Physical Distribution Chapter 13 Physical Distribution Physical Supply goods moving from supplier to manufacturer inbound Physical Distribution goods moving from manufacturer to customers outbound ID: 771646
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Physical Distribution Chapter 13
Physical Distribution Physical Supply goods moving from supplier to manufacturer “inbound” Physical Distribution goods moving from manufacturer to customers “outbound”
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
Physical Distribution Adds place value by delivering goods to customers Adds time value by delivering goods when customers want them
Reverse Logistics - Information Goods are returned to supplier Information is also needed reason / approval for the return credit information
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 $ 200 $1000 Inventory Carrying Cost 1000 100 Total $1200 $1100
Global Distribution Differences in: Distance Language Currency Measurement
Interfaces A bridge between: Marketing Production
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
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
Line Haul Costs Fuel, labor, depreciation Approximately the same per mile whether full or empty LHC = Total Line-Haul Cost Distance Travelled
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, Centum Weight) will vary. LHC 50,000 lbs = $300 = $.60 per cwt 500 LHC 10,000 lbs = $300 = $3.00 per cwt 100
Line-Haul Costs Total line-haul cost varies with: cost per mile distance moved Line-haul cost per cwt varies with: cost per mile distance moved weight moved
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? Cost 600 =($2.50 x 500) / 600 = $2.083 / cwt Cost1000 = ($2.50 x 500) / 1000 = $1.25 / cwt Savings = $2.083 - 1.25 = $0.833 / cwt
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
Shipping un-assembled Some Assembly Required
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.
Shipping Cost - Example Line-haul cost assembled = $12.50/100 =$0.125 / bbq / mile Line-haul cost unassembled = $12.50/500 =$0.025/ bbq/mile Savings per mile = $0.125 - 0.025 = $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
Pickup and Delivery Costs Depends on time spent (not distance) Charged for each pickup Therefore, consolidate multiple shipments to avoid many trips
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
Billing and Collecting Costs of paperwork Costs of invoicing Therefore, reduce the number of pickups and pieces shipped (consolidating)
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)
Distance Versus Cost of Carriage Total Cost Distance Fixed Cost: pickup, and delivery terminal handling, billing and collecting
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
Role of Warehouses Transportation consolidation Product Mixing Service
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
Product Mixing Figure 13.6 Product mixing
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
3. Service Local distribution centers can improve customer service by being close to the customer Faster response time Improved variety of products
Warehousing and Transportation Costs Number of customers Geographic distribution of customers Customer order size Number and location of plants and distribution centers Customer Service $
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
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
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
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
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
Market Boundary - Example Problem Figure 13.7 Market boundary Market Boundary
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. LDC A = LDC B 100 + 0.40X = 110 + 0.40(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.
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
Market Boundary - Example Problem Product cost at Boston = product cost at Toronto + TL transportation + handling = $10 + $50 + $10 = $70 LDC T = LDC B $10 + $0.20X = $70 + $0.20(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.
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
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
Effect of Adding More Warehouses Figure 13.8 Transportation cost versus number of warehouses
Multi-Warehouse System Transportation costs Inventory-carrying cost Warehousing costs Materials handling costs Packaging costs Total system cost System service capability
Inventory-Carrying Cost Inventory order quantity - stays the same safety stock Total SS increases with the number of warehouses varies with the square root of the change SS new = SS old New Annual Demand/warehouse Old Annual Demand/warehouse
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 500 = 71 units (in each warehouse) 1000
Total System Cost Figure 13.11 Total system cost
System Service Capability Figure 13.12 Estimate of market reached versus number of warehouses
System Service Capability 3 distribution centers provide the lowest total system cost Figure 13.13 Cost versus number of warehouses
Homework Assignment Problems 13.8, 13.9, 13.10, 13.11