When a company is primarily an exporter from a single country to a single market; the typical approach to the physical movement of goods is the selection of a dependable mode of transportation that ensures safe arrival of the goods within a reasonable time for a reasonable carrier cost. As a company becomes global such a solution to the movement of products could prove costly and highly inefficient for seller and buyer. As some global marketers say, the hardest art is not making the sale but getting thee correct quantity of the product to customers in the required time frame at a cost that leaves enough margins for a profit.
At some point in the growth and expansion of an international firm, costs other than transportation are such that an optimal cost solutions to the physical movement goods cannot be achieved without thinking of the physical distribution process as an integrated system. When a international marketer begins producing and selling in more than one country and becomes a global marketer, it is time to consider the concept of logistics management a total systems approach to management of the distribution process that includes all activities involved in physically moving raw materials in process inventory and goods inventory from the point of origin to the point of use or consumption.
Interdependence of physical distribution activities
A physical distribution system involves more than the physical movement of goods. It includes location of plants and warehousing (storage), transportation mode, inventory quantities and packing. The concept of physical distribution takes into account the interdependence o the costs of each activity, a decision involving one activity affects the cost and efficiency of one or all others. In fact because of their interdependence the sum of each of the different activity costs entail an infinite number of total costs (Total costs of the system is defined as the sum of the costs of all these activities)
The idea of interdependence can be illustrated by the classic example of airfreight. Exhibit is an illustration of an actual company’s costs of shipping 44,000 peripheral boards worth $7.7 million from a Singapore plant to the US West coast using two modes of transportation ocean freight and the seemingly more expensive airfreight. When considering only rates for transportation and carrying costs for inventory in transit air transportation costs were approximately $57,000 higher than ocean freight. But notice that when total costs are calculated air freight was actually less costly than freight because of other costs involved in the total physical distribution system.
To off set the slower ocean freight and the possibility of unforeseen delays and to ensure prompt customer delivery schedules, the company had to continuously maintain 30 days of inventory in Singapore and another 30 days inventory at the company’s distribution centers. The costs of financing 60 days of inventory and of additional warehousing to both points – that is real physical distribution costs – would result in the cost of ocean freight exceeding air by more than $75,000. Ocean freight may even entail additional cost such as higher damage rate higher insurance and higher packing rates.
Substantial savings can result from systematic examination of logistics costs and the calculation of total physical distribution costs. A large multinational firms with facilities and customers around the world shipped parts from its US Midwest plant to the nearest East Coast port, then by water route around the Cape of Good Hope (Africa) and finally to its plants in Asia, taking 14 weeks substantial inventory was maintained in Asia as safeguard against uncertain water borne deliveries. The transportation carrier costs were the least expensive available; however delivery delays an unreliable service caused the firm to make emergency air shipments to keep production lines going. As a result air shipment costs rose to 70 percent of the total transport bill. An analysis of the problems in the physical distribution system showed that trucking the parts to West Coast ports using cost motor carriers and then shipping them by Asia by sea could lower costs. Transit time was reduced, delivery reliability improved inventory quantities in Asia lowered and emergency air shipments eliminated. The new distribution system produced annual savings of $60,000.
Although a cost differences will not always be the case, the example illustrate the interdependence of the various activities in the physical distribution mix and the total cost. A change of transportation mode can effect a change in packaging and handling inventory costs, warehousing tem and cost, and delivery charges.