Physical distribution managers try to minimize the costs of each element in the physical distribution system viz, order processing, material, handling, inventory, warehousing, and transportation – decreasing costs in one area often raise them in another.
Therefore, by using a total cost approach to physical distribution, managers can view the distribution system as a whole, not a collection of unrelated activities.
The emphasis shifts from lowering the separate costs of individuals’ function to minimizing the total cost of the entire distribution system.
Ways for Cost Reduction of Physical Distribution
Opportunities for cost reduction in physical distribution operations can usually be found in one or more of the following type of improvements:
1. Simplification of the System
Physical distribution is primarily the movement and storage of goods.
Therefore, a more streamlined physical distribution system can lower the cost of distribution operations.
For example, the physical distribution system can be simplified by eliminating a field warehouse by supplying customers in the local market direct from the manufacturing source.
By this, one complete filed handling operation gets eliminated from the system.
2. Reduction in Inventories
It is possible to reduce inventories often by consolidating them at fewer locations, centralizing the storage of slow-moving items, or by reducing the stock replenishment cycle for filed warehouses.
By reducing inventories the carrying costs can be minimized and the resulting free capital can be used for other purposes int the business.
3. Improvements in Packaging
4. More Efficient Methods and Procedures
While it is important to eliminate cost through simplification of the distribution system, it is also important to ensure that maximum eff leniency is achieved from whatever system is being used.
This refers to the selection and use of the most efficient materials handing procedures and equipment, warehouses layout and utilization of warehouse space, warehousing and shipping methods and order processing procedures, and the considerations of alternative modes of transportation and various types of transportation equipment.
5. Use of Technological Innovations
Technological innovations such as containerization, high-speed computers and communication equipment, air freight, new and more automatic materials handling equipment, trucks suitable for both over the road and local delivery service, etc., improve the efficiency of distribution and reduce distribution costs.
6. Revised Channel of Distribution
Depending upon the company’s volume, its sales objectives, and policies, and the nature of its markets, it may be possible to reduce the distribution costs considerably by revising the channels of distribution being used.
It is assumed that this can be accomplished without affecting marketing effectiveness.
7. Studying the System for Improvements Opportunities
The entire distribution process is completely reviewed from vendors through company operations to and through customer distribution operations.
Such total cost analysis will avoid limited improvement due to suboptimization.
Such a complete review of the entire distribution system involves four steps. They are:
- Analyzing customer demand patterns.
- Delineating present distribution methods, costs, and volumes.
- Developing a representative range of alternative methods and systems and
- Evaluating alternatives and selecting the optimum plan.
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