Wholesaling and Physical Distribution 16 Wholesaling and Physical Distribution

To understand the nature of wholesaling in the marketing channel Objectives To understand the nature of wholesaling in the marketing channel To explain wholesalers’ functions To understand how wholesalers are classified To recognize how physical distribution activities are integrated into marketing channels and overall marketing strategies Copyright © Houghton Mifflin Company. All rights reserved.

To discuss the strategic implications of physical distribution systems Objectives To examine the major physical distribution functions of order processing, inventory management, materials handling, warehousing, and transportation To discuss the strategic implications of physical distribution systems Copyright © Houghton Mifflin Company. All rights reserved.

The Nature of Wholesaling Types of Wholesalers Chapter Outline The Nature of Wholesaling Types of Wholesalers The Nature of Physical Distribution Functions of Physical Distribution Strategic Issues in Distribution Copyright © Houghton Mifflin Company. All rights reserved.

The Nature of Wholesaling Transactions in which products are bought for resale, for making other products, or for general business operations Wholesaler An individual or organization that facilitates and expedites wholesale transactions Handles the physical distribution of goods Furnishes channel information to facilitate and manage the supply channel Copyright © Houghton Mifflin Company. All rights reserved.

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The Nature of Wholesaling (cont’d) Services Provided by Wholesalers Serve as an extension of the producer’s sales force through contact with suppliers and retailers Lend financial assistance for the distribution channel Transporting and warehousing inventories Assuming credit risks of buyers/customers Purchasing producers’ entire output: converting producer’s output immediately to working capital Channeling information from and to sellers and buyers Copyright © Houghton Mifflin Company. All rights reserved.

The Nature of Wholesaling (cont’d) Advantages in Utilizing Wholesalers Have closer contact with retailers Are less expensive and more efficient than maintaining an independent sales force Can spread selling costs over more products Can assist in selecting optimum inventory Are experts in negotiating final purchases Are knowledgeable about sources of supply Perform physical distribution activities efficiently Copyright © Houghton Mifflin Company. All rights reserved.

Types of Wholesalers Merchant Wholesalers Independently owned businesses that take title to goods, assume ownership risks, and buy and resell products to other wholesalers, business customers, or retailers Provide market coverage Make sales contacts Store inventory Handle orders Collect market information Furnish customer support Copyright © Houghton Mifflin Company. All rights reserved.

Types of Merchant Wholesalers FIGURE 16.1 Copyright © Houghton Mifflin Company. All rights reserved.

Types of Full-Service Wholesalers General-Merchandise Wholesalers Full-service wholesalers with a wide product mix but limited depth within product lines Limited-Line Wholesalers Full-service wholesalers that carry only a few product lines but many products within those lines Specialty-Line Wholesalers Full-service wholesalers that carry only a single product line or a few items within a product line Copyright © Houghton Mifflin Company. All rights reserved.

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Types of Agents and Brokers FIGURE 16.2 Copyright © Houghton Mifflin Company. All rights reserved.

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Types of Wholesalers (cont’d) Manufacturers’ Sales Branches and Offices Sales branches Manufacturer-owned intermediaries that sell products and provide support services to the manufacturer’s sales force Sales offices Manufacturer-owned operations that provide services normally associated with agents Copyright © Houghton Mifflin Company. All rights reserved.

The Nature of Physical Distribution Physical Distribution (Logistics) Activities used to move products from producers to consumers and other end users Order processing Inventory management Material handling Warehousing Transportation Outsourcing Contracting physical distribution tasks to third parties with specialized logistics skills who do not have managerial authority within the marketing channel Copyright © Houghton Mifflin Company. All rights reserved.

Proportional Cost of Each Physical Distribution Function as a Percentage of Total Distribution Costs Source: Herbert W. Davis and Company/Establish, Inc., Fort Lee, NJ. Davis Database, June 2004, www.establishinc.com. Reprinted by permission of Herbert W. Davis and Company/Establish, Inc. Davis Database, Copyright © 2004 by Herbert W. Davis and Company/Establish, Inc. FIGURE 16.3 Copyright © Houghton Mifflin Company. All rights reserved.

The Nature of Physical Distribution (cont’d) Physical Distribution Objectives Meetings standards of customer service for Timeliness of order fulfillment Accuracy of order fulfillment Reducing total distribution costs Inventory levels against warehousing costs Materials costs versus transportation costs Distribution costs against customer service standards Overall goal is to achieve the lowest total distribution cost compatible with the firm’s customer service objectives. Reducing cycle (process completion) time Faster processes for increased customer service Copyright © Houghton Mifflin Company. All rights reserved.

Functions of Physical Distribution Order Processing The receipt and transmission of sales order information Order entry Order handling Order delivery Electronic data interchange A computerized means of integrating order processing with production, inventory, accounting, and transportation Copyright © Houghton Mifflin Company. All rights reserved.

Functions of Physical Distribution (cont’d) Inventory Management Developing and maintaining adequate assortments of products to meet customers’ needs Minimize inventory costs yet have sufficient supply of goods to satisfy customers Stockouts—inventory-related shortages of products Reorder point = (Order Lead Time x Usage Rate) + Safety Stock Just-in-Time An inventory management in which supplies arrive just when needed for production or resale Copyright © Houghton Mifflin Company. All rights reserved.

Functions of Physical Distribution (cont’d) Materials Handling The physical handling of products in warehousing operations and the transportation from points of production to points of consumption Unit loading—one or more boxes of product are placed on a pallet and handled by mechanical means (e.g., forklift) Containerization—consolidation of many small items into a single large container providing increased handling efficiency and security in shipping Copyright © Houghton Mifflin Company. All rights reserved.

Functions of Physical Distribution (cont’d) Warehousing The design and operation of facilities for storing and moving goods Enables compensation for dissimilar production and consumption rates Helps stabilize prices and availability of seasonal items Functions Receiving, identifying, sorting, dispatching to storage, holding goods, recalling and assembling, and dispatching shipments Copyright © Houghton Mifflin Company. All rights reserved.

Types of Warehouses Private Warehouses Public Warehouses Company-operated warehouses for storing and shipping products Public Warehouses Businesses that lease storage space and related physical distribution facilities to other firms Field public warehouses Bonded storage Distribution Centers Large centralized warehouses that focus on moving rather than storing goods Copyright © Houghton Mifflin Company. All rights reserved.

Functions of Physical Distribution (cont’d) Transportation The movement of products from where they are made to where they are used Transportation modes Railroads—heavy, bulky full carloads of freight Trucks—Flexible schedules, speed and access Waterways—heavy, low-value nonperishables Airways—fast delivery, high-value or perishable goods Pipelines—bulk petroleum and chemicals Copyright © Houghton Mifflin Company. All rights reserved.

Proportion of Intercity Freight Carried by Various Transportation Modes Source: Bureau of the Census, Statistical Abstract of the United States (Washington, DC: Government Printing Office, 2002), p. 658. FIGURE 16.4 Copyright © Houghton Mifflin Company. All rights reserved.

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Coordinating Transportation Intermodal Transportation Two or more transportation modes used in combination Containerization: piggyback, fishyback, birdyback modes Freight Forwarders Organizations that consolidate shipments from several firms into efficient lot sizes Megacarriers Firms that provide several modes of shipment Copyright © Houghton Mifflin Company. All rights reserved.

Strategic Issues in Physical Distribution Distribution Decisions Impact customer service and satisfaction Affect the marketing mix makeup Provide assistance in maintaining competitive prices Support promotion and advertising campaigns Influence warehousing and inventory costs Change the scope of the physical distribution process Copyright © Houghton Mifflin Company. All rights reserved.

After reviewing this chapter you should: Understand the nature of wholesaling in the marketing channel. Know about wholesalers' functions. Understand how wholesalers are classified. Be able to recognize how physical distribution activities are integrated into marketing channels and overall marketing strategies. Copyright © Houghton Mifflin Company. All rights reserved.

After reviewing this chapter you should: Have examined the major physical distribution functions of order processing, inventory management, materials handling, warehousing, and transportation. Be able to discuss the strategic implications of physical distribution systems. Copyright © Houghton Mifflin Company. All rights reserved.