Distribution costs and service levels

Once you have decided on the distribution channels, the next step would be to design and operate a physical distribution system that will deliver products and services effectively and efficiently.

Physical distribution or marketing logistics starts by asking how customers want to receive the product and then work backwards to the design of materials, final goods, inventory scheduling, transportation, warehousing and customer service to meet those needs.

There are five key determinants of distribution costs and service levels.

1. Customer service

Identify what customers want and estimate the benefits and costs of meeting these wants. Remember that the higher the service level the more it cost.

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Availability - meet needs from existing stock.
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Speed of delivery - customers will pay more for expeditious delivery.
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Reliability - customers need to be informed of delivery and their expectation is met.
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Lot size - number of units that customers are permitted to buy in one single purchase occasion, small lot sizes adds to the cost.
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Product variety - greater range for more convenience and choice for the customer.
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Convenience - more till points and outlets.
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Service and support - financial support, installation, maintenance and after sales service.

2 Communications and order processing

The re-engineering of order processing and internal communications is offering companies major sources of competitive advantage and cost savings.

Modern computer systems can offer major opportunities in this area such as SAPS.

3. Production and warehousing location decisions

The key determinant of stock availability is the number and locations of production facilities and warehouses. How much do you need to make? The decision on the number and location of such facilities is a complex one and computer based mathematical models are used to solve these problems. Coca-Cola has perfected this area of marketing.

4. Inventory management and control

Keeping high levels of stock is expensive but always satisfies the customer, while a low stock is cheaper but with the chance of the customer not being satisfied and going to your competitor. Therefore you need to find a good balance between customer service and the cost of carrying additional stock.

Inventory focuses on how much to order and when to re-order. You can use just-in-time that works well in manufacturing where parts are delivered to the production line before they run out. Work to your bottlenecks in production and therefore cutting down in material costs in other departments. The other way to calculate the right balance is by using an economic order quantity system.

5. Transportation management

This is the largest cost element in physical distribution. The choice of transport is, therefore, the principal determinant. You need to identify criteria such as speed, service, frequency, reliability and cost. The other consideration should be, the cost of having you own fleet or using a professional consolidated transport company