Physical distribution refers to the processes through which a business moves a product through distribution channels and gets it to its customers. Physical distribution is the sum of a firm’s warehouse location decisions, inventory control processes, order handling and transportation decisions. The goal for a firm is to manage all these aspects so as to minimize its total physical distribution costs.
A firm needs warehouses as storage facilities for finished goods. One objective of physical distribution is to decide how many warehouse locations the firm needs, and where to locate them. If the warehouses are too far away from the consumer, it might mean a slower time to deliver the product to the customer. On the other hand, if it is close to the customer location, the cost of the warehouse might increase the total cost of distribution.
In processing a customer’s order, the firm might have to move it through a number of channels. It could go from the manufacturer to the wholesaler to the retailer, and finally reach the consumer. Some firms have found ways to cut down on the multiple middlemen involved in this classic distribution system. Online ordering allows a customer to order directly from the manufacturer, cutting down some of these distribution costs.
There is a trade-off for a firm between having too much inventory on hand, with its incurred additional costs, and not having enough inventory on hand to satisfy shifting customer demand. Another objective for physical distribution is to put in suitable inventory policies so as to bring down the total cost of the physical distribution function.
The firm also has to make decisions relating to what mode of transportation to use for its physical distribution. For instance, it could truck the products, ship them, send them by train, or fly them. One factor that influences the decision is the cost of transportation. There is also the speed factor. Sending a product by air is faster for international delivery, but it is also likely to be more expensive. Other decisions related to transportation include how often to transport goods, or the frequency of transportation, and the transportation route.