Chapter 7

Physical Distribution System

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 Learning Outcomes
After reading this chapter you should be able to:

7.1 Define Physical distribution channel

7.2 Discuss different types of Physical distribution channel
7.3 Identify the relevant channel objectives
7.4 Understand Channel characteristics
7.5 Design a channel structure
7.6 Choose between own account distribution or third party

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Definition of Physical distribution
channel

Physical distribution channel is the term used to describe

the method and means by which a product or a group of
products are physically transferred, or distributed, from their
point of production to the point at which they are made
available to the final customer.

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Types of Physical distribution channel
There are several alternative physical channels of distribution that
can be used, and a combination of these may be incorporated
within a channel structure. They are manufacturer-to-retail and
direct deliveries.

1- Channel alternatives: manufacturer-to-retail

The diagram in Figure 1 illustrates the main alternative channels
for a single consumer product being transferred from a
manufacturer’s production point to a retail store. The circles in
the diagram indicate when products are physically transferred
from one channel member to another.

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5 Figure 1 Alternative distribution channels from manufacturer-to-retail
The alternative channels in Figure 1 are:
• Manufacturer direct to retail store. The manufacturer or supplier
delivers direct from the production point to the retail store, using its
own vehicles. As a general rule, this channel is only used when full
vehicle loads are being delivered, thus it is quite unusual in today’s
logistics environment.

• Manufacturer via manufacturer’s distribution operation to retail

store. This used to be one of the classic physical distribution channels
and was the most common channel for many years. Here, the
manufacturer or supplier holds its products in a finished goods
warehouse, a central distribution centre (CDC) or a series of regional
distribution centres (RDCs). The products are trunked (line-hauled) in
large vehicles to the sites, where they are stored and then broken
down into individual orders that are delivered to retail stores on the
supplier’s retail delivery vehicles. All of the logistics resources are
owned
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• Manufacturer via retailer distribution centre to retail store. This
channel consists of manufacturers either supplying their products to
national distribution centres (NDCs)or RDCs for final delivery to stores, or
supplying them to consolidation centres, where goods from the various
manufacturers and suppliers are consolidated and then transported to either
an NDC or RDC for final delivery. These centres are run by the retail
organizations or as is often the case, by their third-party contractors. The
retailers then use their own or third-party delivery vehicles to deliver full
vehicle loads to their stores.

• Manufacturer to wholesaler to retail shop. Wholesalers have acted as

the intermediaries in distribution chains for many years, providing the link
between the manufacturer and the small retailers’ shops. However, this
physical distribution channel has altered in recent years with the
development of wholesale organizations or voluntary chains (often known
as ‘symbol’ groups in the grocery trade). They originated on the basis of
securing a price advantage by buying in bulk from manufacturers or
suppliers.
• Manufacturer to cash-and-carry wholesaler to retail shop.
Another important development in wholesaling has been the
introduction of cash-and-carry businesses. These are usually built
around a wholesale organization and consist of small independent
shops collecting their orders from regional wholesalers, rather than
having them delivered. The increase in cash-and-carry facilities has
arisen as many suppliers will not deliver direct to small shops
because the order quantities are very small.

• Manufacturer via third-party distribution service to retail store.

Third-party distribution, or the distribution service industry, has
grown very rapidly indeed in recent years. Thus, a number of
companies have developed a particular expertise in logistics
operations. These companies can be general distribution services but
may also provide a ‘specialist’ service for one type of product or for
one
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client company.
•Manufacturer via small parcels carrier to retail shop. This
channel is very similar to the previous physical distribution channel,
as these companies provide a ‘specialist’ distribution service where
the ‘product’ is any small parcel. The competition generated by these
companies has been quite fierce. Small parcels carriers also
undertake many home deliveries.

• Manufacturer via broker to retail store. This is a relatively rare

type of channel, and may sometimes be a trading channel and not a
physical distribution channel. A broker is similar to a wholesaler in
that it acts as intermediary between manufacturer and retailer. Its
role is different, however, because it is often more concerned with
the marketing of a series of products, and not necessarily with their
physical distribution. Thus, a broker may use third-party
distributors, or it may have its own warehouse and delivery system.

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2-Channel alternatives: direct deliveries
The main alternative physical distribution channels previously
described refer to those consumer products where the movement is
from the manufacturer to the retail store. There are additional
channels for industrial products and for the delivery of some
consumer products that do not fit within the structure of the diagram
because they bypass the retail store. There are different types of
distribution channel for these flows, which are sometimes referred to
as business to consumer (B2C):

• Mail order. The use of mail order or catalogue shopping has

become very popular. Goods are ordered by catalogue, and delivered
to the home by post or parcels carrier. The physical distribution
channel is thus from manufacturer to mail order house as a
conventional primary transport (line-haul) operation, and then to the
consumer’s home by post or parcels carrier, bypassing the retail
store.
• Factory direct to home. The direct factory-to-home channel is a
relatively rare alternative. It can occur by direct selling methods,
often as a result of newspaper or magazine advertising. It is also
commonly used for one-off products that are specially made and do
not need to be stocked in a warehouse to provide a particular level
of service to the customer.

• Internet and shopping from home. Shopping from home via the
internet is now a very common means of buying products. Initially,
physical distribution channels were similar to those used by mail
order operations – by post and parcels carrier.

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• Factory to factory/business to business (B2B). The factory-to-
factory or business-to business channel is an extremely important one,
as it includes all of the movement of industrial products, of which there
are many. This may cover raw materials, components, part-assembled
products, etc. Options vary according to the type and size of product
and order. This may range from full loads to small parcels, and may be
undertaken by the manufacturers themselves or by a third party.

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Channel Objectives
Channel objectives will necessarily differ from one company to
another, but there are a number of general points that are likely to be
relevant to most companies. The key points that should be addressed
are as follows:
•To make the product readily available to the market consumers at
which it is aimed.
•To enhance the prospect of sales being made.
• To achieve cooperation with regard to any relevant distribution
factors.
• To achieve a given level of service.
• To minimize logistics and total costs.
• To receive fast and accurate feedback of information.
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Channel characteristics
As well as identifying the relevant channel objectives, as described in
the previous section, there are a number of channel characteristics
that also need to be considered. These include market, product and
competitive characteristics. These different factors will affect the
decisions that need to be made when designing a channel to be used
in a distribution system. They can be summarized as follows:

1-Market characteristics
The important consideration here is to use the channels that are the
most appropriate to get the product to the eventual end user. The size,
spread and density of the market is important. If a market is a very
large one that is widely spread from a geographic point of view, then
it is usual to use ‘long’ channels.

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 A long channel is one where there are several different storage
points and a number of different movements for the product as it is
transferred from the point of production to the final customer.
Where a market has only a very few buyers in a limited geographical
area, then ‘short’ channels are used. A simple example of what are
known as ‘long’ and ‘short’ channels is illustrated in Figure 2.

Figure 2 ‘Long’ and ‘short’ distribution channels

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2-Product characteristics
The importance of the product itself when determining channel choice
should not be underestimated. This is because the product may well impose
constraints on the number of channels that can be considered. For example:

•Complex products often require direct selling because any intermediary

may not be able to explain how the product works to potential customers.

•High-value items are more likely to be sold direct via a short channel,
because the high gross profit margins can more easily cover the higher sales
and distribution costs that are usual from short channels.

• Time-sensitive products need a ‘fast’ or ‘short’ channel, for shelf-life

reasons in the case of food products such as bread and cakes.

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3-Competitive characteristics

Competitive characteristics that need to be considered concern the

activities of any competitors selling a similar product. Typical
decisions are whether to sell the product alongside these similar
products, or whether to try for different, exclusive outlets for the
product in order to avoid the competition and risk of substitution. It is
essential that channel selection is undertaken with a view to ensuring
that the level of service that can be given is as good as, or better than,
that which is being provided by key competitors.

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 Designing a channel structure
All of the factors described above will need to be taken into account when
designing a channel structure and selecting the appropriate channel
members. A formalized approach that might be adopted when undertaking
the design of a channel structure is set out in Figure 3.

Figure
18 3 An approach to designing a channel structure
Own account distribution or third party
It is probably true that the most important channel decision for those
operating in distribution and logistics is whether to use an own-
account (in-house) operation or whether to outsource to a third-party
logistics (3PL) service. If the decision is to outsource then there are a
number of associated factors that need to be considered concerning
how much of the operation to outsource and which of the many
third-party companies to choose to undertake the outsourced
operation.
A 2006 study of third-party logistics (Langley, 2006), found that the
most common logistics services outsourced to 3PL providers were
transportation and warehousing and this continues to be reflected
by subsequent studies. Increasingly, however, many other services are
outsourced, including customs clearance and brokerage, freight
forwarding, cross-docking/ shipment consolidation, order
fulfilment and distribution.
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A list of the key drivers for outsourcing can be seen from a survey
conducted by Eyefortransport , and is shown in Figure 4.

Figure 4 key drivers for outsourcing

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 Thanks for listening

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