the product.

2. Distribution inventory.

· It includes all finished goods inventory at any point in the distribution system.

· It is the second most important item in distribution, accounting for about 25% to 30%.

· Inventories create time value by placing the product close to the customer.

3. Warehouses (distribution center)

· Warehouses are used to store inventory.

· The management of warehouse makes decisions on site selection, number of

distribution centers in the system, layout, and methods of receiving, storing, and

retrieving goods.

4. Material handling.

· Material handling is the movement and storage of goods inside the distribution center.

· The type of materials handling equipment used affects the efficiency and cost of

operating the distribution center.

5. Protective packaging.

· Goods are moved and stored in packages and must fit into the dimension of

the storage spaces and the transportation vehicles.

6. Order processing and communication.

· Order processing includes all activities needed to fill customer orders.

· Order processing represents a time element in delivery and is an important part

of customer service.

□ Interfaces.

- Marketing

· Physical distributions' closest relationship is probably with marketing.

· The marketing mix is made up of product, promotion, price, and place, and the

latter is created by physical distribution.

· Physical distribution has the responsibility of meeting the customer service levels

established by marketing and the senior management of the firm.

· Physical distribution contributes to creating demand.

: Prompt delivery.

: Product availability.

: Accurate order filling.

- Production.

· In selecting a site of a factory, an important one is the cost and availability of

transportation for raw materials to the factory and the movement of finished

goods to the marketplace.

· Demand on the factory is created by the distribution center orders.

Therefore, the way that the distribution system interfaces with the factory will

influence the efficiency of factory operations.

2. Transportation.

□ Transportation Modes.

- Rail Transportation.

· Is best able to move large volumes of bulky.

· Provides less frequency of departing than trucks.

· Provides good speed of transit over long distances.

· Provide reliable service.

· Provide flexible in types of goods carried.

· Is cheaper than road for large quantities of bulky cargo.

- Road Transportation.

· Has low capital cost compared with rail.

· Provides door-to-door service.

· Provides fast, flexible service.

· Is particularly suited to distribution of small volume goods to a dispersed market.

- Air Transportation.

· Provides speedy service over long distances.

· Uses passenger aircraft as well as freight aircraft.

· Can go anywhere there is a suitable landing strip.

· Has high cost.

· Is suitable of high-value, low-weight cargo and for emergency items.

- Water Transportation.

· Has low operating costs per ton-mile.

· Is slow and usually not door-to-door.

· Is most useful for moving low-value, bulky cargo over long distances where

water route are available.

- Pipeline Transportation.

· Low operating costs.

· Impervious to weather.

· Move large volumes continuously.

□ Costs of Moving Goods.

- Shipping patterns.

· If the shipment is full load, it moves directly from the shipper to the consignee.

· If less than full load, the shipment moves through terminals.

- Shipping costs.

1. Line-haul costs

: Line-haul costs depend on the distance moved.

2. Pickup and delivery costs.

: Carriers charge for each pickup and the weight moved.

3. Terminal handling costs.

: Terminal handling costs depend on the number of times a shipment is

: handled, loaded, and unloaded.

4. Billing and collecting costs.

: Paperwork must be completed everytime a shipment is made.

Figure 2. Shipping Patterns

Figure 3. Distance vs. Cost of carriage

- Total transportation costs.

· To reduce shipping costs, the shipper needs to do the following :

: Decrease line-haul costs by increasing the weight shipped.

: Decrease pickup and delivery cost by reducing the number of pickups.

This can be done by consolidating and increasing the weight per pickup.

: Decrease terminal-handling cost by decreasing the number of parcels by

consolidating shipments.

: Decrease billing and collecting by consolidating shipments.

· The line-haul costs vary with the distance shipped, whereas pickup and delivery,

terminal-handling, and billing cost are fixed.

· The rate charged by a carrier will also vary with the commodity shipped and will

depend upon the following.

1. Value : A carrier's liability for damage will be greater the more valuable the item.

2. Density : The more dense the item, the greater the weight that can be

carried in a given vehicle.

3. Perishability : Perishable goods often require special equipment and

methods of handling.

4. Packaging : The method of packaging influences the risk of damage and breakage.

- Example 1.

For a particular commodity, the line-haul cost is $2.50 per mile. For a trip of 500                 miles and a shipment of 600 cwt., what is the cost of shipping per cwt. ? If the                  shipment is increased to 1000 cwt., what is the saving in cost per cwt. ?

Answer)

· Total line-haul cost = $2.5 × 500 = $1250.

· Cost per cwt. = $1250 ÷ 600 = $2.083.

If 1000 cwt. is shipped :

· Cost per cwt. = $1250 ÷ 1000 = $1.25

· Saving per cwt. = $2.08 - $1.25 = $0.83.

- Example 2.

A company ships barbecues fully assembled. The average line-haul cost per                      shipment is $12.50 per mile, and the truck carries 100 assembled barbecues. The                 company decides to ship the barbecues unassembled and figures they can ship 500                barbecues in a truck. Calculate the line-haul cost per barbecues assembled and                  unassembled. If the average trip is 300 miles, calculate the saving per barbecue.

Answer)

· Line-haul cost assembled = $12.50 ÷ 100 = $0.125 per barbecue per mile.

· Line-haul cost unassembled = $12.50 ÷ 500 = $0.025 per barbecue per mile.

· Saving per mile = $0.125 - $0.025 = $0.10.

· Trip saving = 300 × $ $0.10 = $ 30.00 per barbecue.

3. Distribution Inventory.

□ Distribution Inventory.

Figure 4. Distribution Inventory

- The objectives of distribution inventory management are to

· Provide the required level of customer service.

· Minimize the cost of transportation and handling.

· Interact with the factory to minimize scheduling problems.

- Questions about the independency.

· Although the demand from customers may be uniform, the demand on central                     supply is not, because it is dependent on when the distribution centers place

replenishment orders.

· The demand on the factory depends on when central supply places order.

Figure 5. Demand at distribution center vs. central supply

□ Pull System.

- Each distribution center orders when it needs from central supply when required,

without regard for

· Needs of other distribution centers.

· Available inventory at center supply.

· Production schedule at the factory.

- Advantage : Allow each center to operate independently.

- Disadvantage

· Lack of coordination.

· Poor customer service.

· Disrupted factory schedules.

□ Push System.

- All forecasting and order decisions are made centrally.

- Advantage : coordination among factory, central supply, and the distribution centers.

- Disadvantage : Difficulty in reacting to local demand.

□ Distribution Requirement Planning.

- Distribution requirements planning is a system of forecasting when the various demands

will be made by the system on central supply.

· Central supply and the factory can plan to provide the goods needed when they

are needed.

· DRP can respond to local customer demand.

· DRP can coordinate planning and control.

Figure 6. Distribution Requirement Planning.

- Example.

A company making lawnmowers has a central supply attached to their factory and                 two distribution centers. Distribution center A forecast demand at 25, 30, 55, 50 and                30 units over the next five weeks and has 100 lawnmowers in transit that are due                in week 2. The transit time is two weeks, the order quantity is 100 units, and there                are 50 units on hand. Distribution B forecasts demand at 95, 85, 100, 70 and 50                  over the next five weeks. Transit time is one week, the order quantity is 200 units,                and there are 100 units on hand. Calculate the gross requirements, projected                     available, and planned order releases for the two distribution centers and the central                warehouse.

Answer)

· Bill of Distribution.

DC A Lot Size = 100 Lead time = 2					DC B Lot Size = 200 Lead time = 1
		Central Supply

Transit Time : 2 weeks.

Order Quantity : 100 units.

Week		1	2	3	4	5
D/C A	Gross Requirement	25	30	55	50	30
	In Transit		100
	Projected Available 50	25	95	40	90	60
	Planned Order Release		100

Transit Time : 1 weeks.

Order Quantity : 200 units.

Week		1	2	3	4	5
D/C B	Gross Requirement	95	85	100	70	50
	In Transit
	Projected Available 100	5	120	20	150	100
	Planned Order Release	200		200

Transit Time : 2 weeks.

Order Quantity : 500 units.

Week		1	2	3	4	5
Central Supply	Gross Requirement	200	100	200	0	0
	In Transit
	Projected Available 400	200	100	400
	Planned Order Release	500

4. Warehousing.

□ Warehousing Management

- The objective of a warehouse is to minimize cost and maximize customer service.

- Efficient warehouse operation perform the following :

1. Provide timely customer service.

2. Keep track of items so they can be found readily and correctly.

3. Minimize the total physical effort and thus the cost of moving goods into and out

of storage.

4. Provide communication links with customers.

- The costs of operating a warehouse.

· Capital costs  : Those of space and material handling equipment.

. : The space needed depend on the peak quantities, the methods

:  of storage, the need for ancillary space, and so on.

· Operation costs : Labor cost.

: The type of MHSs, the location and accessibility of stock,                                      : warehouse layout, stock location system, and order picking system.

□ Warehouse Activities.

- Several processing activities for operating a warehouse.

1. Receiving goods.

a. Check the goods against an order and the bill of lading.

b. Check the quantities.

c. Check for damage and fill out damage reports if necessary.

d. Inspect goods if required.

2. Identify the goods with the appropriate SKU number.

3. Dispatch goods to storage.

4. Hold goods.

5. Pick goods.

6. Marshal the shipment.

7. Dispatch the shipment.

8. Operate an information system.

- To maximize productivity and minimize cost, warehouse management must work with the following.

1. Maximum use of space.

: This means not only floor space but cubic space as well.

2. Effective use of labor and equipment.

: Select the best mix of labor and equipment.

: Provide ready access to all items.

: Perform efficient movement of goods.

□ Several Factors Affecting Use of Warehouses.

- Cube utilization and accessibility.

- Stock location.

- Order picking and assembly.

- Packaging.

1. Cube Utilization and Accessibility.

-  Cube Utilization : The use of space horizontally and vertically.

-  Accessibility : Ability to get at the goods wanted with a minimum amount of

work.

-  Cube Utilization vs. Accessibility.

Figure 7. Cube Utilization vs. Accessibility

· There will be excellent accessibility for all items except item 9.

· A cube utilization = 70% (21 ÷ 30 × 100)

· To install tiers of racks so lower pallets can be removed without disturbing

the upper ones.

- Example.

A small warehouse stores five different SKUs in pallet loads. If pallets are

stacked three high and there is to be 100% accessibility, how many pallet

positions are needed ? What is the cube utilization ?

SKU A           4 pallets.

SKU B           6 pallets.

SKU C          14 pallets.

SKU D           8 pallets.

SKU E           5 pallets.       Total   37 pallets.

Answer)

SKU	Pallet positions.
A : 4 pallets	2
B : 6 pallets	2
C : 14 pallets	5
D : 8 pallets	3
E : 5 pallets	2
Total	14

· In 14 pallet positions, there is room to store 14 × 3 = 42 pallets.

· Cube Utilization = 37 ÷ 42 × 100% = 88%.

2. Stock Location.

- Stock location is concerned with the location of individual items in the warehouse.

- Some basic systems of locating stock.

· Group functionally related items together.

· Group fast-moving items together.

· Group physically similar items together.

· Locate working stock and reserve stock separately.

-  There are two basic systems for assigning specific location to individual stock items.

2.1 Fixed location.

· An SKU is assigned a permanent location or locations, and no other

items are stored there.

· This system makes it possible to store and retrieve items with a

minimum of record keeping.

· However, fixed-location systems usually have poor cube utilization. On

average, only 50% of the cube space is utilized.

· Fixed-location systems are often used in small warehouse where

space is not at a premium, where throughput is small, and where

there are a few SKUs.

2.2 Floating location.

· Goods are stored wherever there is appropriate space for them. The

same SKU may be stored in several locations at the same time and

different location at different times.

· The advantage to this system is improved cube utilization.

· However, it requires accurate and up-to-date information on item

location and the availability of empty storage space.

· Usually computer based systems.

2.3 Point-of-use storage.

· Particularly in repetitive manufacturing and in a JIT environment,

inventory is stored close to where it will be used.

· Several advantages.

: Materials are readily accessible to users.

: Material handling is reduced or eliminated.

: Central storage costs are reduced.

: Material is accessible at all times.

· This method is excellent as long as inventory is kept low and

operating personnel can keep control of inventory records.

· Sometimes C items are issued as "floor stock".

· Inventory records are adjusted when the stock is issued, not when it is used.

2.4 Central storage.

· As opposed to point-of-use storage, central storage contains all

inventory in one central location.

· Several advantages.

: Ease of control.

: Inventory record accuracy is easier to maintain.

: Specialized storage can be used.

: Reduced safety stock, since users do not need to carry their own

: safety stock.

3. Order Picking and Assembly.

- Once an order is received, the items on the order must be retrieved from the

warehouse, assembled, and prepared for shipment.

- All these activities involve labor and the movement of goods.

- There are several systems that can be used to organize.

3.1 Area system.

· The order picker circulates throughout the warehouse selecting the

items on the order.

· The items are then taken to the shipping area for shipment.

· The order is self-marshalling in than when the order picker is

finished, the order is complete.

3.2 Zone system.

· The warehouse is broken down into zones, and order pickers work

only in their own area.

· Zones are usually established by grouping related parts together.

3.3 Multi-order system.

· This system is the same as the zone system except that, rather than                             handling individual orders, a number of orders are gathered together

and all the items divided by zone.

- The area system is simple to manage and control, but as the warehouse

throughput and size increase, it becomes unwisely.

- The multi-order system is probably most suited to the situation in which there are

many items or many small orders with few items.

4. Distribution Packaging.

- The basic role of packaging is to carry the goods safety through a distribution

system to the customer.

- Packaging is a pure cost that must be offset by the increased physical distribution

efficiency that the package can provide.

- The package must do the following :

· Identify the product.

· Contain and protect the product.

· Contribute to physical distribution efficiency.

- Some requirements :

· The package serves as a means of identifying the product.

· The package must be robust enough to protect and contain the product.

- There are at least three level of packaging :

· Primary package.

· Shipping container.

· Unit load.

- Unitization.

· Unitization is consolidation of several units into large units, called units

loads, so there is less handling.

· A unit load is a load made up of a number of items, or bulky material,

arranged or constrained so the mass can be picked up or moved as a

single unit too large for manual handling.

· In industry, unit loads are used instead of "shopping bags."

· Examples include pallets, sheets, racks, and containers. One of the most

common is the Pallet.

· Unitization can be successive. Shipper place their products into primary

package, the package into shipping cartons, the cartons onto pallets, and

pallets into warehouse trucks, or other vehicles.

□ Role of Warehouse.

- Transportation consolidation.

· Consolidation can occur in both the supply and distribution systems.

· In physical supply, LTL shipments from several suppliers can be consolidated at

a warehouse before being shipped TL to the factory.

· In physical distribution, TL shipments can be made to a distant warehousing and

LTL shipments made to local users.

· Transportation consolidation in physical distribution is sometimes called break-bulk.

Figure 8. Transportation Consolidation.

- Product Mixing.

· While transportation consolidation is concerned with reduction of transportation

costs, product mixing deals with the grouping of different items into an order and

the economies that warehouses can provide in doing this.

Figure 9. Product Mixing.

- Service

· Distribution centers improve customer service by providing place utility.

· Goods are positioned close to markets so the markets can be served more quality.

- Service Capability and Total System Cost.

· Estimate of market reached vs. Number of warehouse.

Number of Warehouses	Percentage of Market Reached in 1 Day
1	30%
2	70%
3	87%
10	95%

· Cost vs. Number of warehouse.

Cost	No. of Warehouses.
	1	2	3	10
Transportation	$ 8000	$ 6000	$ 5000	$ 4500
Warehousing	500	600	700	900
Material Handling	1000	1000	1100	1400
Inventory	400	425	460	700
Packaging	100	100	100	100
Total Cost	$10,000	$ 8125	$ 7360	$ 7600

Figure 10. No. of Warehouses vs. Total Transportation Cost.

■ Performance Check

1. Which of the following statements is most accurate ?

A. About 20% of the items will usually account for about 80% of the total value.

B. "A" items should have the loosest possible control.

C. The general rule for using the ABC approach is to have plenty of everything in stock.

D. "C" items account for about 50% of the total value.

2. Which of the following statement is best ?

A. A items usually account for about 50% of the total usage value.

B. About 50% of the items usually account for 5% of the value.

C. "C"items should be given top priority in inventory management.

D. All inventory items should bee managed in the same way.

3. Which is the best statement regarding floating location systems ?

A. Goods are always stored in the same location.

B. The same SKU may be stored in several location at the same time.

C. An informal information system can be used.

D. The system is appropriate for all warehouses.

4. Which of the following is a major objective of distribution inventory management ?

A. To provide the required level of customer service.

B. To minimize the costs of warehouse space.

C. To always have enough of everything on hand so there are no stockouts.

D. To minimize labor costs.

5. Which of the following is not an activity in a physical distribution system ?

A. Distribution inventory.

B. Protective packaging.

C. Shop floor control.

D. Order processing.

6. Which of the following activities is not considered a function of physical distribution ?

A. Transportation.

B. Production control.

C. Distribution inventory.

D. Warehousing.

7. Which of the following statements is best ?

A. Physical distribution provides a bridge between marketing and production.

B. Physical distribution is a factor creating customer demand.

C. Replenishment orders to replace field warehouse stocks will not affect productions.

D. Both A and B are true.

8. Considering the service desired and the relative cost of the item, which of the following would you most likely ship by truck ?

A. Regular shipments of cut flowers direct to a florist shop.

B. Regular shipments of iron ore.

C. Regular shipments of grain.

D. Emergency maintenance parts.

9. Total line-haul costs will vary directly with which of the following ?

A. The distance moved.

B. The packaging.

C. Customer discounts.

D. The perishability of the goods.

10. What is the name for the consolidation of several units into a large unit for less handling ?

A. Unitization.

B. Consolidation.

C. Cube Utilization.

D. Packaging.

Solutions :

1  2  3  4  5  6  7  8  9  10

A B B A C B D A A A