In this article we will discuss about the distribution function and its strategy as a part of business planning and strategy.
The function of distribution in case of a large firm can be seen from three view points:
(a) From a Value-Added Perspective:
The distribution function provides ‘time and utility’. An inability to deliver goods within the promised time schedule results in lost sales and/or extra operating costs. Poor transportation plan delays the arrival of goods at the customers’ place.
The distribution process provides a physical link between inventory and accounts receivables. Close coordination between distribution and sales activities speeds up this conversion process and improves cash flow.
(b) From a Structural View-Point:
This function encompasses the network system of inventory stock-points (warehouses at different locations) and the flows therefrom to the customers.
(c) From Managerial Aspects:
The function identifies, within the framework of ‘marketing-production-finance plan-external factor’, the means to satisfy customer service through cost-effective inventory control, warehousing and transportation.
The major problem of distribution policy and strategy is how to determine the effective means of placing a firm’s products in the hands of the customers. It is not simply a question of determining the most effective ‘channel of distribution’. It is also a question of organising most strategically the physical movement of finished products to the customers.
The distribution planning and strategy begins with an examination of company marketing as well as any particular strategic planning factors affecting distribution.
The strategic planning factors cover many faces like the nature of firm’s operations, product characteristics, location of a company’s producing units in relation to its customers, customer service requirements, distribution and delivery offered by the competitors, production capacity and output plans, climate considerations, sales fluctuations (size, timing, area, and volatility), inventory fluctuations, warehousing facilities, and transportation modes.
Developing an overall strategy for distribution, based on the above planning factors, requires reconciling many conflicting customer service and cost requirements. This reconciliation is not easy.
For example, customer service cell wants large supplies kept on hand to service customers quickly, while cost considerations dictate keeping small quantities on hand to reduce inventory expenses. Or, customer service cell argues for many stock points (warehouses) located close to customers, while cost control argues for reducing the number of points in order to reduce warehousing expenses.
The optimum distribution strategy, thus, strives to balance sales and customer service requirements with manufacturing and distribution cost requirements at the least possible cost.
In the light of the above perspectives, the distribution strategy needs to be designed through an integration of four-fold sub-strategies as discussed below:
1. Customer Service-Strategy:
(a) Realistic and competitive levels of service to meet the requirements of each geographic area, market segment and product group;
(b) Periodic interviews with the customers to determine
(i) Customers’ real service needs vs. existing service levels and
(ii) Competitors’ abilities vs. own abilities (to measure the performance gap).
(a) Review of individual product-market segment objectives to determine marketing policies with respect to the channels of distribution and product flow;
(b) Consideration of capacity costs with respect to physical distribution, inventory, investment in distribution activities, and overall ROI; and
(c) Optimisation of customer services through identification and balancing of factors like existing arid potential distribution centre location, inventory stocking levels at each distribution centre, distribution centres’ capacity limits and costs, transportation costs on each origin-destination link, etc.
3. Inventory Staging-Strategy:
(a) Review and estimation of the volume of each product that should be at each stage of inventory (work-in-progress, semi-finished, finished goods at factory/in transit/at distribution centre location) at any particular time or season;
(b) Optimisation of the flow of finished products inventory through the distribution process; and
(c) Categorisation of inventory based upon turnover, value, replacement, and legal requirements in consideration of distribution location-wise factors.
4. Transportation Mode Mix-Strategy:
(a) identification and determination of each and every transportation route in the distribution network (say, 80 : 20 relationship whereby 80% costs attributable to 20% routes);
(b) determination of the characteristics of traffic movement in the key routes in consideration as to volume, frequency, shipment, size, transit time, service requirements, etc.; and
(c) identification and selection of the most appropriate modes with due consideration of alternative transport modes, their costs and service capabilities.
In developing the distribution strategy and its sub-strategies, ‘total’ costs are what count.
For example, the savings gained from reducing warehouse space must be weighed against the cost of shorter production runs; the savings gained from bulk shipping must be weighed against any increased handling costs; and the savings gained from using slow modes of transportation, such as rail, instead of fast modes, must be weighed against the cost of any reduced sales resulting from decreases in customer service efficiency.
Operations research and computer simulation provide the distribution strategy maker with tools to determine scientifically the total cost of alternative plans and strategies.
Nowadays, linear programming models are used to quantify and measure the economics of alternative transportation methods and shipping schedules, the effect on total costs of reducing or increasing the number of warehouses or changing their locations, and the impact on distribution costs of changes in demand, production schedules, product line or service requirements.
Finally, the strategy-planner should ensure that the distribution strategy indicate an integrated character from the aspects of:
(i) The needs of the key groups of customers,
(ii) The requirements of key product-market segments,
(iii) A realistic set of time-phased distribution goals, and
(iv) The marketing-sales policy-direct and/or through the intermediaries.