Physical Distribution, Marketing Logistics, and Supply Chain Management

Distribution/Marketing Logistics

Physical distribution is the process of delivering the product to the marketing channels and consumers. It encompasses the various activities involved in the physical flow of the product from the producer to the consumer.

Marketing logistics is somewhat larger in scope compared to physical distribution. It covers physical distribution plus a part of the task of marketing channels. While physical distribution takes care of functions such as transportation, warehousing and inventory management and facilitates the flow of the product, marketing channels actually connect the firm with its customers. Marketing logistics covers physical distribution in full measure, plus a part of the function of marketing channels. Marketing logistics bring in greater value addition in the delivery chain, beyond mere transportation or distribution.

The Physical Distribution Concept

This emphasizes the connection between costs and service levels and aims to minimize the total distribution costs at a given service level, when backed by an integrated logistics network. Its four main components are:

• The total cost approach: this considers all the costs of the physical distribution network, visible and invisible, while trying to achieve a given service level. It is necessary to remember the interdependence of all these elements and to try to minimize the total costs instead of attempting to reduce them piecemeal.
• Trade-offs in costs: certain costs may increase while others are being reduced, but the objective should be to reduce the total distribution costs.
• Minimum sub optimization: owing to the interdependence of all the distribution functions, any change in one will affect the others. When these functions are integrated, the goal should be to minimize sub optimization through systems management.
• The total system perspective: this takes the concept a stage further by considering the costs in the entire marketing process from the beginning to the sale to the end-user,
• For example, instead of the retailer pricing the goods received, which is a time-consuming and therefore expensive process, the retailer can provide the manufacturer with up-to-date price lists, the manufacturer can price the products and charge the retailer for the service; the result being lower costs in total.

Supply Chain Management (SCM)

SCM is larger in scope than both physical distribution and marketing logistics. It encompasses materials management task as well. Supply chain actually refers to the whole business chain, encompassing procurement of inputs, in-bound logistics, conversion of inputs into products, physical distribution/ marketing logistics and channel functions, which finally take the end product to the ultimate consumers Essentially, SCM can be viewed as the combination of materials management and end product distribution, which constitute the two vital components of the business process and form the key tasks at the front and back ends of the process, respectively.

It can be seen that the supply chain is in effect the firm’s value chain. Value is actually spread through the firm’s supply chain. A firm can optimize its total customer value by managing activities in the supply chain in an integrated manner, treating them as one continuous chain. The supply chain constitutes a value delivery network. That is why it is often said that firms compete in the marketplace using their supply chains as the weapon, not their products and brands. Superiority in supply chain is thus a major competitive advantage. A firm with the better supply chain wins in the market. We have discussed the value chain concept in detail in the two chapters on Industry Analysis, and Competitive Advantage.

Taking note of the advantage in dealing together materials management and physical distribution of end products, which constitute the two major functions at both end and which form a virtual chain permeating the business from end-to-end, many experts have preferred to combine the two subjects and deal them as SCM.

The SCM approach, no doubt, has some merits. It facilitates the integrated handling of the functions of the business, especially the procurement function and the logistics functions at the front and the back ends of the business. As a result, it comes handy in value creation! Value addition.

The approach, however, has a strong demerit as well. It gives prominence to materials management and treats the customer requirements of logistics as an appendix to the business cycle. The requirements from the side of the customer/market get diluted in such an approach. Moreover, in the nature of things, the focus as well as requirements of materials management and physical distribution of end products is somewhat different from each other. Perhaps all things considered, the two subjects should be studied independently, rather than as one unified subject.

Materials Management

The materials management cycle consists of the inflow of goods through materials acquisition whether it is by outright purchase or partially or fully on credit basis, plus internal transport and inventory management. The relevant strategies regarding purchasing transport and warehousing must include cost-effective methods in these functions. The materials flow Involves vendors and suppliers, and is integral to the operation of the business, Purchasing forecasts are directly based on production schedules or other internal usage plans, and highly integrated materials management is possible given a disciplined internal planning process.

The logistics activity in a company acts to co-ordinate the flow of material and the related information through the system. It has to co-ordinate production planning; delivery frequencies required matching sales demands and customer order frequencies. All this has to be achieved through shared information. This requires an integrated information system in which:

• Data entering one subsystem is also available to any other subsystem requiring it; for example, data concerning customer orders should be available to inventory control, production scheduling, sales forecasting, etc.
• All inter-related subsystems should have access to data in a common data base.
• Closely connected activities are integrated into the same procedure, order processing, credit checking and stock allocation.

A high degree of sharing of expensive capital equipment should be allowed for; for example, the central computer installation, the data base and the application packages, among others, can be shared among the various functions.

The logistics information system consists of two subsystems dealing with supplies and customers. The supply subsystem input consists of the materials requirements plan, indicating how many of what types of items are needed und when they are needed for production; this has to be checked against the standing inventory and any orders outstanding. If necessary, sources of supply for any extra materials needed will have to be decided upon and purchase orders generated. This process appears simple but a company may have a register of hundreds of suppliers and maintain an inventory with many thousands of stock-keeping units. Also a sharp look-out must be kept for possible shortages and the suppliers checked for their reliability, prices and service. At the same time, the inventory must be minimized while making sure that production is not held up due to a stock out. It is obvious that a sophisticated information system is necessary to balance all these factors simultaneously.

In many ways, the customer subsystem is the mirror image of the supply system. An order from a customer is the start of the process. Hundreds of such orders per day have to be monitored against customer records for creditworthiness and special terms or needs, among other things. After which stock has to be assigned to the order, replenishment of inventory catered for if necessary, delivery and invoices as well as other complementary activities arranged for, A host of other information regarding achievements of service levels, re-order levels, etc., has to be gathered at this point to assist in making demand forecasts.

These two subsystems come together in the manufacturing function and have to be integrated through production control so that the supply sub system generates what the customer subsystem demands. Many companies have installed materials requirements planning (MRP) systems. Basically these forecast the components and materials needed from the company’s master production schedule (MPS) and the bill of material (BOM) for each end product. The requirements are calculated by taking existing stock levels and orders already placed into account, as well as the times when the items will be needed and the supply lead times. A successfully implemented MRP system can reduce inventory levels, speed up changes in the production process to meet changes in demand and increase the level of service in meeting demand. The basic idea is simple but the control of such multiple activities has only become possible through the use of advanced computer technology.

Other methods such as the just-in-time (JIT) system can reduce inventory levels while maintaining service levels. The idea is that the materials needed should arrive just in time for their use in manufacture. Reliable lead times are necessary for these systems to work properly. A similar development in the distribution field is the distribution requirements planning (DRP) system. This starts from the demand for the finished product and produces requirements schedules at each level of the distribution chain. This is a ‘pull’ system in that the end demand ‘pulls’ the required products down the chain rather than a centrally decided production plan ‘pushing’ the products down the line. Since the emphasis is now on customer needs, the former makes more sense than the latter, though both have their advantages.

The latest innovation is a combination of the MRP and D RP systems into logistics requirements planning (LRP) systems, which will link the end demand through the whole chain back to the suppliers. This has a number of complex requirements which must be satisfied before such a system can be contemplated, including a high degree of dedication on the parts of the management and the whole organization.