“Superior sales and distribution by itself can create a monopoly, even with no product differentiation,” writes venture capitalist and billionaire Peter Thiel in his renowned book, Zero-to-One. “The converse is not true.”
We’ve all seen the news about the global supply chain crisis. Clogged waterways, trade wars, and economic sanctions have plagued the industry the past few years, leading many retailers to reshape their physical distribution systems.
Despite the ongoing chaos, retailers still need to find a way to distribute their products. No matter how good a product is, if you can’t sell it, you don’t have a workable business model.
Fortunately, there are ways retailers can build a strong physical distribution system. By investing in distribution, you can sell more products efficiently, delight customers, and impact your bottom line. This article will teach you how to do exactly that.
What is physical distribution?
Physical distribution is the movement of goods, products, and raw materials between warehouses, factories, and distribution centers, and sending finished products to the customer. It involves sales distribution channels, such as ecommerce and wholesale, and components like customer service, inventory, materials, order processing, and transportation.
Importance of physical distribution
- Increased sales
- Faster shipping
- Reduced costs
- Supports price stabilization
Physical distribution plays an important role in supply chain management. There are several benefits to investing in a physical distribution system, including increased sales, faster shipping, lower costs, and price stability.
Distribution is something of a catchall term. It essentially refers to how you get a product out to consumers.
Businesses can increase customer satisfaction and sales by using a physical distribution system that ships products faster and more economically.
That’s why regionalization remains a top priority for many companies. Almost 90% say they plan to work with regional suppliers and distributors over the next three years.
The ability to store products in convenient places and move them efficiently is the key to retailers' continued success in an increasingly competitive global market.
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The biggest benefit of investing in distribution is faster shipping times. Nearly half (48%) of shoppers say they normally receive packages within 2 and 3 days, and 42% receive them within 4 to 7 days. Consumers expect faster shipping from all retailers.
“Investing in a physical distribution system is the most surefire way to shorten shipping times and keep customers happy. This works by strategically storing items in several locations all over the country,” says Dan Potter, Head of Digital at CRAFTD, a premium jewelry brand based out of London.
“And by upping speeds, customers are less likely to abandon their carts, and more likely to keep shopping with you. So while it’s not for everyone, investing in a physical distribution system can improve your shipping times and thus, customer satisfaction.”
Investing in a physical distribution system is the most surefire way to shorten shipping times and keep customers happy.
Another benefit of optimizing distribution is reduced supply chain costs. Areas in which you can save include:
- Transportation: Using a physical distribution system can speed up and improve your shipping processes. As a result, you won't have to pay extra for shipping or storage.
- Inventory: You can better balance inventory and meet demand, which leads to savings on storage fees from holding excess inventory.
- Warehousing: Efficiently moving products leads to lower warehousing costs, since you won’t have to pay for extra storage space.
Accurate inventory counts can help optimize your storage space. By knowing exactly how much space each item takes up in your warehouse or storeroom, you can efficiently use all the space you have.
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Supports price stabilization
Another major benefit of physical distribution is price stabilization. Implementing a system that can deliver products efficiently and quickly can prevent price spikes when demand is high and supplies are low.
With a physical distribution system in place, you can fulfill products even when there is high demand, which keeps prices stable. It also helps you avoid marketing up prices to cover unforeseen handling and shipping costs.
Components of physical distribution
- Customer service
- Order processing
- Inventory control
- Package and material handling
Let's examine each of these components individually.
Customer service is key in physical distribution. Delightful experiences, such as consistently good service and friendly interactions, impact customer loyalty.
Successful companies set high levels of customer service that guide physical distribution activities. For example, the company may guarantee:
- Immediate responses to shipping-related inquiries.
- 2-day delivery.
- Various shipping options.
These guarantees dictate the shipping and distribution methods a company will use. For example, a company offering 2-day delivery may invest in last-mile delivery logistics to fulfill orders on time.
The order processing process involves taking an order and delivering it. Order fulfillment relies on accuracy and reliability to satisfy customers. If a purchase does not arrive within two days of a promised delivery date, 69% of shoppers say they will likely not shop with that retailer again.
Picking, sorting, tracking, invoicing, and shipping are part of the order processing process. Management tools can range from handwritten documents, like log sheets to highly automated records via online orders.
Inventory control is managing stock levels to enable businesses to meet customer demand without incurring excessive costs.
- Overstocking leads to higher storage costs and tied-up cash.
- Understocking leads to disappointed customers and lost sales.
An effective inventory control system will balance various factors to optimize stock levels and minimize costs. It will also keep customers orders fulfilled.
Businesses with a long lead time may decide to keep higher levels of safety stock on hand to avoid stockouts, while businesses with short lead times may be able to get by with lower levels.
Calculating safety stock can be done using historical data, statistical methods, or demand forecasting. Businesses must establish a system for tracking inventory levels and ensuring they remain at the desired level once the desired safety stock level has been determined.
Businesses must replenish their inventory when inventory levels fall, whether the product is manufactured in-house or ordered from a supplier. In either case, planning ahead is key to avoiding supply chain disruptions.
💡 PRO TIP: When you use different platforms to run your online and retail stores, inventory discrepancies are more likely to happen. This can lead to more frequent inventory counts to reconcile differences and ensure stock levels are accurate.
Transportation is the most critical function of physical distribution. It involves moving products from production to warehouse to end user. Transportation ensures products are delivered to the correct destination at the right time.
There are a few common types of transportation:
- Road. Moving products by truck or vehicle. It’s the most efficient way to move goods in a supply chain. The US transportation moved a daily average of about 55.2 million tons of freight, valued at more than $54 billion, in 2019.
- Rail. Moving goods by train. It’s cheaper to transport long distance by train, costing about $70.27 per net ton compared to trucking. which costs around $214.96 per net ton.
- Air freight. Moving goods by airplane. Air transportation is ideal for moving freight around the world quickly and safely. However, it can be more expensive than other modes of transportation.
- Water. Moving products by boat. Ideal for moving bulk products at a low cost, with extensive coverage in the US and around the world. Ships transport more than 80% of world trade volume.
- Pipeline. Moving product by system of pipes. Ideal for moving large quantities of liquids like gas to an area for consumption.
Logistics is key to a successful transportation system. A logistics system makes certain that products follow the correct schedule, shipping routes, and transportation modes. An effective logistics system can also help you choose the right method of transportation based on speed, availability, reliability, and cost.
A physical distribution system usually has one or more warehouses to store goods. Retailers take two approaches to warehousing:
- Traditional warehouse storage. You pay for a central location where you store inventory. All your stock is sent to the warehouse, and from there it’s processed, stored, and shipped to your store (or customer’s door, if you’re selling online).
- Third party logistics (3PL). Existing warehouses often have space you can rent to store inventory. You pay housing and shipping fees, but storing and moving inventory are actually done by a third party logistics company. Shipping is often quick and affordable.
3PLs have become trusted partners for distribution and fulfillment. A recent report by supply chain management firm Armstrong & Associates found that 90% of Fortune 500 companies work with 3PL providers.
Benefits of working with a 3PL include:
- You don’t have to worry about inventory management and distribution channels.
- You get access to inventory tracking tools.
- You can improve deliveries and ship faster.
If you go the traditional route, you need to manage inventory directly and staff your warehouse. You’ll need to consider factors like:
- Size of your market
- Frequency of customer orders
- Your transportation system
- Storage and handling equipment available
- Optimal warehouse layout
If you are a retail business growing and opening more locations, or expanding into physical retail, working with a 3PL could very well be an excellent addition to your physical distribution system, compared to running a warehouse.
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Package and material handling
The purpose of package and material handling is to receive, store, and ship products and materials.
Transporting packages and materials within an area and loading and unloading trucks and other vehicles are all part of this process. It can be done manually, or with the aid of machines like conveyor belts, cranes, and forklifts.
When designing a package and material handling system, consider:
- The type of products and materials being handled
- The size and weight of the products and materials
- The packaging of the products and materials
- The frequency of shipments
- The number of receiving and shipping docks
- The layout of the facility
Physical distribution system process
Let's walk through the process of building a physical distribution system.
To build a cost-effective physical distribution process, retailers must first set objectives. By doing so, you can tailor the process to meet your company’s specific needs.
Some common objectives retailers have include:
- Minimizing physical distribution costs
- Maximizing customer service levels
- Reducing inventory levels.
Review cost trade-offs
After establishing objectives, you want to review cost trade-offs. A cost trade-off means that by reducing costs in one area, you may increase costs in another.
Cost trade-offs include variable costs, such as transportation and inventory, and fixed costs, such as buildings and land. The aim should be to maximize customer service while minimizing total cost of ownership.
The graph below shows a simple relationship between logistics costs, transport costs, and warehousing costs. You can see that as shipment size or the number of warehouses increases, transport costs go down, but warehousing costs go up.
At a certain point, increasing shipments and warehouses can increase logistics costs. It’s a balancing act to find the optimal shipment size and number of warehouses for a physical distribution system.
Once you figure out your fixed and variable costs, you can begin to identify cost trade-offs. For example, one trade-off may be to increase inventory levels to reduce transportation costs. Another may be to have facilities closers to customers to reduce shipping time and costs.
Understanding cost trade-offs lets you make informed decisions about your physical distribution system. It enables you to minimize total cost of ownership and improve your bottom line.
Identify design alternatives
There are a variety of design options available to retailers regarding physical distribution. Most retailers use a third-party logistics provider (3PL), which can be an outside company or a subsidiary. You can also use in-house staff, outsource to companies specializing in certain aspects of the process (such as transportation management), or combine approaches.
Each approach has its own advantages and disadvantages, so it's important to carefully weigh all your options before deciding. 3PLs, for example, can be less expensive than doing everything in-house, but they may also be less flexible and less controllable. Ultimately, the best approach depends on a retailer’s specific needs and goals.
Create your own physical distribution management system
Building a physical distribution system is key to running a successful retail business, as it includes the final steps a business takes before putting its product into a customer’s hands. If done well, the efficient movement of products will delight customers and build loyalty.
By investing in a third-party logistics (3PL) partner, you can ensure products are handled with care and delivered on time. A 3PL partner can help you ship products faster, meet demand more easily, and improve your bottom line.
Manage your inventory with confidence
Only Shopify POS helps you manage warehouse and retail store inventory from the same back office. Compare inventory costs to revenue, see which items are selling out or sitting on shelves, forecast demand, and more.