978-0134129945 Chapter 12 Lecture Note Part 2

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PHYSICAL DISTRIBUTION, SUPPLY CHAINS, and LOGISTICS MANAGEMENT

√ (Learning Objective #4)

In Chapter 1, marketing was described as one of the activities in a firm’s value chain.

The distribution P of the marketing mix is a critical value chain activity.

Physical distribution consists of activities involved in moving finished goods from manufacturers

to customers.

The value chain concept is much broader, for two reasons.

1. It is a useful tool for assessing an organization’s competence as it performs value-creating

activities within a broader supply chain that includes all the firms that perform support

activities by generating raw materials, converting them into components or finished

products, and making them available to customers.

2. The particular industry in which a firm competes is characterized by a value chain.

The specific activities an individual firm performs help define its position in the value chain.

If a company is somewhat removed from the final customer, it is said to be upstream in the value

chain.

A company that is relatively close to customers is said to be downstream like a retailer.

Logistics is the management process that integrates the activities of all companies—both

upstream and downstream—to ensure an efficient flow of goods through the supply chain.

INNOVATION, ENTREPRENEURSHIP, AND THE GLOBAL STARTUP

Malcolm McLean: Containerization Visionary

Malcolm McLean was an entrepreneur. He developed an innovative industrial product and used

it to help his business grow. Along the way, he revolutionized the way goods are shipped, thus

helping usher in the era of globalization. By applying the basic tools and principles of modern

marketing, McLean achieved remarkable success.

Until the mid-twentieth century, shipping goods was slow and expensive. Longshoremen would

unload as many as 200,000 separate pieces of cargo from trucks or warehouses near the docks

and then stow each item on an oceangoing freighter. The process was reversed at the end of the

journey.

The solution was obvious to McLean: the solution was containerization – the use of standardized

steel boxes that could be loaded with freight at the factory and shipped by rail or by truck to a

port. McLean was pragmatic. He didn’t care about the “romance of the sea”. For him freight

was freight.

As Marc Levinson notes in his book about McLean, the container turned the economics of

location on its head. Containerization revolutionized the handling of cargo. McLean’s innovation

– containerization – represented a disruptive technology.

An industry’s value chain can change over time.

The value chain, logistics, and related concepts are extremely important as supply chains stretch

around the globe (Figure 12-5).

Physical distribution and logistics are the means by which products are made available to

customers when and where they want them.

The most important distribution activities are order processing, warehousing, inventory

management, and transportation.

Order Processing

Activities relating to order processing provide information inputs that are critical in fulfilling a

customer’s order. Order processing includes:

Order entry, in which the order is actually entered into a company’s information system;

Order handling, which involves locating, assembling, and moving products into

distribution; and

Order delivery, the process by which products are made available to the customer.

Warehousing

Warehouses are used to store goods until they are sold; another type of facility, the distribution

center, is designed to efficiently receive goods from suppliers and then fill orders for individual

stores or customers. Modern distribution and warehousing is such an automated, high-tech

business today that many companies outsource this function.

One of the driving forces behind the growth of third-party warehousing is the need to reduce

fixed costs and speed up delivery times to customers.

Inventory Management

Proper inventory management ensures that a company neither runs out of manufacturing

components or finished goods nor incurs the expense and risk of carrying excessive stocks of

these items.

Another issue is balancing order-processing costs against inventory-carrying costs.

An important new tool for inventory management is radio frequency identification RFID, which

utilizes small tags that are attached to pallets, containers, or individual inventory items.

Transportation

Finally, transportation decisions concern the method or mode a company should utilize when

moving products through domestic and global channels.

The word mode implies a choice, and the major transportation choices are rail, truck, air, water,

pipeline, and the Internet (Table 12-4).

Rail provides an extremely cost-effective means for moving large quantities of merchandise long

distances.

In the United States, rail carriers such as CSX and Burlington Northern Santa Fe account for

nearly half of all cargo moved when measured by ton-miles. (Exhibit 12-11)

Rail’s capability is second only to water in terms of the variety of products that can be

transported.

Trucks are an excellent mode for both long-haul, transcontinental transport and local delivery of

goods. In nations with well-developed highway systems, truck freight provides the highest level

of accessibility of any mode.

There are two main types of water transportation.

Inland water transportation is an extremely low-cost mode generally used to move agricultural

commodities, petroleum, fertilizers, and other goods that, by their nature, lend themselves to bulk

shipping via barge.

Inland water transportation can be slow and subject to weather-related delays.

Virtually any product can be shipped via ocean transportation.

Although sailing times are not competitive with air transportation, it is generally more cost

effective to ship large quantities of merchandise via ocean than by air.

Why is water rated “low” in reliability? In any given year, approximately 200 freighters sink due

to bad weather or other factors.

Air is the fastest transport mode and the carrier of choice for perishable exports such as flowers

or fresh fish, but it is also the most expensive.

Thanks to the digital revolution, the Internet is becoming an important transportation mode

that is associated with several advantages and one major disadvantage.

Disadvantage: the Internet’s capability is low.

Advantages: Anything that can be digitized—text, voice, music, pictures, and video—

can be sent via the Internet. Advantages include low cost and high reliability.

Channel strategy involves an analysis of each shipping mode to determine which mode, or

combination of modes, will be both effective and efficient in a given situation.

Containerization refers to the practice of loading ocean-going freight into steel boxes measuring

20 feet, 40 feet, or longer. Containerization offers many advantages, including flexibility in the

product that can be shipped via container, as well as flexibility in shipping modes.

Intermodal transportation of goods involves a combination of land and water shipping from

producer to customer.

The decision about which mode of transportation to use may be dictated by a particular market

situation, by the company’s overall strategy, or by conditions at the port of importation.

Logistics Management: A Brief Case Study

The term logistics management describes the integration of activities necessary to ensure the

efficient flow of raw materials, in-process inventory, and finished goods from producers to

customers.

J.C. Penney’s provides a case study in the changing face of logistics, physical distribution, and

supply chains in the 21st century.

Penney outsources its private-label shirt supply chain to TAL Apparel Ltd. of Hong Kong.

Penney’s North American stores carry virtually no extra inventory of house-brand shirts.

When a shirt is sold, scanner data is transmitted to Hong Kong. TAL’s computer and replacement

shirts are sent to stores without passing through Penney’s warehouse system.

Since the shirts are sent via air or ship; by working with TAL, Penney’s can lower inventory

costs, reduce the quantity of goods marked down, and respond to consumer tastes.

TEACHING TOOLS AND EXERCISES

Additional Case:

“Mary Kay Inc.: Asian Market Entry (B). John A. Quelch. HBS 509067.

Activity: Students should be preparing or presenting their Cultural-Economic Analysis and

Marketing Plan for their country and product as outlined in Chapter 1.

Out-of-Class Reading: Gabrielsson, Mika, V.H. Manke Kirpalani, and Reijo Luostarinen.

“Multiple Channel Strategies in the European Personal Computer Industry.” Journal of

International Marketing 10, no. 3 (2002), pp. 73-95.

Internet Exercises: Visit www.amazon.com and critique their web site. Does it motivate you to

buy? What problems or concerns do you have with its site?

Go to www.walmart.com and examine its “direct to store” shipping policy. Do you find that this

is an added convenience having your selection shipped to your local Wal-Mart? Or do you find

this an inconvenience versus Amazon’s direct to home shipping policy? Explain your reasoning

and rationale.

Go to L.L.Bean at www.llbean.com. This huge direct marketer has made the transition from

strictly catalog selling to selling via the Internet. Critique the web site. Does it motivate you to

buy? What other interesting features are found on this site?

Writing Assignment: Do research on the railroads or on the airlines as a mode of shipping and

write a brief paper on the strengths and weaknesses, the future, and the popularity of these

modes.

Writing Assignment: By the time this IM is published, Cadbury Chocolates will be owed by

either Hershey’s or Kraft Foods. Do some extensive Internet search and a) find out what the

implications are for increased international distribution of Cadbury; and b) specifically, explore

this implication for Cadbury in the India market.