9. Physical Distribution


In a Manufacturing Organization, material flow can broadly be classified into three phases as shown in above figure
• Flow of raw material from a supplier to the manufacturing company through Physical Supply
• Flow of material as they are processed, within a manufacturing company through the Manufacturing Planning and Control System
• Flow of finished goods from the manufacturing company to the end customers through Physical Distribution

The particular path in which the goods move (through distribution centers, wholesalers and retailers) is called the channel of distribution.

A "distribution channel" can be defined as
"all the organisations through which a product must pass between its point of production and consumption"

The specific way in which materials move depends upon many factors. For example:
- The channels of distribution that the firm is using;
- The types of markets served. Market characteristics such as the geographic dispersion of the market, the numbers of customers and the size of orders;
- The characteristics of the product;
- The type of transportation available to move the material.
All are closely related.

Distribution Channel Levels

The Producer and Consumer are part of every channel. The movement of goods through channels of distribution can be classified into channel levels as shown in the figure Zero Level Channel (also called direct distribution) consists of a producer sending the goods directly to the consumer.
One Level Channel contains one intermediary between the producer and the consumer
Two Level Channel contains two intermediaries...and so on.

In the figure above, Channel 0 is called a "direct-marketing" channel, since it has no intermediary levels. In this case the manufacturer sells directly to customers. An example of a direct marketing channel would be a factory outlet store. Many holiday companies also market direct to consumers, bypassing a traditional retail intermediary - the travel agent.
The remaining channels are "indirect-marketing channels".

Functions of a Distribution Channel
The main function of a distribution channel is to provide a link between production and consumption. Organisations that form any particular distribution channel perform many key functions:

Information Gathering and distributing market research and intelligence - important for marketing planning
Promotion Developing and spreading communications about offers
Contact Finding and communicating with prospective buyers
Matching Adjusting the offer to fit a buyer's needs, including grading, assembling and packaging
Negotiation Reaching agreement on price and other terms of the offer
Physical distribution Transporting and storing goods
Financing Acquiring and using funds to cover the costs of the distribution channel
Risk taking Assuming some commercial risks by operating the channel (e.g. holding stock) 

All of the above functions need to be undertaken in any market. The question is - who performs them and how many levels there need to be in the distribution channel in order to make it cost effective.
 

Types of Markets Served
The types of market exposure strategies and the desired customer service levels make up the types of markets served.
An Intensively Distributed Market aims at maximizing the product availability in the market by establishing the maximum number of channel distribution points. This strategy becomes suitable for low cost consumer items and helps in mass-distribution. Examples
include pens, softdrinks etc.,

A Selectively Distributed Market aims at having a select few distribution channels capable of providing a specified customer service thus catering to a niche market. In each of these strategies, desired customer service levels can be achieved by a detailed understanding of the customers, their buying habits, expectations and catering to the size of orders, timely delivery, speed and accuracy or order processing.

An Exclusively Distributed Market aims at having a limited number of distribution points for better administration, control and certain business interests. Examples include Garment stores (exclusive Raymonds outlets), Automobiles etc.,

Product Characteristics and Transportation modes Product Characteristics (weight, fragility, perishability etc.,) and Transportation Modes (air, water, rail, road) also influence the movement and storage of goods and hence are taken into consideration during the design of distribution channels

Distribution System

The overall goal of a distribution system is to provide products & services in an efficient, timely &
cost-effective manner to multiple customers.

Distribution of products often creates a hierarchy of stocking locations. These include manufacturing
centers, distribution centers, wholesalers & retailers. These locations constitute the supply chain from
original producer to ultimate consumer.

The distribution of goods is also often referred to as logistics a term used in military to denote the planning & delivery of inbound & outbound materials.

Logistics 1) In an industrial context, the art and science of obtaining, producing, and distributing material and product in the proper place and in proper quantities.
2) In a military sense (where it has greater usage), its meaning can also include the movement of personnel”.

Factors Influencing Distribution Network Design
At the highest level, performance of a distribution network should be evaluated along two dimensions:
1. Customer needs that are met
2. Cost of meeting customer needs
The customer needs that are met influence the company's revenues, which along with cost decide the
profitability of the delivery network.

While customer service consists of many components, we will focus on those measures that are
influenced by the structure of the distribution network. These include:
• Response time
• Product variety
• Product availability
• Customer experience
• Order visibility
• Returnability
Response time is the time between when a customer places an order and receives delivery. Product
variety is the number of different products / configurations that a customer desires from the
distribution network. Availability is the probability of having a product in stock when a customer
order arrives. Customer experience includes the ease with which the customer can place and receive
their order. Order visibility is the ability of the customer to track their order from placement to
delivery. Returnability is the ease with which a customer can return unsatisfactory merchandise and
the ability of the network to handle such returns.

It may seem at first that a customer always wants the highest level of performance along all these
dimensions. In practice, however, this is not always the case. Customers ordering a book at
Amazon.com are willing to wait longer than those that drive to a nearby Borders store to get the same
book. On the other hand, customers can find a far larger variety of books at Amazon compared to the
Borders store. Firms that target customers who can tolerate a large response time require few locations that may be far from the customer and can focus on increasing the capacity of each location. On the other hand, firms that target customers who value short response times need to locate close to them. These firms must have many facilities, with each location having a low capacity. Thus, a decrease in the response time customers desire increases the number of facilities required in the network.

Distribution System Objectives:
The overall goal of a distribution system is to provide products & services in an efficient, timely &
cost-effective manner to multiple customers. This goal can be linked to the following objectives:

High Levels of customer service:
· Timely delivery lead times in accordance with customer expectations.
· Buffering against uncertainties in customer demand.
· Providing the necessary variety of goods, including display & sample products.

High Levels of Distribution Efficiency:
· Minimum transportation & storage costs for optimum distribution efficiency.
· Level production of replenishment orders to minimize disruption at the suppliers.
· Size & location of storage.
· Provision of timely & accurate inventory data.

Minimum Inventory Investment:
· Minimum necessary safety stock.
· Optimum order quantities to control excessive cycle stock.

Materials Handling & Packaging

Typically, distribution warehouses perform the activities of receiving, shipping and storing large number of goods on a continuous basis. This demands large amounts of internal movement of goods, loading and unloading activities and good storage mechanism within the warehouse.

Material handling is responsible for :

Designing efficient processes required for handling and moving goods.
Using these processes for the actual handling and movement of goods from / to the required locations to / from the storage areas

Some objectives of materials handling are as follows:
- To increase cube utilization by using the height of the building and by reducing the need for aisle space as much as possible;
- To improve operating efficiency by reducing handling. Increasing the load per move will result in fewer moves;
- To improve the service level by increasing the speed of response to customer needs

For convenience, materials handling equipment can be grouped into 3 categories:
- Conveyors are devices that move material horizontally or vertically between 2 fixed points. They are expensive, create a fixed route and occupy
space continuously. They are used only where there is sufficient throughput between fixed points to justify their cost;

- Industrial trucks are vehicles powered by hand, electricity, or propane. Industrial trucks are more flexible than conveyors in that they can move
anywhere there is a suitable surface and no obstructions. They do not occupy space continuously. For these reasons, they are the most often-used form of material handling in distribution centers and in manufacturing;

- Cranes and hoists can move materials vertically and horizontally to any point within their area of operation. They use overhead space and are used to move heavy or large items. Within their area of operation, they are very flexible.

 PACKAGING
The basic role of packaging in any industrial organization is to carry the goods safely through a distribution system to the customer. The package must do the following:

- Identify the product,
- Contain and protect the product,
- Contribute to physical distribution efficiency.

For consumer products, the package may also be an important part of the marketing program. The package serves as a means of identifying the product in a way not possible from its outward appearance. The package must be robust enough to protect and contain the product through all phases of distribution.

Unitization
Unitization is the process of consolidating individual products into bigger units in order to achieve reduction in material handling and labour costs and in improving the transportation efficiency of the products. These bigger units are called unit loads. Unit loads can represent containers, boxes, cartons, racks, pallets and other possible packaging forms.

Unitization can be successive where the initial products can be consolidated in a unit load, these unit loads can further be consolidated into bigger unit loads and so on. Effective unitization requires the products to be consolidated into the appropriate unit loads. To achieve this, it is necessary to understand the dimensional relationshipsbetween the products and their subsequent unit loads.

As an example, consider a soft drink bottle to be a product. 20 such bottles are handled in a crate, the racks in one transport vehicle handles 100 crates and the distribution storage area is designed to hold 10 racks.
One product = one soft drink bottle
One crate = 20 soft drink bottles
One rack = 100 crates = 2000 soft drink bottles
Storage area = 10 racks = 1000 crates = 20000 soft drink bottles
In addition to the advantages of material handling and transport efficiency, unitization also helps in reducing the chances of damage to the products

Multi Warehouse System

We want to know what happens to the service level as more distribution centers are added to the system. To make valid comparisons, we must freeze the sales volume. We can then compare the costs as we add distribution centers to the system.

Transportation costs
Generally, as more distribution centers are added to a system, we expect the following:

- The cost of TL shipments increases,
- The cost of LTL shipments decreases,
- The total cost of transportation decrease.

The major savings are made with the addition of the first distribution centers. Eventually, as more distribution centers are added, the marginal savings decrease.

Warehousing costs
The space needed depends on the amount of inventory carried. As we have seen, as more distribution centers are added to the system, more inventory has to be carried, which requires more space. In addition, there will be some duplication of non-storage space such as washrooms and offices. So as the number of distribution increases, there will be a gradual increase in distribution center space costs.

Operating costs depend largely on the number of distribution center increases. Operating costs depend largely on the number of units handled. Since there is no increase in sales, the total number of units handled remains the same, as does the cost of handling. However, the non-direct supervision and clerical costs increase.

Inventory-carrying cost
The average inventory carried depends on the order quantity and the safety stock. The total SS will be affected by the number of warehouses in the system. For the same SKU, the standard deviation varies approximately as the square root of the ratio of the different annual demands. Suppose that the average demand is 1000 units and, for a service level of 90%, the safety stock is 100 units. If the 1000 units is divided between 2 distribution centers each having a demand of 500 units, the safety stock in each is:


Thus, with a constant sales volume, as the number of distribution centers increases, the demand on each decreases. This causes an increase in the total safety stock in all distribution centers.

Material handling costs
There will be a little change in materials handling costs as long as the firm can ship units loads to the distribution center. However, if the number of distribution centers increases to the point that some non-unitized loads are shipped, materials handling costs increase.

Packaging costs
Per-unit packaging costs will remain the same, but since there will be more inventory, total packaging costs will rise with inventory.

Total system cost

Figure shows graphically how the cost of transportation, warehousing, materials handling inventory and packaging behave as distribution centers are added to the system. Up to a point, total cost decrease and then start to increase. It is the objective of logistics to determine this least-cost point.

System service capability
The service capability of the system must also be evaluated. One way of assessing this is by estimating the percentage of the market served within a given period.

As expected, the service level increases as the number of distribution centers increases. The first distribution center is built to serve the best market, the next to serve the second best market and so on. Let us assume that a study has been made of a system of 1 to 10 distribution centers and the costs are as shown in figure:

A three-distribution center system would provide the least total cost. Figures show that by moving from 3 to 10 distribution centers, the one-day service level increases by 8%. Management must decide which system to select. The decision must be based on adequate analysis of the choices available and a comparison of the increase in costs and service level.

Forecasting by Aggregation
Forecast can be conducted by estimating the demand at each final distribution center or store based on
historical demand, when possible using techniques such as exponential smoothing, correlation, regression or market surveys. Once the forecast at each final distribution point is determined the sum of all the final distribution points served by an area distribution center constitutes the forecast for the area stocking point.

Forecasting by Allocation
In this the forecast at the final distribution centers is done by forecasting the total nationwide or worldwide
sales of the product in terms of the number of units. Forecasting total sales tends to yield a more accurate
prediction because larger volumes spread over many customers. A 2nd forecast is then necessary which
involves the historical % of the total sales consumed by each regional center. Regional sales are then
distributed again by historical % to area centers & so fourth.

Physical Distribution System

The objective of distribution management is to design and operate a distribution system that attains the required level of customer service and does that at least cost. To reach this objective, all activities involved in the movement and storage of goods must be organized into an integrated system.

In a distribution system, 6 interrelated activities affect customer service and the cost of providing it:
- Transportation. Transportation involves the various methods of moving goods outside the firm’s buildings. For most firms, it is the single highest cost in distribution, usually accounting for 30% to 60% of distribution costs. Transportation adds place value to the product;

- Distribution inventory. Distribution inventory includes all finished goods inventories at any point in the distribution system. In cost terms, it is the second most important item in distribution, accounting for 25% to 30% of the cost of distribution. Inventories create time value by placing the product close to the customer;

- Warehouses (distribution centers). Warehouses are used to store inventory. The management of warehouses makes decisions on site
selection, number of distribution centers, layout and methods of receiving, storing and retrieving goods;

- Materials handling. Materials handling is the movement and storage of goods inside the distribution center. The type of materials handling equipment used affects the efficiency and cost of operating the distribution center. Materials handling represents a capital cost;

- Protective packaging. Goods moving in a distribution system must be contained, protected and identified. In addition, goods are moved and
stored in packages and must fit into dimension of the storage spaces and the transportation vehicles;

- Order processing and communication. Order processing includes all activities needed to fill customer orders. Many intermediaries are involved in the movement of goods and good communication is essential to a successful distribution system.

Total-cost concept
The objective of distribution management is to provide the required level of customer service at the least total system cost. What happens to one activity has an effect on other activities, total system cost and the service level. Management must treat the system as a whole and understand the relationship among the activities.

There are 2 related principles illustrated here:
- Cost trade-off. The cost of transportation increased with the use of air transport, but the cost of carrying inventory decreased. There was a cost
trade-off between the 2;
- Total cost. By considering all of the costs and not just any one cost, the total system cost is reduced. Note also that even though no cost is attributed to it, customer service is improved by reducing the transit time. The total cost should also reflect the effect of the decision on other departments, such as production and marketing.

Transportation


Transport or transportation is the movement of people, cattle, animals and goods from one location to another.Transport is important since it enables trade between peoples, which in turn establishes civilizations.

By making a product available at a particular point in the distribution system, it adds place value to the product. On a broader perspective, transportation contributes to the social and economic development.

Carriers are legally classified as public (for hire) or private (not for hire). In the latter , individuals or firms own or lease their vehicles and use them to move their own goods. Public transport, on the other hand, is in the business of hauling for others for pay. All mode of transport have public and for-hire carriers.

For hire carriers are subject to economic regulation by federal, state or
municipal governments. Economic regulation has centered on 3 areas:

- Regulation of rates,
- Control of routes and service levels,
- Control of market entry and exit.

Private carriers are not subject to economic regulation but, like public carriers,
are regulated in such matters as public safety, license fees and taxes.
There are basically five modes of transportation

Costs of carriage
To provide transportation service, any carrier must have certain basic physical lements. These elements are ways, terminals and vehicles. Each results in a cost to the carrier and, depending on the mode and the carrier, may be either capital (fixed) or operating (variable) costs.

Fixed costs are costs that do not change with the volume of goods carried. The purchase cost of a truck is a fixed cost. However, many costs of operation, such as fuel, maintenance and driver’s wages, depend on the use made of the truck. These are variable costs.

Ways are the paths over which the carrier operates. The nature of the way and how it is paid vary with the mode. They may be owned and operated by the government or by the carrier or provided by the nature.

Terminals are places where carriers load and unload goods to and from vehicles and make connections between local pickup and delivery service and linehaul service. Other functions performed at terminals are weighing; connections with other routes and carriers; vehicle routing, dispatching and maintenance; and administration and paperwork. The nature, size and complexity of the terminal varies
with the mode and size of the firm and the types of good carried. Terminals are generally owned and operated by the carrier but, in some special circumstances, may be publicly owned and operated.

Vehicles of various types are used in all modes except pipelines. They serve as carrying and power units to move the goods over the ways. The carrier usually owns or leases the vehicles, although sometimes the shipper owns or leases them.

Rail
Railways provide their own ways, terminals and vehicles, all of which represent a large capital investment. This means that most of the total cost of operating a railway is fixed. Thus, railways must have a high volume of traffic to absorb the fixed costs. Therefore, railways are best able to move large volumes of bulky goods over long distances.

Rail speed is good over long distances, the service is generally reliable and trains are flexible about the goods they can carry. Train service is cheaper than road for large quantities of bulky commodities moved over long distances.

Although the rail mode of transportation has the advantages of large volume transportation over long distances, less per unit transportation costs compared to the other modes, good transportation speed over long distances, reliable service, flexibility in the types of goods carried, etc., it has certain drawbacks as listed below :

They operate on specific predetermined time schedules and hence the frequency and transit times are not flexible.
They operate between their terminals and hence cannot provide a stock-point to stock-point type of service
Unlike the road transport, general availability at the required locations and at the required times cannot be guaranteed.

Road
Trucks do not provide their own ways but pay a fee to the government as license, gasoline and other taxes and tolls for the use of roads. Terminals are usually owned and operated by the carrier but may be either privately owned or owned by the government. If owned, they are a major capital expense. However, in comparison to other modes, the cost of a vehicle is small. This means that for road carriers most of
their costs are operating (variable) in nature.

Trucks can provide door-to-door service. They are particularly suited to distribution of relatively small-volume goods to a dispersed market.

Air

Air transport requires an airway system that includes air traffic control and navigation systems. These systems are usually provided by the government. Carriers pay a user charge that is variable cost to them.

Terminals include all of the airport facilities, most of which are provided by the government. However, carriers are usually responsible for providing their own cargo terminals and maintenance facilities,
either by owning or renting the space.

The aircraft are expensive and are the single most important cost element for the airline. Since operating costs are high, airlines’ costs are mainly variable.

The main advantage of air transport is speed of service, especially over long distances. Most cargo travels in passenger aircraft and thus many delivery schedules are tied to those of passenger service. Transportation cost for air cargo is higher than for a other modes. For these reasons, air transport is most often suitable for high-value, low-weight cargo or for emergency items.

Water
Waterways are provided by nature or by nature with assistance of the government. The carrier thus has no capital cost in providing the ways but may have to pay a fee for using the waterway. Terminals may be provided by the government but are increasingly privately owned. The carrier will pay a fee to use them. Thus, terminals are mainly a variable cost. Vehicles are either owned or leased by the carrier and represent the major capital or fixed cost to the carrier.

The main advantage of water transport is cost. Operating costs are low and, since the ships have a relatively large capacity, the fixed costs can be absorbed over large volumes. Ships are slow and are door-to-door only if the shipper and the consignee are on the waterway. Therefore, water transportation is most useful for moving low-value, bulky cargo over relatively long distances where waterways are
available.

Pipelines
Pipelines are unique among the modes of transportation in that they move only gas, oil and refined products on a widespread basis. Capital costs for ways and pipelines are high and are borne by the carrier, but operating costs are very low.

 

Transportation Costs

In a physical distribution system, transportation function is concerned with the movement of goods from the factory to the end customer through a number of intermediaries.

In a typical distribution setup, the finished goods are shipped to the factory warehouse, from the factory warehouse, the goods are shipped to the distribution warehouses, from the distribution warehouses the goods are sent to local storage. From the local storage, the goods are sent to the final customers.

An efficient transportation system helps attain a high customer service level and contributes in gaining a competitive advantage by being cost effective in their operations. This requires transportation to understand and analyse the various costs of the system,
which further help in gaining economies of transportation by selecting the appropriate transportation mode, optimizing on the transportation capacity, transportation routes etc.,

The following are the costs associated with the transportation function :

Line – Haul Costs
Pickup and Delivering Costs
Handling Costs
Billing and Collection Costs

Goods move either directly from the shipper to the consignee or through a terminal. In the latter, they are picked up in some vehicle suitable for short-haul local travel. They are then delivered to a terminal where they are sorted according to destination and loaded onto highway vehicles for travel to a destination terminal. There they are again sorted, loaded on local delivery trucks and taken to the consignee.

Line-haul costs
When goods are shipped, they are sent in a moving container that has a weight and a volume capacity. The carrier has basic costs to move this container, which exit whether the container is full or not. These costs vary with the distance travelled, not the weight carried. For example, if for a given commodity, the line-haul costs is $3 per mile and the distance is 100 miles, the total line-haul cost is $300. if the shipper sends 50,000 pounds the total line-haul is the same as if 10,000 pounds is sent. However, the line-haul costs (LHC) per hundred weight (cwt.) is different.
LHC / cwt. = 300 / 500 (for 50,000 lb.) = $0.60 per cwt.
LHC / cwt. = 300 / 100 (for 10,000 lb.) = $3.00 per cwt.

Thus, the total line-haul cost varies with the cost per mile and the distance moved. However, the line-haul cost per hundred weight varies with the cost per mile, the distance moved and the weight moved.

The carrier has 2 limitations or capacity restrictions on how much can be moved on any one trip: the weight limitation and the cubic volume limitation of the vehicle. With some commodities, their density is such that the volume limitation is reached before the weight limitation. If the shipper wants to ship more, a method of increasing the density of the goods must be found. This is one reason that some products are made so they nest and others are shipped in an unassembled state.

Pickup and delivery costs
Pickup and delivery costs are similar to line-haul costs except that the cost depends more on the time spent than on the distance travelled. The carrier will charge for each pickup and the weight picked up. If a shipper is making several shipments, it will be less expensive if they are consolidated and picked up on one trip.

Terminal handling costs
Terminal-handling costs depend on the number of times a shipment must be loaded, handled and unloaded. If full truckloads are shipped, the goods do not need to be handled in the terminal but can go directly to the consignee. If part loads are shipped, they must be taken to the terminal, unloaded, sorted and loaded onto a highway vehicle. At the destination, the goods must be unloaded , sorted and loaded onto a local delivery vehicle.

The basic rule for reducing terminal-handling costs is to reduce handling effort by consolidating shipments into fewer parcels.

Billing and collecting costs
Every time a shipment is made, paperwork must be done and an invoice made out. Billing and collecting costs can be reduced by consolidating shipments and reducing the pickup frequency.

Total transportation costs
The total cost of transportation consists of line-haul, pickup and delivery, terminal-handling and billing and collecting costs. To reduce shipping costs, the shipper needs to do the following:
- Decrease line-haul costs by increasing the weight shipped;
- Decrease pickup and delivery cost by reducing the number of pickups. This can be done by consolidating and increasing the weight per pickup;
- Decrease terminal-handling costs by decreasing the number of parcels by consolidating shipments;
- Decrease billing and collecting costs by consolidating shipments

For any given shipment, the line-haul costs vary with the distance shipped. However, the other costs are fixed. The total cost for any given shipment thus has a fixed cost and a variable cost associated with it. In the latter, the cost per mile for short distances far exceeds that for longer distances.

The rate charged by a carrier will also vary with the commodity shipped and will depend upon the following:

- Value. A carrier’s liability for damage will be greater the more valuable the item;
- Density. The more dense the item, the greater the weight that can be carried in a given vehicle;
- Perishability. Perishable goods often require special equipment and methods of handling;
- Packaging. The method of packaging influences the risk of damage and breakage.

In addition, carriers have 2 rate structures, one based on full loads called truckload (TL) or carload (CL) and one based on less than truckload (LTL) and less than carload (LCL). For any given commodity, the LTL rates can be up to 100% higher than the TL rates. The basic reason for this differential lies in the extra pickup and delivery, terminal-handling and billing and collection costs. Truckers, airlines and water carriers accept less than full loads but usually the railways do not accept.

Warehouses

Warehouses provide a place to store , handle and protect goods. They form an integral part of the business functions of an organization and contribute to the competitive advantage of a company by improving customer service levels and reducing transportation costs.Warehouses include plant warehouses, regional warehouses and local warehouses. They may be owned and operated by the supplier or intermediaries such
as wholesalers, or may be public warehouses.

The general activities carried out by warehouses can be broadly classified as follows :

  1. Receiving
  2. Put-away / Storing
  3. Order Picking
  4. Shipping
  5. Maintaining an Information System

The service functions warehouses perform can be classified into 2 kinds:

- The general warehouse where goods are stored for long periods and where the prime purpose is to protect goods until they are needed. There is minimal handling, movement and relationship to transportation. It is also the type used for inventories accumulated in anticipation or seasonal sales;
- The distribution warehouse has a dynamic purpose of movement and mixing. Goods are received in large-volume uniform lots, stored briefly,
and then broken down into small individual orders of different items required by the customer. The emphasis is on movement and handling rather than on storage. This type of warehouse is widely used in distribution systems.

Warehouses represent an interruption in the flow of material and thus add cost to the system. Items should be warehoused only if there is an offsetting benefit gained from storing them.

Role of Warehouses in the Distribution System
In a physical distribution system, the primary activities of the distribution warehouses / distribution centers include product mixing, handling and moving goods to meet customer requirements at reduced costs.
To be effective in their functioning, distribution warehouses should perform the following roles :

Consolidation :

 Usually products shipped to the distributors from various sources are in less-than-truckload (LTL) shipments. Consolidation function helps to convert many such small shipments into full / truckload (TL) shipments and in transporting these truckloads to the deployment warehouses. From the deployment warehouses, the shipments are broken down into smaller, less-thantruckload (LTL) shipments to cater to the local market requirements and this process is called break-bulk.

Product mixing. Product mixing deals with the grouping of different items into an order and the economies that warehouses can provide in doing this. When customers place orders, they often want a mix of products that are produced in different locations.

Service. Distribution centers improve customer service by providing place utility. Goods are positioned close to markets so the markets can be serve more quickly.

Warehousing and transportation costs
The particular shipping pattern will depend largely upon the following:

- Number of customers,
- Geographic distribution of the customers,
- Customer order size,
- Number and location of plants and distribution centers.

Suppliers have little or no control over the first 3 but do have some control over the last. With respect to transportation, it then becomes a question of the cost of serving customers direct from the central distribution center or from the regional distribution center. A company can now supply customers in other locations directly from the factory or through the distribution center. The question is to decide which locations
should be supplied from each source. The answer is the source that can service the location at least cost.

Laid-down cost (LDC) is the delivered cost of product to a particular geographic point. The delivered cost includes all costs of moving the goods from A to B.
           LDC = P + T*X            
Where: P = Product costs,
              T = Transportation cost per mile,
              X = Distance.
The product cost includes all costs in getting the product to the supply location and storing it there (TL cost to point B, inventory cost at B,...).

Market boundary. The market boundary is the line between 2 or more supply sources where the laid-down cost is the same. There are 2 sources of supply: A and B. Y marks the market boundary between A and B, where the LDC from A is the same as B. Assume the product cost at A is $100 and product cost from B is $100 plus the TL transportation from A to B and inventory carrying costs at B ($10 per unit).

Transportation costs from either A or B are $0.40 per unit per mile:
LDCA = LDCB
100 + 0.40X = 110 + 0.40 (100-X)
X = 62.5 Miles

Effect on transportation costs of adding more warehouses

Generally, as more distribution centers are added to the system, we can expect
the following:

- The cost of truckload shipments to the distribution centers to increase,
- The cost of LTL shipments to customers to decrease,
- The total cost of transportation to decrease.
- The total cost of warehousing to increase.
- The total cost of logistics(warehousing + transport) to decrease for first few warehouses but increase after a certain number of warehouses.


As expected, the major savings is from the addition of the first few distribution centers.

Eventually, as more distribution are added, the saving decrease.

The number of customers served by additional distribution centers decreases and the volume that
can be shipped TL to the additional distribution centers is less than to the first ones.