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Physical Distribution in Marketing: Definition, Functions & Importance

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James Carnrite

A marketing, communications, and supply chain professional who has a masters degree in IT Mangement. Has been working with young professionals to develop their leadership styles.

In this lesson, we'll be looking at physical distribution and the movement of finished goods from production to consumer. We will explore the functions of physical distribution and its importance.

We also recommend watching Marketing Channel: Definition and Function in the Marketplace and Market Segmentation: Why Market Segments Are Important to Marketers

Definition

Physical distribution is the group of activities associated with the supply of finished product from the production line to the consumers. The physical distribution considers many sales distribution channels such as wholesale and retail, and includes critical decision areas which include customer service, inventory, materials, packaging, order processing, and transportation and logistics. You often will hear these processes be referred to as distribution which is used to describe the marketing and movement of products.

Accounting for nearly half of the entire marketing budget of products, the physical distribution process typically garnishes a lot of attention from business managers and owners. As a result, these activities are often the focus of process improvement and cost saving initiatives in many companies.

Physical Distribution Drawing

Importance of Physical Distribution

The importance of physical distribution to a company can vary, and is typically associated with the type of product and the necessity it has to customer satisfaction. Strategically staging products in locations to support order shipments and generating a rapid and consistent manner to move the product enables companies to be successful in dynamic markets.

Physical distribution is managed with a systems approach and considers key interrelated functions to provide efficient movement of products. The functions are interrelated because any time a decision is made in one area it has an effect on the others. For example, a business that is providing custom handbags would consider shipping finished products via air freight versus rail or truck in order to expedite shipment time. This importance of this decision would offset the cost of inventory control which could be much more costly. Managing physical distribution from a systems approach can provide benefit in controlling costs and meeting customer service demands.

Function of Physical Distribution Systems

The key function within the physical distribution system are:

  • Customer service
  • Order processing
  • Inventory control
  • Transportation and logistics
  • Packaging and materials

Function of Physical Distribution System

Customer Service

The customer service function is a strategically designed standard for consumer satisfaction which the business intends to provide its customers. As an example, a customer satisfaction approach for the handbag business mentioned above may be that 75% of all custom handbags are delivered to the customer within 72 hours of ordering. An additional approach might include that 95% of custom handbags be delivered to the customer within 96 hours of purchase. Once these customer service standards are set, the physical distribution system is then designed to attain these goals.

Order Processing

Order processing is designed to take the customer orders and execute the specifics the customer has purchased. The business is concerned with this function because it directly relates to how the customer is serviced and attaining the customer service goals. If the order processing system is efficient, then the business can avoid other costs in other functions, such as transportation or inventory control. For example, if the handbag business has an error in the processing of a customer order, the business has to turn to premium transportation modes such as next day air or overnight to meet the customer service standard set out, which will increase the transportation cost.

Inventory Control

Inventory control is a major role player in the distribution system of a business. Costs consider investment into current inventory, loss of demand for products, and depreciation. There have been inventory control systems implemented such as first in-first out (FIFO) and flow through, which are methods for businesses to handle products.

First in-first out, or FIFO, is a method in which the new products coming into the warehouse replace existing products of the same SKU so that merchandise is cycled and does not expire or become old as more recent production is available. Flow through, on the other hand, is product that does not get processed in the warehouse. It is off loaded from an inbound trailer, pushed across the warehouse and onto outbound trailers for departure without being stored in the warehouse.

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