PHYSICAL DISTRIBUTION

SYSTEM
UNIT-4
 INTRODUCTION TO PHYSICAL
DISTRIBUTION SYSTEM
 Physical distribution is concerned with the physical movement of the goods
from the producer to the consumer. It is an important part of marketing
activity and a major component of marketing mix. It includes all those
activities which help in efficient movement of goods from producer to
consumer, such as trans­portation, warehousing, material handling,
inventory control, order processing, market forecasting, packaging, plant
and warehouse location and customer ser­vice.

 Philip Kotler has defined physical distribution as, “Physical distribution

involves planning, implementing and controlling the physical flow of
materials and final goods from the point of origin of use to meet consumer
needs at a profit.”
Need &Objectives of Physical Distribution:

 Physical distribution has two broad objectives viz.

consumer satisfaction and profit maximization.

Apart from these two broad objectives, physical

distribution has other objectives as follows:

 I. To make available the right goods in right quantity at right

time and right place at least cost.
 ii. To achieve minimum inventory level and speedier
transportation.
 iii. To establish price of products by effective management of
physical distribution activities.
Importance of Physical Distribution
System:
Its importance can be judged from following points:

1. Creating Time and Place Utility: Physical distribution activities help in

creating time and place utility. This is done through transportation and
warehousing. Transportation system creates place utility as it makes
available the goods at the right place where they are required.
Warehousing creates time utility by storing the goods and releasing them
when they are required.

2. Helps in Reducing Distribution Cost: Physical distribution cost account

for a major part of the price of the product. If these costs are handled
systematically, decrease in costs of product can be there. Proper and
systematic planning of transportation schedules and routes, warehousing
location and operation, material handling, order processing, etc. can easily
bring in cost economies.
Importance of Physical Distribution
System:
3. Helps in Stabilization of Price: Physical distribution
helps in maintaining stable prices. Even customers
expect price stability over a period of time. Proper use
of transportation and warehousing facilities can help in
matching demand with supply and thus ensure
stabilization of price.
4. Improved Consumer Services: Consumer service in
physical distribution means making products in right
quantity available at right time and right place i.e.
place where customer needs.
Components of Physical Distribution:
(1) Order Processing:
 Order processing is the starting point of any distribution
activity. Order processing includes activities like receiving the
order, handling the order, granting credit, invoicing,
dispatching, collecting bills, etc. Each customer expects that the
order placed by him is implemented without delay, and as per
the specifications of the order.
(2) Storage and Warehousing:
 Storage means making proper arrangements for retaining the
goods in proper condition till they are demanded by customers.
There are many products which are seasonally produced but are
used throughout the year, they can be stored and later released.
Components of Physical Distribution:
(3) Inventory Control:
 Inventory control refers to efficient control of goods stored in
warehouses. Maintaining adequate level of inventory is very
essential for smooth flow of business. Inventory acts as a bridge
between the orders of customers and production. They are the
reservoir of the goods held in anticipation of sales. Therefore, it
needs to be properly managed and controlled. Neither to small nor
too large inventory should be maintained.
(4) Material Handling:
 Material handling includes all those activities which are associated in
moving products when it leaves the manufacturing plant but before it
is loaded on the transport. This activity has been in existence since
very long period of time, and now it has developed as a system.
Components of Physical Distribution:
(5) Transportation:
 Transportation as a component of physical distribution is concerned with the
movement of goods from the warehouse to customer destination. It includes
loading and unloading of goods and their movement from one place to
another. In doing so it provides time and place utility. Transport accounts for
a major portion of the distribution cost and of the total price of the product.
Different modes of transportation are there like Road transport, railways,
Airways, Water transport and pipeline from which a choice has to be made.
i. Road Transport:
 This is an ancient form of transport and plays an important role in marketing.
Road transport may be through different means like transport by animals
(like bullock, camel), transport by human beings (like coolies or porters),
transport by automobiles (like scooters, auto rickshaws, cars, truck buses
etc.). Road transport is flexible and economical. However, it is unsuitable for
long distances.
Components of Physical Distribution:
ii. Railways:
 It is suitable for transporting bulk goods over long distances. It is an
economical mode because large volume of traffic is handled over large
network of railways. However, it is inflexible as it is unfit to transport
goods to rural areas. Further, it involves huge maintenance
expenditure.
iii. Water Transport:
 Water way is an important mode of transport for heavy and bulky
goods in large quantities. It consists of inland water transport and
ocean transport. Inland water transport is used for transporting goods
within county and ocean transport is used to transport goods to other
countries. Water transport is a cheapest form of transport, having great
carrying capacity and is highly suitable for heavy and bulky goods, but
it has low speed and higher degree of risk due to seasonal difficulties.
Components of Physical Distribution:
iv. Air Transport:
 Of late air transport has assumed significant importance as a mode
of transport. Although it accounts for a small percentage of
transportation, it is useful for perishable items, overnight
packages, emergency supplies etc. The main disadvantage of air
transport is that it has high freight charges, low carrying capacity
and too much dependence on climatic conditions.
v. Pipelines:
 These are specialized carriers design to transport the crude and
refined petroleum and natural gas from wells to refineries and
further to distribution centre. It is an economical mode as it
involves less handling and labor cost, but it is the slowest mode of
transportation and very limited in number.
What is a Distribution Channel?
A distribution channel (also called a marketing
channel) is the path or route decided by the company
to deliver its good or service to the customers. The
route can be as short as a direct interaction between the
company and the customer or can include several
interconnected intermediaries like wholesalers,
distributors, retailers, etc.
Hence, a distribution channel can also be referred to as
a set of interdependent intermediaries that help make a
product available to the end customer.
Functions of Distribution
Channels
 In order to understand the importance of distribution channels, you
need to understand that it doesn’t just bridge the gap between the
producer of a product and its user.

 Distribution channels provide time, place, and ownership utility.

They make the product available when, where, and in which
quantities the customer wants. But other than these transactional
functions, marketing channels are also responsible to carry out the
following functions:

1. Logistics and Physical Distribution: Marketing channels are

responsible for assembly, storage, sorting, and transportation of
goods from manufacturers to customers.
Functions of Distribution
Channels
2. Facilitation: Channels of distribution even provide pre-
sale and post-purchase services like financing,
maintenance, information dissemination and channel
coordination
3.Creating Efficiencies: This is done in two ways: bulk
breaking and creating assortments. Wholesalers and
retailers purchase large quantities of goods from
manufacturers but break the bulk by selling few at a time
to many other channels or customers. They also offer
different types of products at a single place which is a
huge benefit to customers as they don’t have to visit
different retailers for different products.
Functions of Distribution
Channels
4.Sharing Risks: Since most of the channels buy the
products beforehand, they also share the risk with the
manufacturers and do everything possible to sell it.

5.Marketing: Distribution channels are also called

marketing channels because they are among the core
touch points where many marketing strategies are
executed. They are in direct contact with the end
customers and help the manufacturers in propagating
the brand message and product benefits and other
benefits to the customers.
Levels of Distribution Channels

Distribution Channels

Indirect Direct Dual

Channels Channel Distribution

One-level Two-Level Three-Level

Channel Channel Channel
Direct Channel or Zero-level Channel (Manufacturer to
Customer)
Direct selling is one of the oldest forms of selling
products. It doesn’t involve the inclusion of an
intermediary and the manufacturer gets in direct
contact with the customer at the point of sale. Some
examples of direct channels are peddling, brand
retail stores, taking orders on the company’s
website, etc. Direct channels are usually used by
manufacturers selling perishable goods, expensive
goods, and whose target audience is geographically
concentrated. For example, bakers, jewelers, etc.
Indirect Channels (Selling Through Intermediaries)
 When a manufacturer involves a middleman/intermediary
to sell its product to the end customer, it is said to be using
an indirect channel. Indirect channels can be classified into
three types:

 One-level Channel (Manufacturer to Retailer to

Customer): Retailers buy the product from the
manufacturer and then sell it to the customers. One level
channel of distribution works best for manufacturers
dealing in shopping goods like clothes, shoes, furniture,
toys, etc.
Indirect Channels (Selling Through
Intermediaries)
Two-Level Channel (Manufacturer to
Wholesaler to Retailer to
Customer): Wholesalers buy the bulk from the
manufacturers, breaks it down into small packages
and sells them to retailers who eventually sell it to
the end customers. Goods which are durable,
standardized and somewhat inexpensive and whose
target audience isn’t limited to a confined area use
two-level channel of distribution.
Indirect Channels (Selling Through
Intermediaries)
 Three-Level Channel (Manufacturer to Agent to Wholesaler to
Retailer to Customer):
 Three level channel of distribution involves an agent besides the
wholesaler and retailer who assists in selling goods. These agents come
handy when goods need to move quickly into the market soon after the
order is placed. They are given the duty to handle the product distribution
of a specified area or district in return of a certain percentage commission.
The agents can be categorized into super stockiest and carrying and
forwarding agents. Both these agents keep the stock on behalf of the
company. Super stockiest buy the stock from manufacturers and sell them
to wholesalers and retailers of their area. Whereas, carrying and forwarding
agents work on a commission basis and provide their warehouses and
shipment expertise for order processing and last mile deliveries.
Manufacturers opt for three-level marketing channel when the user base is
spread all over the country and the demand of the product is very high.
Indirect Channels (Selling Through
Intermediaries)
Dual Distribution
When a manufacturer uses more than one
marketing channel simultaneously to reach the end
user, he is said to be using the dual distribution
strategy. They may open their own showrooms to
sell the product directly while at the same time use
internet marketplaces and other retailers to attract
more customers.
Factors Determining the Choice of Distribution Cha­nnels
Factors Determining the Choice of
Distribution Cha­nnels
Market Characteristics
This includes the number of customers, their
geographical location, buying habits, tastes and
capacity and frequency of purchase, etc.
Direct channels suit businesses whose target audience
lives in a geographically confined area, who require
direct contact with the manufacturer and are not that
frequent in repeating purchases
In cases of customers being geographically dispersed
or residing in a different country, manufacturers are
suggested to use indirect channels.
Factors Determining the Choice of
Distribution Cha­nnels
Product Characteristics
Product cost, technicality, perishability and whether they
are standardised or custom-made play a major role in
selecting the channel of distribution for them.
Perishable goods like fruits, vegetables and dairy products
can’t afford to use longer channels as they may perish
during their transit. Manufacturers of these goods often
opt for direct or single level channels of distribution.
Whereas, non-perishable goods like soaps, toothpaste, etc.
require longer channels as they need to reach customers
who reside in areas which are geographically diverse.
Factors Determining the Choice of
Distribution Cha­nnels
Competition Characteristics
The choice of the marketing channel is also affected by
the channel selected by the competitors in the market.
Usually, the firms tend to use a similar channel as used
by the competitors. But some firms, to stand out and
appeal to the consumer, use a different distribution
channel than the competitors. For example, when all
the smartphones were selling in the retail market, some
companies partnered with Amazon and used
the scarcity principle to launch their smartphone as
Amazon exclusive.
Factors Determining the Choice of
Distribution Cha­nnels
Company Characteristics
Financial strength, management expertise, and the
desire for control act as important factors while
deciding the route the product will take before being
available to the end user.
A company having a large amount of funds and good
management expertise (people who have sufficient
knowledge and expertise of distribution) can create the
distribution channels of its own but a company with
low financial stability and management expertise has
to rely on third-party distributors.
Recent Development in Sales &
Distribution Scenario
 There are four key areas that are changing and have all seemed to
happen within the same timeframe. With these swift changes, the Sales
& distribution aspect of production has become a different atmosphere,
with changes being in the following areas:
1. Options - Customers like to have a choice - making sure that you are
the best choice becomes essential. Becoming the best distribution
choice can be done by integration with distributors who offer various
other products. By doing this, you are beating out the competition by
having a wide variety all in one package.
2. Convenience - Having a location that is closer to customers will
enable them to want your product more, simply out of convenience.
As customers are ambitious with buying, this creates a demand for
receiving a product quickly. A nearby location to customers is
extremely beneficial to distributors.
Recent Development in Sales &
Distribution Scenario
3. Experience - This term can range from availability of product
to product description enhancements. This area also includes
order history, shipping and refunds, management of
productivity, and various other aspects. Customer experience is
extremely important to distribution - after all, happy customers
mean more sales.

4. Cost - Arguably one of the most important factors pertaining to

customers, having a cost friendly distribution network can lead
to more sales. When you integrate options and diversify your
product line, distribution can cost less through large orders and
reduced delivery times. All in all, this creates a lower, more
price-friendly option for your consumers.
ANY QUERY ?