37 Place Decision

Rajwant Kaur

1. Learning Outcome:

After completing this module, the students will be able to:

Understand the concept of distribution and physical distribution
Explain demand-oriented functions of distribution
Identify the major decision areas in physical distribution management
Understand role of physical distribution

2. Introduction

Place (Distribution) decision is of vital importance in marketing management. Marketing objectives cannot be achieved unless manufactured goods are transferred to ultimate consumers. It is important to decide how this movement of goods will take place. Place decision involves determining the right place (transportation), right time (warehousing) and right person (channel member) to ensure smooth flow of goods.

3. Meaning

Distribution means using external and/or internal sources for effective movement of goods and services and performing various activities like transport, warehousing, storage, inventory management, packaging to achieve marketing goals of the firm. Effective distribution creates time, place and possession utilities in products and delivers high level of customer satisfaction at less cost.

4. Distribution functions

Distribution functions have twin objectives i.e. extending market base and ensuring smooth flow of goods. Therefore, these functions can be categorized as demand-oriented functions and supply oriented functions. Demand-oriented functions refer to primary operations of distribution channels whereas supply-oriented functions refer to physical product movement with a view to ensure quick, economic and safe transfer of goods to buyers.

4.1 Demand oriented functions

4.1.1. Direct selling (Channelless Retailing)

Direct selling means transferring the title to goods and their possession directly to the buyer. It aims at serving the customers without engaging any middleman. Under direct selling, various means of promotion are used to induce customers. Advertising is used to create awareness and interest. Personal selling is required to convince the prospect and secure sale. Sales promotion is employed for impulse buying.

In direct selling/ direct marketing, customer contact is made at locations other than a retail outlet through sales force, by telephone, T.V., newspapers, magazines, post or home computer. Thus, a direct link is created between the marketer and prospect or customer. There are various means of direct selling which are as follows:

(i) Mail order Sale

(ii) Door to door selling

(iii) Telephone shopping or teleshopping

(iv) Automatic vending machines

(v) Manufacturer’s showrooms

(v) Factory Outlets

Advantages of Direct Selling

Goods are sold effectively to the selected target markets.
Free home delivery provides convenience to customers.
It is economical when large number of orders is received simultaneously.
It requires less capital investment.
Manufacturing process is not disturbed as direct selling is taken as side activity.

Disadvantages of Direct Selling

Mail order or teleshopping does not offer prior purchase inspection.
Door to door selling is costly.
Sometimes customers have more faith on retailers and they do not prefer new direct marketers.

4.1.2. Wholesaling

It means selling the product through wholesaler. Wholesaler as merchant middleman buys goods from manufacturers in bulk quantity and sells them to retailers or buyers in relatively small lots. Wholesaler as agent middleman does not take title to goods. He only facilitates the exchange process and charges commission for his services. He is an important link in distribution chain and performs various functions:

(a) He collects orders and executes them. Manufacturers are able to concentrate on production as distribution work is assumed by wholesaler.

(b) Wholesaler provides expert advice to manufacturer on market trends or public tastes. Manufacturer can regulate his production activity accordingly.

(d) Retailers get quick delivery of products due to wholesalers.

(e) Retailers are not required to maintain large stock.

(f) Wholesaler grants liberal credit to retailers.

(g) Wholesaler informs retailers about new product arrivals.

4.1.3. Retailing

It refers to selling goods through retailers who buy goods from wholesaler in small quantity and sell them to customers in much smaller lots. Big retailers buy directly from manufacturers. Retailer is also an important link in distribution chain. He deals directly with consumers and collects information about their needs which is helpful to producers.

The retailers provide valuable services to wholesalers, manufacturers and consumers. They provide maximum local convenience to consumers. Consumers are not required to store goods beyond a normal requirement. Retailers provide them these goods as per their need and sometimes on credit too. Retailer develops better relations with customers as they are in his direct contact. Retailers inform manufacturers about customers’ needs.

In the chain of distribution, there are certain other agencies who facilitate exchange process like banks , insurance companies and advertising agencies. Producers are able to expand their market through the invaluable services provided by channels of distribution.

4.2. Supply oriented functions

These functions are termed as physical distribution function of marketing which focuses on supply side of market.

4.2.1. Meaning of physical distribution

It means facilitating the physical movement of goods from producer to user by performing intervening activities like order processing, inventory management, warehousing, packaging, product handling and transportation. Physical distribution system ensures the smooth flow of goods and creates place and time utilities in goods. It tries to serve customer through better service without compromising the minimum distribution cost objective of management.

4.2.2 Objectives of Physical distribution

Physical distribution function is carried out to achieve the following objectives:

The physical distribution aims at providing right quality of goods, at right time in right condition and at right cost.
It strives to make balance between two objectives i.e. minimum distribution cost and better customer service.
Physical distribution system focuses on maintaining sufficient supplies of spares so that replacement can be made quickly.
It aims at establishing an effective control system for distribution operations so as to provide desired service level to the customers.
It aims at keeping investments in stock at optimum level.
Physical distribution system focuses on ensuring safe storage and good warehousing facilities.

4.2.3 Functions of physical distribution

The physical movement of goods requires certain activities for smooth flow of goods from producer to ultimate user. Obviously, it involves decision making on the part of management regarding these activities.

Physical distribution management involves integration of decisions in following areas:

(i) Establishing a procedure for order processing

(ii) Maintaining effective inventory control system

(iii) Selecting a good warehousing system

(iv) Establishing product handling system

(v) Choosing an appropriate mode of transport

The various functions or decision areas covered under physical distribution have been explained as follows:

Order Processing : Order processing refers to receiving, recording and assembling the products for dispatch. It is necessary that the time gap between receipt of order and dispatch of order is kept reasonable and short as far as possible. Order cycle time should be minimum. Now a days, computers are used to speed up order handling. Before dispatch of order, quality and quantity of product should be ensured for proper execution of order. Quality control must be exercised and other requirements should be fulfilled to ensure better customer service. An organisation should follow standard procedure while handling orders which may also relate to invoicing, collection of accounts and grant of credit. Order processing procedure affects customer service level in two ways viz. (i) consistency of delivery time and (ii) reorder time. i.e. the time gap between two orders. However customer service of firm is greatly evaluated in terms of consistency of delivery time i.e. assured delivery within promised time.

A firm incurs customer’s wrath for delay in execution of order or omissions and errors in order of goods delivered. Customers tend to shift their orders to suppliers who can offer better order processing services. So, firms must go for electronic data processing as it expedites order processing and reduces the possibility of errors or omissions in dispatch of goods. Order processing time can act as competitive advantage for the business unit as customer is mainly interested in safe, quick, punctual and reliable delivery services. Proper feedback or routine enquiries from dispatch staff by manager will bring efficiency in the system. It will make order processing smooth, quick and effective. A firm can assess quality of its customer service on the basis of speed of delivering orders or percentage of customers getting order in scheduled time.

Inventory Management : Inventory management has assumed great significance in physical distribution system and acts as a powerful tool in the process of creation and satisfaction of customer demand. It aims at reconciliation of two conflicting goals of the management i.e. (i) to offer better customer service by strictly dispatching orders as per scheduled delivery dates and (ii) to minimize capital investment and cost of handling inventory. Hence, managerial decisions regarding location, size, handling and transportation of inventories are of vital importance.

Inventories mean stock of goods held in anticipation of sales. These are kept to meet the customer’s demand quickly. Huge inventories help in better customer service but increase inventory cost. Marketers should balance this added cost against expected profit from additional sales as a result of convenience in product availability.

Inventory act as a link between customer’s orders and company’s production activity. There is a need to maintain an adequate inventory level which calls for effective inventory management. The size of inventory is determined by keeping in mind market demand and inventory cost. However, the optimum size is also decided by considering responsiveness of distribution system and desired level of customer service. The firm should determine maximum stock level and minimum stock level. Maximum stock level will help in meeting sudden rise in demand whereas minimum stock level will point out the need to replenish the stock and avoid in running out of stock position. Hence, inventory control should be exercised to avoid (i) out of stock position and (ii) piling up a large undesired stock.

For this, there will be need for inventory surveillance to reduce inventory costs and improve service level. A constant watch on inventory movement will ensure that inventory level conforms to pre-determined levels. Moreover selective inventory control like ABC analysis can be exercised by dividing products carried out in the stock on the basis of their relative values. Product of high value should be placed in category ‘A’ and of low value in category ‘C’. Products of moderate value should be placed in category ‘B’. Inventory of product ‘A’ should be kept minimum and more stringent control should be exercised for products under this category. In addition to these measures, an effective information system should be developed for getting periodic information about stock level and variance of stock from desired level.

Warehousing : Warehousing has unique significance in distribution system. Production and consumption usually do not take place simultaneously. Storage of goods helps in even out the fluctuations in demand and supply of goods. Firms have to store the goods and provide them as per demand. Warehousing involves storage of goods as well as carrying out certain functions like breaking bulk, regulating the flow of goods to wholesalers or retailers, providing market intelligence and dispatch of small consignments.

Warehousing creates time utility in goods and stabilizes prices by regulating supplies as per changing market demand. Goods are stored in warehouses till they are demanded. There are private warehouses which are owned by the users as well as public warehouses which are owned and controlled by others. Public warehouses charge commission or fee for providing storage space and performing warehousing functions.

Each firm requires a certain number of warehouses to provide desired level of customer service. However, it has to keep in mind that physical distribution cost does not raise beyond a limit.

Now a days, a full service warehouse called as distribution centre is becoming popular. Distribution centre serves a regional market. It makes use of computer and latest sophisticated material handling equipments for processing, material handling and inventory control. A distribution centre emphasizes movement of goods to customers rather than their storage only. Goods are transferred directly from factory to the distribution centre and not to storage warehouse. The major functions of distribution centre include consolidation of large consignments and regrouping products as per customer’s orders.

A firm can establish one distribution centre in one region where market for its goods exists. It will facilitate order taking, order filling and delivery of goods directly to the customers through an integrated system. The centralized accounting system will help in quick dispatching of invoices and ensuring earlier payments.

The distribution centre remarkably improves the customer services by ensuring prompt delivery of goods. It also minimizes distribution cost. Firms, which are opting for distribution centre, can have a less number of warehouses, no huge inventories and no out of stock position. This system, thus, reduces storage and delivery time. The customer is benefited through just in time availability of goods.

Packing and product handling: Goods may get damaged during transportation or they may be damaged in warehouses. Goods are packed in suitable containers so as to protect them from leakage, spoilage or breakage. Packing means to wrap on fill goods with the purpose of their protection and convenient handling. It will also increase their durability.

Package means wrapper, container or case which is used for packing goods. It gives identity to the product. Packaging refers to putting goods in convenient sized lots like bottles, jars, cans, bags etc. Marketers should try to invent attractive packages. It will help in making goods familiar with consumers. Packaging facilitates branding and advertising of goods. It is helpful in creation of demand. As brand name is attractively and clearly printed on the package and product features are also given, the consumer becomes familiar with the package of goods. Packaging also provides protection to goods against damage. It is important to mention here that packaged goods need careful handling during transportation otherwise they may lose their worth.

Product handling can be manual or mechanical. Now, automated product handling devices are available and marketers should use these modern devices. New techniques of packaging like containerization lead to considerable cost reduction. Containerization means packing and transporting of good in standard sized containers. These containers can be placed on small platforms which can be removed easily by using mechanical devices. Product handling devices and packaging facilities have appreciably speeded up the order processing as well as movement of consignments. The sophisticated product handling devices and protective packaging have led to better customer service and lower physical distribution costs.

The product handling decisions of a firm i.e. to use manual handling or mechanized handling are affected by (i) nature of product like fragile products which need to be moved by mechanical methods for safety (ii) fund availability (iii) operational cost involved as it will be high for mechanized methods if volume of product movement is not sufficient, and (iv) plant layout

Management should assess the relative merits and demerits of both methods and make choice of method or combination of method. However, company’s product handling needs should primarily be assessed.

Transportation : Warehousing and transportation constitute major activities in whole distribution system. Physical distribution involves storage of goods at different places which are interconnected by transport links. Goods need to be transported from the place of supply to the place of demand . This consumes time and cost. Product handling cost can be reduced by reducing the number of times goods are handled and also by shortening the time for each handling during transportation.

There are various means of transport like waterways, roadways, railways, airplanes & pipelines. Decisions regarding means of transport are primarily related to size and nature of inventory as well as location of warehouse. Apart from this, certain other factors are also worth considering such as speed, availability, frequency of services, operational cost, dependability and safety. Road transport offers higher frequency, greater flexibility and unlimited geographical reach. It is suitable for short distances. Railways provide frequency and reliability. These are suitable for carrying heavy goods but provide limited geographical reach. These can be used for transporting goods at longer distances. Water transport provides versatility as it can handle cargo of any dimension or shape. It is cheaper than air transport but it is slow means of transport. Air transport is the fastest. It can be used for transporting goods which are costly or perishable in nature.

Management should take into account all factors as discussed above while making choice of mode. It is preferable to assign weight to different factors to facilitate selection of mode.

4.2.4 Factors affecting physical distribution system

Physical distribution system varies from company to company or within the company from time to time. There are numerous factors which influence this system. Some of them are described briefly as under:

Liquidity Position of Company : Physical distribution is affected by a company/firm’s liquidity position. A firm which is facing cash crunch will opt for holding low level of inventory and faster transportation. Shortage of funds may also necessitate firm to opt for centralized dispatching. Such firms may also opt for less sophisticated material handling system.
Size of market : Market size influences physical distribution system. Distribution facilities tend to be focused in markets with high consumer density. Similarly distribution facilities are dispersed when there is large but scattered market.
Product : The choice of physical distribution is also governed by product. Highly perishable goods require to be dispatched quickly to the markets but it may involve high transportation cost. There is lot of transportation and handling concerns of perishable and fragile products.

Further, product cost may influence inventory decisions. Low inventory is usually preferred for high value products. However, large inventory can be kept for goods of small value. Product line also influences inventory decisions. Wide range of products is difficult to handle in warehouse.

Distribution Channels : Physical distribution decisions are influenced by distribution channels used by the company. Direct selling will lead to larger inventory, small order handling and decentralized warehousing. However, a company will have distribution cost economies when it uses services of wholesalers. It can avail advantages of bulk deliveries, low inventory and less warehousing.
Availability of facilities : Facilities also govern the decision regarding physical distribution system. Sometimes handling equipment, mode of transport and space of warehouse are not available in desired shape, at desired time and in desired size. The company may have to compromise on these facilities.

4.2.5. Role of Physical Distribution

An effective physical distribution of goods contributes significantly towards achievement of marketing as well as corporate goals. Physical distribution has assumed great significance as a component of marketing mix. Various contributions of physical distribution are discussed as below.

It serves customers by effective warehousing operations. Goods are sold to them as easily acceptable assortments.
A systematic planning of inventory, warehousing activities, material handling and transportation leads to reduction in distribution cost.
It helps firm to avoid out of stock position through proper inventory control.
It is possible to increase market share by decentralising warehousing activities and using efficient means of transportation to cover distant areas.
A firm can regulate the flow of goods in the market through judicious use of transport facilities and warehouse operations. It will restrict price fluctuations which may arise due to gap between demand and supply of products and thus, will stabilize prices.
Warehousing creates time utility in goods as goods are stored and demand is fulfilled at right time.
Transportation provides goods as and where needed, so it creates place utility.

Physical distribution system involves a network of activities like order processing, inventory management, storage, material handling and transport. These activities are undertaken by the company with an aim to serve its customer in most effective manner. But, this increases the cost associated with these tasks. Effective distribution management can assure a competitive edge in terms of better customer services level and lower distribution cost. It is, therefore, necessary that marketers should follow the idea of cost trade-offs and avoidance of sub optimization of costs.

5. Summary

Place (Distribution) decision involves determining the right place (transportation), right time(warehousing) and right person (channel member)to ensure smooth flow of goods. Hence, understanding of distribution function is necessary.

Demand oriented functions are carried out to reach the consumers and fulfil their demand. These functions aim at transferring the title of ownership of goods through direct selling, wholesaling or retailing. Supply oriented functions are termed as physical distribution function of marketing which focuses on supply side of market. Physical distribution means facilitating the physical movement of goods from producer to user by performing intervening activities like order processing, inventory management, warehousing, packaging, product handling and transportation. An effective physical distribution system ensures the smooth flow of goods at minimum distribution cost.

Physical distribution system varies from company to company or within the company from time to time. There are numerous factors which influence this system such as liquidity position of company, size of market , product , distribution channels and availability of facilities.

It is important to remember that physical distribution activities are undertaken by the company with an aim to serve its customer in most effective manner. But this increases the cost associated with these tasks. Effective distribution management can assure a competitive edge in terms of better customer service level and lower distribution cost. It is, therefore, necessary that marketers should follow the idea of cost trade-offs and avoid sub optimization of costs.

Learn More

Few important sources to learn more about place decision:

Baker,J.Michael (2000). Marketing Strategy and Management, Macmillan Press Ltd., London
Bose,S. Biplab (2010) Marketing Management, Himalaya Publishing House, Mumbai.
Cannon, Tom. Basic Marketing: Principles and Practice, 3rd Edition, A.I.T.B.S. Publishers, Delhi.
Gandhi,C J (1998). Marketing- A Managerial Introduction, Tata McGraw Hill, New Delhi
Havaldar and Cavale (2011). Sales and Distribution Management: Text and Cases, 2nd Edition, Tata McGraw Hill Education Private Limited, New Delhi.
Jha & Singh (1998) Marketing Management in Indian Perspective, Himalaya Publishing House, Mumbai.
Kotler, Philip (2002). Framework for Marketing Management, Pearson Education (Singapore) Pte. Ltd., Indian Branch, Delhi.
Still, Cundiff and Govoni. Sales Management: Decisions, Strategies and Cases, 5th Edition, Prentice Hall of India Private Limited, New Delhi.

Points to Ponder

Place (Distribution) decision involves determining the right place (transportation), right time(warehousing) and right person (channel member)to ensure smooth flow of goods.
Demand-oriented distribution functions refer to primary operations of distribution channels.
Supply-oriented distribution functions refer to physical product movement with a view to ensure quick, economic and safe transfer of goods to buyers.
Effective distribution creates time, place and possession utilities in products and delivers high level of customer satisfaction at less cost.