1. Physical Distribution
Chapter 13

2. Physical Distribution
Physical Supply
goods moving from supplier to manufacturer
“inbound”
Physical Distribution
goods moving from manufacturer to customers
“outbound”

3. Channels of Distribution
Any series of firms or individuals that participates in the flow of goods and services from the raw material supplier and producer to the final user or consumer.”
APICS 12th Edition Dictionary

4. Physical Distribution
Adds place value
by delivering goods to customers
Adds time value
by delivering goods when customers want them

5. Reverse Logistics
Supplier
Customer
Returned Goods
Information

6. Reverse Logistics - Information
Goods are returned to supplier
Information is also needed
reason / approval for the return
credit information

7. Total Cost Concept Cost trade-off Total cost
a cost decrease in one area may incur a smaller increase in another area
Total cost
consider all of the costs
increases in one area are offset by reductions in other areas
Keep customer service in mind

8. Total Cost Concept - Example Problem
A company normally ships a product by rail. Transport by rail costs $200, and the transit time is 10 days. However, the goods can be moved by air at a cost of $1000 and it will take one day to deliver. The cost of inventory in transit is $100 per day. What are the costs involved in the decision?
Rail Air
Transportation Cost $ $1000
Inventory Carrying Cost
Total $ $1100

9. Global Distribution Differences in: Distance Language Currency
Measurement

10. 3PLs – Third Party Logistics Providers
Provide a wide range of logistics services
Delivery
Warehousing
EDI
Freight Forwarding
Packaging

11. 3PLs – Third Party Logistics Providers
Can provide the service at less cost
They have the equipment and networks
Can react to seasonal increase
Reverse logistics
Examples:
Fed Ex
Kuehne + Nagel
DHL

12. Interfaces
A bridge between:
Marketing
Production

13. Interface with Marketing
Marketing is responsible for the transfer of ownership
selling, advertising, sales promotion, merchandising and pricing
Physical distribution is responsible for delivering the goods
contributes to creating demand
prompt delivery, availability of product, accurate order filling

14. Interface with Production
Production requires a steady flow of raw materials and components
interruptions are very expensive
Factory location may depend on the transportation cost
raw materials
finished goods
Factory demand is created by distribution centers

15. Transportation Costs Ways
land, water, road, space, etc over which goods are moved
may be owned by the operator (railroad tracks), operated by the government (roads, canals) or mother nature (ocean)

16. Transportation Costs Terminals Used to sort, load and unload goods
connection between line-haul and local deliveries
connection between different modes or carriers
dispatching, maintenance, administration

17. Transportation Costs Vehicles Other (fixed or variable)
owned or leased by the carrier
Other (fixed or variable)
maintenance
administration
fuel
labor

18. Transportation - Modes
Rail
Road
Air
Water
Pipeline
Vary by flexibility and operating cost

19. 1. Rail Provide own ways, terminals and vehicles
large capital investment
need high volume
modest flexibility
Used for bulky commodities over long distances

20. 2. Road Pay for ways through taxes or tolls
Provide their own terminals
Vehicle cost though large, is smaller than vehicle costs for water or rail
Door-to-door service (very flexible)
Used for small volume goods to many delivery locations

21. 3. Air
Uses government provided terminals and air traffic control systems (ways)
High variable costs for fuel and operating costs
Most expensive mode
Used for high value, low weight goods over long distances

22. 4. Water Nature provides ways Carrier pays for use of terminals
canals are government controlled
Carrier pays for use of terminals
Carrier owns the ships
Operating cost is very low
Slow and not very flexible
Used for low value bulk cargo over long distances

23. 5. Pipelines Very high capital costs Operating costs are very low
Not flexible!
Used for high volume gases or liquids moving from point to point

24. For Hire Carriers Common carriers Contract carriers
licensed to carry only certain goods
available to public
designated points or areas served
scheduled service
Contract carriers
provides specific service to a shipper

25. Private Carriers Need to buy and operate their own equipment
Carry their own goods
licenses are still required
Very high volume to justify expense

26. Other Transportation Agencies
Use combinations of modes
Freight Forwarders
Post Office
Couriers
Agencies make use of load consolidation

27. Transportation Cost Elements
Line haul
Pickup and delivery
Terminal handling
Billing and collecting
Principles are the same for all modes

28. Line Haul Costs Fuel, labor, depreciation
Approximately the same per mile whether full or empty
LHC = Total Line-Haul Cost
Distance Travelled

29. Line-Haul Costs - Example
For example, for a given commodity, the line-haul cost is $3 per mile and the distance shipped is 100 miles. The total line-haul cost is therefore, $300. If the shipper sends 50,000 pounds (or 500 cwt), the total line haul cost is the same as if 10,000 pounds were shipped. However the line-haul cost (LHC) per hundredweight (cwt) will vary.
LHC50,000 lbs = $300 = $.60 per cwt
500
LHC10,000 lbs = $300 = $3.00 per cwt
100

30. Line-Haul Costs Total line-haul cost varies with:
cost per mile
distance moved
Line-haul cost per cwt varies with:
weight moved

31. Line-haul Cost - Example
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 savings per cwt?
Cost600 =($2.50 x 500) / 600 = $2.083 / cwt
Cost1000 = ($2.50 x 500) / = $1.25 / cwt
Savings = $ = $0.833 / cwt

32. Increasing Weight Shipped
Truck will have a weight limitation
Some products have a low density and the truck is filled before the weight limitation is met
Therefore, nest products or ship products unassembled to increase the weight shipped

33. Shipping un-assembled
Some Assembly
Required

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

35. Shipping Cost - Example
Line-haul costassembled = $12.50/100 =$0.125 / bbq / mile
Line-haul cost unassembled = $12.50/500 =$0.025/ bbq/mile
Savings per mile = $ = $0.10 / bbq / mile
Trip savings = 300 miles x $0.10 / bbq/mile
=$30 per barbecue
probably worth the
cost of assembly
at the buyer’s

36. Pickup and Delivery Costs
Depends on time spent (not distance)
Charged for each pickup
Therefore, consolidate multiple shipments to avoid many trips

37. Terminal Handling
Cost depends on how many times the shipment must be handled
Full truckloads (TL) go directly to the customer
Less than truckloads (LTL) must be sent to a terminal, sorted and consolidated
Therefore, consolidate shipments into fewer parcels

38. Billing and Collecting
Costs of paperwork
Costs of invoicing
Therefore, reduce the number of pickups and pieces shipped (consolidating)

39. Total Transportation Costs
Line-haul + pickup and delivery + terminal handling + billing and collecting
To reduce costs:
increase the weight shipped (line-haul cost)
reduce the number of pickups (pickup and delivery cost)
decrease the number of parcels (terminal handling costs)
consolidate shipments (billing and collecting costs)

40. Distance Versus Cost of Carriage
Total Cost
Fixed Cost: pickup, and delivery
terminal handling, billing and collecting
Distance

41. Rate Charged - Other Factors
Value - to cover carrier’s liability
Density - can affect the total weight shipped
Perishability - may require special equipment i.e. refrigeration
Packaging - to reduce the risk of damage and breakage

42. Warehousing Plant warehouses Regional warehouses Local warehouses
Wholesalers
Public warehouses

43. Role of Warehouses
Transportation consolidation
Product Mixing
Service

44. 1. Transportation Consolidation
Reduces transportation costs
Truckload (TL) shipments to warehouse
Less than truckload (LTL) shipments to local customers
“Break-bulk”
breaking down large shipments from factories into small shipments for local buyers

45. 2. Product Mixing Avoids many small LTL shipments
Customers want a mix of products often from different manufacturers or locations
The distribution center can assemble many small items into one shipment

46. 3. Service
Local distribution centers can improve customer service by being close to the customer
Faster response time
Improved variety of products

47. Product Mixing
Figure Product mixing

48. Warehousing and Transportation Costs
Number of customers
Geographic distribution of customers
Customer order size
Number and location of plants and distribution centers $
Customer
Service

49. Warehousing and Transportation Costs - Example Problem
A plant located in Toronto is serving customers in the Boston area. If they ship direct to customers most shipments will be LTL. However if they locate a distribution center in Boston they can ship TL to the warehouse and LTL from the warehouse to the local customers. Costs are as follows:
Plant to customer (LTL) = $100 / cwt
Plant to distribution center (TL) = $50 / cwt
Distribution center = $10 / cwt
Distribution center to customer (LTL) = $20 / cwt

50. Warehousing and Transportation Costs - Example Problem
Costs if a distribution center is used:
TL Toronto to Boston = $50 per cwt
Distribution center costs = $10 per cwt
LTL Boston area = $20 per cwt
Total cost = $80 per cwt
Savings per cwt = $100 - $80 = $20 per cwt
Annual savings at 10,000 cwt = $20x10,000 = $200,000

51. Market Boundaries
The line between two methods of distribution where the laid down cost is the same.
Deciding which customers should be served from which location

52. Laid-down cost (LDC)
“The sum of the product and the transportation costs. The laid-down cost is useful in comparing the total cost of a product shipped from different suppliers from a customer point of view”
APICS 12th Edition Dictionary

53. Laid-down Costs - Example Problem
Syracuse is 300 miles from Toronto. The product cost is $10 per cwt, and the transportation cost is $0.20 per mile. What is the laid down cost per cwt?
LDC = Product cost +(trans’n cost per mile x distance)
= $10 + ($0.20 x 300)
= $70 per cwt

54. Market Boundary - Example Problem
Figure Market boundary

55. Market Boundary - Figure 13.7
In the example, the distance between A and B is 100 miles. If we let the distance from A to Y be X miles, then the distance from B to Y is (100 - X) miles. Assume supply A is the factory and B is a distribution center. Assume the product cost from A is $100 and from B is $110 which includes inventory and TL costs to the distribution center. LTL costs are $.40 per unit per mile from either location.
LDCA = LDCB
X = (100 - X)
X = 62.5 miles
Customers within 62.5 miles from the factory A, ship direct. The rest of the customers, ship from the distribution center B.

56. Market Boundary - Example Problem
The distance between Toronto and Boston is about 500 miles. Given the cost structure in the previous example, calculate the location of the market boundary between Toronto and Boston. Assume the product cost at Toronto is $10 per cwt.
Product cost at Boston = product cost at Toronto
+ TL transportation
+ handling costs

57. Market Boundary - Example Problem
Product cost at Boston
= product cost at Toronto + TL transportation + handling
= $10 + $50 + $10 = $70
LDCT = LDCB
$10 + $0.20X = $70 + $020(500 - X)
0.4X = 160
X = 400
The market boundary is 400 miles from Toronto or 100 miles from Boston. Ship orders direct within 400 miles from Toronto. Closer to Boston ship from Distribution Center in Boston.

58. Effect of Adding More Warehouses
As more distribution centers are added:
TL shipments to DC’s will increase
LTL costs to customers will decrease
Total cost of transportation will decrease

59. Effect of Adding More Warehouses Transportation Costs
TL shipments will be made over long distances
LTL shipments to customers will be shorter
Total costs decrease with more warehouses
diminishing effect as more warehouses are added

60. Effect of Adding More Warehouses
Figure Transportation cost versus number of warehouses

61. Multi-Warehouse System
Transportation costs
Inventory-carrying cost
Warehousing costs
Materials handling costs
Packaging costs
Total system cost
System service capability

62. Inventory-Carrying Cost
order quantity - stays the same
safety stock
increases with the number of warehouses
varies with the square root of the change
SSnew = SSold Previous # of warehouses
New # of warehouses

63. Inventory Carrying Costs
A company is considering adding a warehouse. For an item with an average demand of 1000 units each warehouse will have a demand of 500 units.
The safety stock in one warehouse was 100 units for a service level of 90%. What is the new safety stock?
SS = 100 x = 71 units (in each warehouse)
1000

64. Total System Cost
Figure Total system cost

65. System Service Capability
Customer service (speed of delivery)
improves with more distribution centers
diminishing effect as more DC’s are added
Must consider cost of service with total system cost

66. System Service Capability
Figure Estimate of market reached versus number of warehouses

67. System Service Capability
3 distribution centers provide the lowest total system cost
Figure Cost versus number of warehouses

68. Homework Assignment
Problems 13.8, 13.9, 13.10, 13.11