Physical distribution costs account for a large proportion of total distribution costs and total sales of the enterprise. Therefore, marketing managers are very interested in total distribution costs, trying to find savings. Basic physical distribution costs include transportation costs, warehousing, inventory maintenance, loading and unloading, delivery, packaging, administrative costs and order processing costs. Physical distribution is a potential tool to create demand. Thanks to a good physical distribution system, costs can be reduced and thereby reduce prices to attract more customers. On the contrary, the company will lose customers if it does not ensure timely supply. Enterprises need to exploit their potential and coordinate decisions on inventory levels, transportation methods, factory locations, warehouses and stores to reduce distribution costs.
The physical distribution goal of a company is usually to provide the right product, in the right quantity, and in the right quality, to the right place, at the right time, at the lowest possible cost. However, it is impossible to achieve all of these goals at the same time. This is because no physical distribution system can simultaneously maximize customer service and minimize distribution costs. Maximizing customer service means larger inventories, fast shipping, more warehouses, and so on. All of these things will increase costs. And minimizing costs means cheap transportation, low inventories, and less warehouses, which will not result in good customer service.
Thus, distribution objectives vary greatly between companies, products, and specific market situations. These objectives can be quantified by companies to some extent.
4.1. Order processing
The physical distribution of products begins with a customer order. Today, businesses are trying to shorten the order-to-cash cycle, that is, the time between placing an order and receiving payment. This cycle includes many steps, including sales staff transferring the order, registering the order and reconciling customer accounts, planning inventory and production schedules, shipping and billing, and receiving payment. The longer this cycle takes, the lower the customer satisfaction and the company's profitability. The optimal reorder quantity can be determined by considering the total cost of processing orders and carrying inventory at different order levels.
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4.2. Warehouse decisions
Every business must store and preserve goods while they are waiting to be sold. Product storage is necessary because production and consumption cycles rarely coincide. Many agricultural products are produced seasonally, but demand is constant. Storage helps to overcome variations in quantity and timing of desired products.
A company must decide on the number and size of storage locations it needs. Having more storage locations means getting products to customers faster. However, it increases storage costs. The number of storage locations must strike a balance between customer service levels and distribution costs.
4.3. Decision on the volume of goods in stock
Inventory levels are an important physical distribution decision that affects customer satisfaction. Salespeople want their businesses to always have enough inventory to fill customer orders immediately. However, it is cost inefficient to have too much inventory. Inventory costs increase at a rapid rate as customer service levels approach 100%.
Making inventory decisions requires knowing when and how much to order. As inventory levels decrease, management needs to know how low they must be before ordering more. This inventory level is called the reorder or (re-order) point. An order point of 50 means that reordering must occur when inventory reaches 50 units. The order point should be higher if lead times are longer, usage rates are higher, and service standards are higher. If lead times and customer consumption rates change, a higher order point must be determined to ensure safety stocks. The final order point must balance the risk of running out of inventory with the cost of over-stocking.
Another inventory decision is how much to order. The larger the order, the fewer the orders. A company must balance the costs of processing orders and the costs of holding inventory. The costs of processing orders include the setup costs and the overhead costs of the item. If setup costs are low, the manufacturer can produce the item frequently and the cost of the item is stable and equal to the overhead costs. If setup costs are high, the manufacturer can reduce the average cost per unit by producing and holding inventory for longer periods.
Order processing costs must be compared with inventory costs. The higher the average inventory level, the higher the inventory costs. These inventory costs include warehousing costs, capital expenditures, taxes and insurance, depreciation, and obsolescence. Inventory costs can be as high as 30 percent of the value of inventory. This means that marketing managers who want their companies to stock more inventory must demonstrate that the increased gross profit from higher inventory levels outweighs the increased inventory costs. The optimal order quantity is determined as follows:
Expense
Average unit cost of product
Average unit storage cost
Unit order processing cost
Q Quantity
Figure 6.5: Determining the optimal order
More and more companies are moving from anticipatory supply networks to on-demand supply networks. The former involves companies that produce in volume based on sales forecasts. Companies create and store inventory at various supply points, such as factories, distribution markets, and retail stores. Each supply point automatically reorders when it reaches its order point. If sales are slower than expected, companies seek to reduce inventory by sponsoring deals and promotions.
On-demand supply networks are customer-driven, with some production continuing and some inventory held as orders come in. Japanese automakers, for example, take orders for cars, produce them, and ship them within four days. Benetton, an Italian fashion house, operates a quick-response system, dyeing its sweaters in colors that are selling fast rather than trying to predict what colors the public will like. Manufacturing to order rather than to forecasts greatly reduces inventory costs and risk.
4.4. Transport decisions
Marketers need to be concerned with the decisions a company makes about transporting its products. The choice of transportation method will affect the pricing of the product, the assurance of on-time delivery, and the condition of the product upon arrival, all of which will influence customer satisfaction.
In transporting goods to their warehouses, to agents and to customers, businesses can choose from five means of transport: rail, water,
road, pipeline and air. Shippers must consider criteria such as speed, frequency, reliability, capacity, availability, product characteristics and cost to select the appropriate mode of transport, whether private or chartered. For example, if the goal is to minimize costs, a choice must be made between water and rail. Businesses are also increasingly looking to combine two or more modes of transport and use container transport. Businesses may also build their own fleets or hire public transport companies.
- Railway transport is often low cost, suitable for goods with large weight, large transport volume and long transport distance.
- Water transport also has low transportation costs, suitable for bulky, perishable, low-value goods such as sand, coal, etc. However, water transport is slow and affected by weather.
- Road transport is highly mobile, suitable for expensive shipments with short transport distances.
- Air transport is the fastest, but has high costs, suitable for perishable, compact and valuable items.
- Pipeline transport is fast, expensive but only suitable for special goods such as water and gas.
In general, transportation decisions must consider many factors between the modes and their relationship to other distribution factors such as warehousing or storage.
REVIEW QUESTIONS
Sentence 1
What does the use of distribution intermediaries mean for businesses?
Sentence 2
Describe the functions of a distribution channel. Which function do you think is the most important? Why?
Sentence 3
Give specific examples of distribution channels. Which types of products and services usually have to go through many intermediary levels, and which types have the shortest intermediary levels possible?
Sentence 4
Compare the advantages and disadvantages of the major forms of distribution.
Sentence 5
Describe the structure of flows in the distribution channel.
Sentence 6
Describe the basic decisions in the distribution of physical goods.
Sentence 7
Present the bases for selecting members in the distribution channel. Give illustrative examples.
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Question 8: Choose the 1 most correct answer
1. Which of the following decisions is not one of the basic product decisions that retailers make?
a. About product types
b. About service structure
c. About the atmosphere (how the goods are displayed)
d. About the target market
2. Moc Chau Milk Company brings its products to stores, then these stores sell their products to consumers. Moc Chau Milk Company organizes a marketing channel system:
a. Direct
b. One level
c. Two levels
d. Three levels
e. None of the above
3. Which of the following definitions is correct for a wholesaler in a distribution channel?
a. Is an intermediary performing distribution functions in the industrial market
b. Is an intermediary with the legal authority to act on behalf of the manufacturer
c. Act as an intermediary selling goods and services to other intermediaries
d. Is an intermediary that sells goods directly to final consumers.
4. Viet Ha Beer Company sells its beer products through retail stores throughout the North and the company's goal is to have as many retail outlets as possible. This method of distribution is called:
a. Selective distribution
b. Wide distribution
c. Exclusive distribution to retail stores
d. Two-level channel distribution
5. Channel conflicts:
a. Includes vertical and horizontal conflicts
b. May reduce channel effectiveness
c. Can increase channel efficiency
d. a and b
e. All of the above
6. Manufacturers use distribution intermediaries for all of the following reasons except:
a. Manufacturers often do not have enough financial resources to perform both distribution functions.
b. Manufacturers realize the efficiency of specialization.
c. Manufacturers do not want to get involved in product distribution
d. None of the above is correct.
7. A distribution channel is called a long channel if:
a. There are many marketing intermediaries
b. There are a large number of intermediaries at each level of the distribution channel.
c. There are many intermediate levels in the channel.
d. All are correct
8. Distribution channel:
a. Is a set of organizations and individuals involved in the flow of goods from producers to their customers.
b. There must be at least one intermediate level
c. Must involve logistics companies
d. All are correct
9. Which of the following statements about the retail industry is incorrect?
a. Retail is the sale of goods to the final consumer.
b. Retail is a big industry.
c. Manufacturers and wholesalers cannot directly retail.
d. Retailing can be done through salespeople, mail order, telephone and door-to-door sales.
10. The sale of goods to individuals and businesses for resale or business use is called:
a. Retail
b. Wholesale
c. Joint venture
d. Production
Question 9: Choose the correct answer, incorrect answer and explain.
1. Distribution decisions have longer-term effects and are more difficult than product, price, and promotion decisions.
2. Different product types require different distribution decisions, specifically using different numbers of intermediaries in a different geographic market area.
3. Every business should try to sell its products through the retail system in the market.
4. Distribution decisions can give a business a competitive advantage because they are difficult for other businesses to follow.
5. The main functions of commercial intermediaries are transportation and storage.
6. Indirect distribution ensures that new products are quickly accepted by all markets.
Question 10: Situational exercise
Colgate palmolive (Colgate) toothpaste market share worldwide is 45%, Unilever 9%, P&G 15%... In the Vietnamese market, Unilever and Colgate account for nearly 90% of the market share, but Unilever leads with a market share of over 65%, far surpassing Colgate's 25%, P&G with the completely obscure Crest brand.
In a market that is almost completely dominated by Unilever and Colgate, hundreds of domestic and foreign brands struggle to share a meager 10% market share.
Colgate stumbles, Unilever benefits
Entering the market at the same time, with the same strategy of acquiring domestic enterprises, but miscalculating the strategy, Colgate had to give up almost all of its market share to Unilever.
To enter the Vietnamese toothpaste market as quickly as possible, both Unilever and Colgate Palmolive chose the strategy of "buying brands" from domestic companies. Unilever bought P/S and Colgate bought Da Lan. The biggest gain from this deal is that both Unilever and Colgate did not spend too much time and money but still took over 60% of P/S's market share and 30% of Da Lan's market share.
Colgate's calculation in choosing to buy Da Lan was only aimed at eliminating a heavyweight competitor in the market, easily penetrating Vietnam with a relatively cheap cost and the fastest.
Therefore, after owning Da Lan, Colgate did not use this brand because it thought it would be difficult to develop it on a global or regional scale. Moreover, Vietnamese consumers prefer foreign goods and the trend of using foreign goods will increase when the door to integration opens.
But the reality is contrary to this calculation. According to Mr. Trinh Thanh Nhon, General Director of International Cosmetics and Chemicals Company (ICC), who is also the owner of the Da Lan toothpaste brand sold to Colgate:
"Before 1995, the toothpaste market had only two brands with the largest market share, P/S and Da Lan. Unilever's advantage was to immediately take advantage of the strength of the P/S brand, which already had market share and was familiar to consumers, to continue developing the market. Meanwhile, Colgate made the mistake of completely eliminating the Da Lan brand to focus only on developing Colgate."
According to many market experts, if comparing advantages, Colgate has the advantage of experience and brand depth over Unilever. Unilever has only been in operation for about 80 years (less than half of Colgate's time of operation) and is only present in more than 100 countries, Colgate's products are the market leader in 223 countries and territories around the world with annual revenue of 13.8 billion USD.
This advantage, combined with the early entry into the Vietnamese market and continued development of Da Lan in parallel with Colgate, makes it very likely that Colgate's market share will increase even more than it is now. In fact, after eliminating Da Lan, Colgate launched a replacement product line called "Colgate Super Firm" but it was not received as expected.
On the contrary, at the exact time when Da Lan's 30% market share was vacant, Unilever quickly took over a number of loyal Da Lan customers because P/S was also a close and familiar brand in the market.
Also because of this mistake, over the past 15 years, despite efforts to increase advertising costs, launch many new product lines, have a more systematic branding strategy, and reasonable prices, Colgate still finds it difficult to shorten the market share gap with Unilever and has even less chance to change the market share balance.
Meanwhile, the market is increasingly seeing more foreign brands entering with ambitions to not only gain 15% of the domestic market share but also move towards sharing market share with Colgate.
Many opinions say that in the near future, the "ocean" that Colgate is struggling in will be "dyed red" and Colgate will have to endure more pressure to defend the 25% market share it owns.