Part Six Distribution Decisions 16 Wholesaling and Physical Distribution

Part SixPart SixDistribution Decisions

1616Wholesaling and

Physical Distribution

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Objectives

1. To understand the nature of wholesaling in the marketing channel

2. To explain wholesalers’ functions

3. To understand how wholesalers are classified

4. To recognize how physical distribution activities are integrated into marketing channels and overall marketing strategies


Objectives

5. To examine the major physical distribution functions of order processing, inventory management, materials handling, warehousing, and transportation

6. To discuss the strategic implications of physical distribution systems


Chapter Outline

• The Nature of Wholesaling

• Types of Wholesalers

• The Nature of Physical Distribution

• Functions of Physical Distribution

• Strategic Issues in Distribution


The Nature of Wholesaling

• 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



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


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


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


Types of Merchant Wholesalers

FIGURE 16.1


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



Types of Agents and Brokers

FIGURE 16.2



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


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


Proportional Cost of Each Physical Distribution Function as a Percentage of Total Distribution Costs

FIGURE 16.3

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.


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


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


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



• 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



• 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


Types of Warehouses

• Private 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



• 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


Proportion of Intercity Freight Carried byVarious Transportation Modes

FIGURE 16.4Source: Bureau of the Census, Statistical Abstract of the United States (Washington, DC: Government Printing

Office, 2002), p. 658.




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


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


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.


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.

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Part Six Distribution Decisions 16 Wholesaling and Physical Distribution