Physical distribution http://www.scribd.

com/doc/31224902/Physical-distribution-system

Planning implementing and controlling the physical flow of material and finished goods from point of origin to point of use to meet customer`s need at a profit By Philip Kotler It is essentially a planning process and an information activity So A integrative process that optimizes the flow of material and supplies through the organization and its operations to the customer

Logistics planning
1.Level of planning

Strategic planning : usually more than one year. Tactical planning : usually less than one year. Operational planning : is short-range decision making.

2. Major planning areas

Four major problem areas: a. customer service levels b. facility location c. inventory decisions d. transportation decisions

the triangle of logistics decision making.

System is shown as logistic Mix including following functional Areas

Order Processing Information Flow Warehousing Inventory control Packaging Transportation

Order Processing Involve following activities

Order checking for any deviation in agreed on negotiated term Technical details;price;delivery period;payment terms;taxes etc Checking the availability of material in stock (material requisition) Production & material scheduling for shortage Acknowledging the order, indicating deviation if any It is routine operation but require great deal of planning training of people involved and investment to bring about efficiency & accuracy In a large organization a system capable of handling thousands of voluminous orders with minimum human involvement or without human involvement is a must involving shortened order fulfillment cycle to have edge over rivals

Information Flow
It is basically information based activity of inventory movement across the supply chain. Hence role of information system plays a vital role in delivering superior customer service This function is required to facilitate the following information needs Order Registration Order checking & editing Order processing Coordination means to integrate the total supply chain of the company with informational needs as to time ,quantity, value e.g Lead time, rate of consumption , delivery schedule & price of the material , Transportation time & cost etc.

Warehousing
A storage place wherein finished goods are stored till they are sold.Effectiveness of an organization`s marketing strategy depends on making the right decision regarding warehouse. Nowadays

Warehouse are treated as switching facilities rather than storage place.It is a major cost center, many customer problem are the direct result of improper warehousing management. Major decision of ware house are as follows: Location ,Size & Number of warehousing facilities

Warehouse layout Design of building Ownership of the warehouse

Inventory management (below) Packaging

It is also a critical element in physical distribution of the product , which influences the efficiency of the logistic system this is done with the view of following : Foe handling and damage prevention

For communications For inter modal transportation Storage space economy Thus to reduce packaging cost

Transportation
Foe the movement of goods from supplier to buyer , transportation is the most fundamental and important component of logistic. E.g. for low unit value products the transportation cost component is 20% of the product cost. In logistic cost its share varies up to 65-70% in case of mass consumed very low unit price products.

 Mode of transportation ( Cost & time factor) Own fleet or Outsourcing Route Planning Vehicle scheduling Are the few decision which are involved in transportation

WAREHOUSING
Warehousing refers to the activities involving storage of goods on a large-scale in a systematic and orderly manner and making them available conveniently when needed. In other words, warehousing means holding or preserving goods in huge quantities from the time of their purchase or production till their actual use or sale. Warehousing is one of the important auxiliaries to trade. It creates time utility by bridging the time gap between production and consumption of goods. Need for Warehousing Warehousing is necessary due to the following reasons. (i) Seasonal Production- You know that agricultural commodities are harvested during certain seasons, but their consumption or use takes place throughout the year. WAREHOUSING & INVENTORY MANAGEMENT Therefore, there is a need for proper storage or warehousing for these commodities, from where they can be supplied as and when required. (ii) Seasonal Demand- There are certain goods, which are demanded seasonally, like woolen garments in winters or umbrellas in the rainy season. The production of these goods takes place throughout the year to meet the seasonal demand. So there is a need to store these goods in a warehouse to make them available at the time of need. (iii) Large-scale Production - In case of manufactured goods, now-a-days production takes place to meet the existing as well as future demand of the products. Manufacturers also produce goods in huge quantity to enjoy the benefits of large-scale production, which is more economical. So the finished products, which are produced on a large scale, need to be stored properly till they are cleared by sales. (iv) Quick Supply - Both industrial as well as agricultural goods are produced at some specific places but consumed throughout the country. Therefore, it is essential to stock these goods near the place of consumption, so that without making any delay these goods are made available to the consumers at the time of their need. (V) Continuous Production- Continuous production of goods in factories requires adequate supply of raw materials. So there is a need to keep sufficient quantity of stock of raw material in the warehouse to ensure continuous production. (vi) Price Stabilization- To maintain a reasonable level of the price of the goods in the market there is a need to keep sufficient stock in the warehouses. Scarcity in supply of goods may increase their price in the market. Again, excess production and supply may also lead to fall in prices of the product by maintaining a balance of supply of goods, warehousing leads to price stabilization.

Issues affecting Warehousing

Since warehouses, stores and distribution centers have to operate as essential component elements within supply chains net work, key decisions when setting up such facilities must be determined by the overall supply chain strategies for service and cost. The factors that should be considered include the following. Market and product base stability Long term market potential for growth and for how the product range may expand will influence decisions on the size and location of a warehouse facility, including space for prospective expansion. These considerations will also impact on the perceived need for potential flexibility, which in turn can influence decisions on the type of warehouse and the level of technology to be used. Type of materials to be handled: Materials handled can include raw materials, WIP, OEM Auto spare parts, packaging materials and finished goods in a span of material types, sizes, weights, products lives and other characteristics. The units to be handled can range from individual small items through carton boxes, special storage containers for liquids, drums, sacks, and palletized loads. Special requirements for temperature and humidity may also have to be met in the case of perishables and all of these will impact on the type of warehouses and technology level. Warehouse Facility: type, size and location. The type of operation, the design capacity and size of a warehouse and its location will all be influenced if not directly determined by its exact role and position in the supply chain network, and the role, capacity and location of any other facilities in the supply chain. The customer base, level of inventory, the need for optimization of inventory, time compression in the supply chain and the overall customer service levels should also be considered when deciding on type, size and location. A further consideration here is whether the warehouse facility should be an own-account operation run by the company or outsourced and run by a 3PL. Inventory and Inventory Location: Within a supply chain network there is an issue not only of what materials to stock and in what quantities, but also in what locations .Options can include distribution centers devoted to specific markets or parts of the product range distribution centers dedicated to serving specific geographic areas, or regional distribution centers that hold for example the fast moving product lines, with the slower lines held only in a Regional distribution centre (RDC). The option depends on such factors as customer base, product range and service levels required. The options on the level of technology have already been noted, and the range can go from very basic installations with high manual input and least mechanization to fully automated and robotic installations.

Types of Warehouses
After getting an idea about the need for warehousing, let us identify the different types of warehouses. In order to meet their requirement various types of warehouses came into existence, which may be classified as follows. i. Private Warehouses ii. Public Warehouses iii. Government Warehouses iv. Bonded Warehouses v. Co-operative Warehouses

i. Private Warehouses - The warehouses which are owned and managed by the manufacturers or traders to store, exclusively, their own stock of goods are known as private warehouses. Generally these warehouses are constructed by the farmers near their fields, by wholesalers and retailers near their business centres and by manufacturers near their factories. The design and the facilities provided therein are according to the nature of products to be stored. ii. Public Warehouses - The warehouses which are run to store goods of the general public are known as public warehouses. Any one can store his goods in these warehouses on payment of rent. An individual, a partnership firm or a company may own these warehouses. To start such warehouses a license from the government is required. The government also regulates the functions and operations of these warehouses. Mostly these warehouses are used by manufacturers, wholesalers, exporters, importers, government agencies, etc. iii. Government Warehouses -These warehouses are owned, managed and controlled by central or state governments or public corporations or local authorities. Both government and private enterprises may use these warehouses to store their goods. WAREHOU Central Warehousing Corporation of India, State Warehousing Corporation and Food Corporation of India are examples of agencies maintaining government warehouses. iv. Bonded Warehouses - These warehouses are owned, managed and controlled by government as well as private agencies. Private bonded warehouses have to obtain license from the government. Bonded warehouses are used to store imported goods for which import duty is yet to be paid. Incase of imported goods the importers are not allowed to take away the goods from the ports till such duty is paid. These warehouses are generally owned by dock authorities and found near the ports. v. Co-operative Warehouses - These warehouses are owned, managed and controlled by co-operative societies. They provide warehousing facilities at the most economical rates to the members of their society.

The following considerations determine the location of a warehouse:

1. Market service area and cost of distribution from the warehouse to the market service area. 2. Satisfaction of transport requirements and facilities available in the form of rail, link roads and road vehicles. 3. Transportation rates prevailing in the area and distribution costs per unit. 4. Competition by rival companies and whether they have warehouse in the same area. 5. Availability of power, water, gas sewage disposal and their cost. 6. Labour supply and labour costs in the area. 7. Industrial relations climate and labour productivity. 8. Pricing arrangements and the level of service desired to be rendered in terms of availability of the product to the customer. WAREHOUSING & INVENTORY MANAGEMENT 9. Individual company requirements and constraints. 10. Real estate, excise and government taxes assessed in the area. 11. Attitudes of local residents and government towards establishment of the warehouse. 12. Restrictions associated with warehouses.

13. Potential for later expansion. 14. Cost of land for the warehouse and other costs. 15. Possibility of change in the use of the facility at a later date if the company so desires, and lease or sale of the land and buildings.

Characteristics of Ideal Warehouses:

I. Warehouse

should be located at a convenient place near highways, railway stations, airports and seaports where goods can be loaded and unloaded easily. II. Mechanical appliances should be there to loading and unloading the goods. This reduces the wastages in handling and also minimises handling costs. III. Adequate space should be available inside the building to keep the goods in proper order. IV. Ware houses meant for preservation of perishable items like fruits, vegetables, eggs and butter etc. should have cold storage facilities. V. Proper arrangement should be there to protect the goods from sunlight, rain, wind,dust, moisture and pests. VI. Sufficient parking space should be there inside the premises to facilitate easy andquick loading and unloading of goods. VII. Round the clock security arrangement should be there to avoid theft of goods. VIII. The building should be fitted with latest fire-fighting equipments to avoid loss of goods due to fire.

Functions of the Warehouse

1. Receiving-This includes the physical unloading of incoming transport, checking, recording of receipts, and deciding where the received goods are to be put away in the warehouse. It can also include such activities as unpacking and repackaging, quality control checks and temporary quarantine storage for goods awaiting clearance by quality control 2. Inspection- Quality and quantity check of the incoming goods for their required characteristics WAREHOUSING & INVENTORY MANAGEMENT 3. Repackaging- Incoming lot may be having non-standard packaging which may not be stored as it is in the respective location. In those cases these materials have to be pre packed in unit loads/pallet loads suitable for storage. 4. Put away Binning and storing the goods in their respective locations including the temp locations from the receiving docking area. 5. Storage Binning the approved material in their respective locations. 6. Order-Order picking / selection Goods are selected from order picking stock in the required quantities and at the required time to meet customer orders. Picking often involves break bulk operations, when goods are received from suppliers in, say, whole pallet quantities, but ordered by customers in less than pallet quantity .order picking is important for achieving high levels of customer service; it traditionally also takes a high proportion of the total warehouse staff complement and is expensive. The good design and management of picking systems and operations are consequently vital to effective warehouse performance 7. Sortation This enable goods coming into a warehouse to be sorted into specific customer orders immediately on arrival. The goods then go directly to order collation.

8. Packing and shipping Picked goods as per the customer order are consolidated and packed according to customer order requirement. It is shipped according to customer orders and respective destinations. 9. Cross-docking Move products directly from receiving to the shipping dock these products are not at all stored in the specific locations. 10. Replenishing This is the movement of goods in larger order quantities, for example a whole pallet at a time , from reserve storage to order picking, to ensure that order picking locations do not become empty. Maintaining stock availability for order picking is important for achieving high levels of order fill.

INVENTORY MANAGEMENT
Inventory management can be defined as the sum total of those related activities essential for the procurement, storage, sale, disposal or use of material. This can be understood by answering the following questions -when is a refrigerator not a refrigerator? In terms of physical distribution, a refrigerator is not a refrigerator when it is in Delhi, whereas when the demand is in Chandigarh. Further more, if the color required is grey and the refrigerator is blue then also the refrigerator is not a refrigerator. To conclude, utilities are created in goods when the right product is available at the right place, at the right time, at the right quantity and is available to the right customer. Inventory management deals itself with all these problems, placing importance on the quantities of goods needed. Role in the supply chain Inventory exists in the entire supply chain because of disparity between supply and demand. This disparity is international at a steel manufacture where it is economical to manufacture in large lots that are then stored for future sales. The disparity is also intentional at a retail store where inventory is held in anticipation of future demand. An important role that inventory plays in the supply chain is to increase the quantity of demand that can be satisfied by having product ready and available when the customer wants it. Another significant role of inventory is to optimize cost by exploiting economies of scale that may exist during both production and distribution. Inventory is spread across the entire supply chain from raw materials to work in process to finished goods that supplier, manufactures, distributors, and retailers hold. Inventory is a most important source of cost in any supply chain and it has an enormous impact on responsiveness. If we think of the responsiveness range the location and quantity of inventory can move the supply chain from one end of the spectrum to the other. For example, an apparel supply chain with high inventory levels at the retail store has a high level of responsiveness because a consumer can walk into a store and walk out with the shirt he is looking for. In contrast, an apparel supply chain with little inventory would be very unresponsive. A customer wanting a WAREHOUSING & INVENTORY MANA shirt would have to order it and wait several weeks or even months for it to be manufactured, depending on how little inventory existed in the supply chain. Role in the competitive strategy Inventory plays a important role in a supply chains ability to support a companys competitive strategy. If a companys competitive strategy requires a very high level of

responsiveness, a company can use inventory to achieve this responsiveness by locating large amounts of inventory close to the customer. Conversely, a company can also use inventory to make it more efficient by optimizing inventory through centralized stocking. The latter strategy would support a competitive strategy of being a low-cost producer. The trade-off implied in the inventory driver is between the responsiveness that results from more inventories and the efficiency that results from fewer inventories.

Functions of Inventory
Inventories have four functions. They are: Minimize costs at acceptable inventory levels: Replacing inventories in exceptionally small quantities result in low investments but high ordering costs. Thus, a point has to be set where the total inventory carrying cost is bare minimum but the level of inventory is such that it does not effect the production or customer base. Provide desired customer service level: Inventories offer service in terms of satisfying customer demand. Inventory influences the time and costs of service. The location of inventory determines the time in which the customer will be served while a company policies concerning the economic order quantity, safety stocks, placement procedures and time will determine the cost at which the customer will be served. Couple successive operations or functions: The decoupling effect of inventories is apparent throughout manufacturing and distributions systems. Normally in the absence of inventories in a system, a demand by a customer triggers a chain reaction of demand at each preceding level, i.e. manufacturing and purchasing. But the customer does not have time or patience to wait for the chain reaction. A small inventory requires frequent response rather than instant response from the transport system, where as, a large inventory reduces the need for frequent response and cost of transport system .The decoupling effect of inventories allows a physical distribution manager to choose amongst various inventory management policies. Stabilize production and the labor force, thereby trying to reduce capital requirements: This function of inventories is more associated to the manufacturing process, though it influences the distribution function as well. If an inventory

CHAPTER - 3
WAREHOUSING & INVENTORY MANAGEMENT management system takes responsibility of finished goods storage, then it has to provide storage facilities for higher levels of inventories. For example, seasonal products in many cases are produced all around the year to decrease investment in capital equipment. The stocks which come into existence are called anticipation stocks. But to produce or not to produce anticipation stocks is a manufacturing decision rather than a distribution decision.

Types of inventory
Raw Material Inventory WIP Inventory Finished Goods Inventory MRO Inventories.

Raw Material Inventory The materials, from which the final product of the company is made, are the raw materials. The material does not include any material that supports production;these materials are called indirect materials. But raw material is limited to the direct material (or) component that actually becomes a part of the final product. The steel used for automobile production is good example of a raw material kept in mind, though that the raw material of one industry is usually the finished product of another .Some of the raw materials may be available only seasonally, like cotton, sugar cane etc. There are certain raw materials which are governed by government control and quata system, like newsprint, coke etc. The size of the raw material inventory is dependent upon factors such as internal lead time for purchase, supplier lead time, vendor relations, availability of raw materials, WAREHOUSING & INVENTORY MANAGEMENT government import policy in the case of imported material, the annual consumption of the materials and the criticality of the material. Some of the examples of raw material inventory are steel, wood, cloth or other materials used to make components of the finished product. The reasons for keeping this inventory are: I. Seasonal factors of availability and price advantage. II. As protective buffer against: a. Delays in supply b. Change in production rates due to market fluctuations for the finished products, etc. WIP Inventory (Work-In-Process Inventory) All materials that have been transformed from their raw materials stage by some manufacturing process but are not final products are work in-process goods. Sometimes, what may appear to be a final product is still really an in process good if the final production step is a packaging one. It is in-process until it is in the form that can leave the plant. WIP can be found on the conveyors, trucks, pallets, in and around the machines and in temporary areas of storage waiting to be worked upon or assembled. In building a ship or boiler the raw material is held as in-process stock till the complete ship is made. This is true in most of the heavy Engineering industries like cement plant, chemical plant. Some time they dispatch sector by sector to the site to reduce the in-process inventory. In continuous process industries the amount of inprocess held is optimum, which cannot be reduced or increased like in petroleum refining, cement manufacturing and chemical industries. Whereas in medium size WAREHOUSING & INVENTORY MANAGEMENT industries where batch production is predominantly adopted, the in-process inventory is very high. After each production process the materials wait for the next operation. The size of the inventory is dependent on the production cycle time, the percentage of machine utilization, the make/buy decision of the company, and the management policy for decoupling the various stages of manufacturing. The reason for keeping In-Process inventory is As liquid stock to cater for variety and shorten the manufacturing cycle. As protective buffer against production breakdowns, rejections etc.

For economic lot production. Finished Goods Inventory Finished goods inventory consists of all the stock that is ready for dispatch. In a bottling plant for example, the finished products are the bottles of beverages that are in their cartons or cases and are ready for shipment. This finished goods inventory acts as a buffer between the production department and the marketing department. Higher the stock of finished goods, then the cost of inventory is high. If the stock level is low or nil then the customer service will be affected .This will damage the good will of the customer about the company and the product. The purpose of this inventory is to reach the market by constant supply through distribution channels. This is controlled by the marketing department. The stock that is to be held at the warehouses, with the distributors and with retailers will be different depending upon the sales rate. In pharmaceutical industries, the finished product stock will be very high at the distributors and retailers level as they have to stock all types and brand of medicine with the risk of expiry dates .In case of daily newspapers there should be absolutely nil finished stock as its life is only one day. WAREHOUSING & INVENTORY MANAGEMENT The spares stock is also an important inventory .In this case, we may not know when and what part will be required and we have to stock all of the items. Statistical methods and good forecasting techniques only will help us in deciding the type and quantity of spares to be held in stock for sale. The size of the finished goods inventory also depends on the ability of the marketing department to push the products, the companys ability to stick to the delivery schedule of the client, the shelf life and the warehousing capacity. The other reasons for holding this inventory are To protective buffer against sales rate changes. To absorb economic production lots. To stabilize the level of production and employment when the sales is of a seasonal variety. MRO Inventories Maintenance, repairs and operating supplies which are consumed during the production process and generally do not form part of the product itself (e.g. oils and lubricants, machinery and plant spares, tools and fixtures, etc) are referred to as MRO inventories

Inventory Cost
Costs of Inventories

-Procurement Cost -Inventory -Carrying Cost Out-of-Stock -Costs Over Stock Costs
WAREHOUSING & INVENTO

Need to hold Inventory

There are number of reasons why a company might choose or need to hold stocks of different products. In planning any distribution system it is essential to be aware of these reasons, and to be sure that the consequences are adequate but not

excessively high stock levels. The main reasons for holding stock can be summarized as follows: To keep down productions costs: Often it is costly to set up machines so production runs need to be as long as possible to achieve low unit costs. It is essential, however, to balance these costs with the costs of holding stock. To accommodate variations in demand: The demand for a product is never wholly regular so it will vary in the short term, by season, etc, To avoid stockouts, therefore, some level of safety stock must be held. To take account of variable supply leads: Additional safety stock is held to cover any delivery delays from suppliers. Buying costs: There is an administrative cost associated with raising an order, and to minimize this cost it is necessary to hold additional inventory. It is essential to balance these elements of administration and stock-holding, and for this the economic order quantity (EOQ) is used. To take advantage of quantity discounts: Some products are offered at a cheaper unit cost if they are bought in bulk. To account for seasonal fluctuations: These may be for demand reasons whereby products are popular at peak times only. To cater for this while maintaining an even level of production, stocks need to be built up through the WAREHOUSING & INVENTORY MANAGEMENT rest of the year. Supply variations may also occur because goods are produced only at a certain time of the year. This often applies to primary food production where, for example, large stocks result at harvest tim To allow for price fluctuations/speculations: The price of primary products can fluctuate for a variety of reasons, so some companies buy in large quantities to cater for this. To help the production and distribution operations run more smoothly: Here, stock is held to decouple the two different activities. To Provide Customers with immediate service: It is essential in some highly competitive markets for companies to provide goods as soon as they are required. To minimize production delays caused by lack of spare parts: This is important not just for regular maintenance, but especially for breakdown of expensive plant and machinery. Thus spares are held to minimize plant shutdowns. Work in progress: This facilities the production process by providing semifinished stocks between different processes.RY MANAGEMENT

Mechanics of Inventory Control

www.slideshare.net/yashpal01/inventory-control-model (check it) Inventory control consists of finding answers to three questions 1. Should this item be stocked at all? 2. If so, when to order it? 3. How much to order? When to Order?

Under the modern concept, inventory should directly contribute to profitability of the company and should be concerned with such matters as flow, lead times, storage costs, and acquisition costs, material handling equipment, preservation and packaging. General levels of stock should be related to sales and production policies of the firm, in the same way specification is related to technical needs. The various levels of stocks are: 1. Deficiency Level: This means stock in hand is inadequate to meet the needs. Existence of this level indicates actual or potential out-of-stock situation. Orders are placed through a faster alternative source of supply. 2. Exhaust bin level: This is a point popularly known as out of stock. At this point, the storage bin is empty. Emergency measures are taken to stock the bin. 3. Buffer stock or minimum stock level: This is the level at which any further demands upon the bin will necessitate with drawls from the reserve or buffer stock, especially when demand is immediate and fresh deliveries will take time to arrive. Usually the goods are ordered through normal channels as soon as the inventory reaches this level. 4. Danger warning level: It is the point of no return. After this point, a stock out is inevitable if delay occurs. A computer program can readily include warning levels. The level should be such that if there is a possible delay, the processing should reveal this in time and the manager should take one of the following actions: a. Find an alternative source of supply b. Request sales department to warn their customers of possible delay in supplies. c. Put extra pressure on the supplier

Selective Inventory Control

Reorder Level: The reorder point determines when a re supply shipment should be initiated. If the reorder point is set too low, stock out position might occur and if it is set too high over stock costs will be high. Moreover, high reorder point will lead to increased investment in inventory and increased inventory carrying cost .A number of systems has been designed to establish the reorder point. The basic reorder point formula is R=D*T Where R = Reorder point D = Average daily demand T= Average performance cycle length. Maximum stock level: This is the level above which the stock should not be permitted to rise. If permitted, it would increase the risk of loss due to deterioration, evaporation and obsolescence. It also will increase the capital tied up in the inventories. Thus, when to order will be dependent upon the level of stock is in the bin. But knowing the level of stock is not enough. Efficient inventory control dictates that inventory level should be controlled.

How much to order?

This is a concept which tries to balance inventory and ordering cost. Practically, the

two costs have inverse relationship .If the order quantity is larger, the order cost will be low but the inventory carrying cost will be high. The point at which two costs are minimum is the optimum point; here in figure the total cost is minimum. Every company should try to order this much quantity WAREHOUSING & INVENTORY MANAGEMENT Economic order quantity (EOQ) is the most useful techniques for determining how much to order? This method aims at determining the right quantity so as to ensure that the sum total of the two costs, i.e carrying cost and procurement cost are at the minimum point possible. The result of this effort is the purchase of right quantity .EOQ is that quantity at which the cost of procuring the annual requirements of an item and the inventory carrying cost are equal, i.e the total of the two costs is minimum. Mathematically, EOQ is represented by the equation EOQ = 2AP/UC Where A = Annual Consumption in units. P = Procurement cost per order. C= Inventory carrying cost expressed as percentage (of value) U = Unit price