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M&DCPhysicalDistribution
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M&DCPurchasing&SupplyChain:MaterialManagement

Physical Distribution

IntroductiontoMaterialManagement

Contents

MasterScheduling
MaterialRequirementsPlanning
CapacityManagement

1.

Introduction

ProductionActivityControl

2.

PhysicalDistributionSystem

Purchasing

3.

Interfaces

4.

Transportation

5.

LegalTypesofCarriage

6.

TransportationCostElements

7.

MaterialsHandling

Forecasting
InventoryFundamentals
OrderQuantities

IndependentDemandOrderingSystems8.

MultiWarehouseSystems

PhysicalInventoryandWarehouseManagement
PhysicalDistribution

1.Introduction
Chapter1introducedthesupplychainconcept.Itwaspointedoutthatasupplychainiscomposedof
aseriesofsuppliersandcustomerslinkedtogetherbyaphysicaldistributionsystem.Usuallythe
supplychainconsistsofseveralcompanieslinkedinthisway.Thischapterwilldiscussthephysical
distributionaspectofsupplychains.
Physicaldistributionisthemovementofmaterialsfromtheproducertotheconsumer.Itisthe
responsibilityofthedistributiondepartment,whichispartofanintegratedmaterialsmanagementor
logisticssystem.Figure13.1showstherelationshipofthevariousfunctionsinthistypeofsystem.
InFigure13.1,themovementofmaterialsisdividedintotwofunctions:physicalSupplyandphysical
distribution.Physicalsupplyisthemovementandstorageofgoodsfromsupplierstomanufacturing.
Dependingontheconditionsofsale,thecostmaybepaidbyeitherthesupplierorthecustomer,butit
isultimatelypassedontothecustomer.Physicaldistribution,ontheotherhand,isthemovement
andstorageoffinishedgoodsfromtheendofproductiontothecustomer.Theparticularpathiiiwhich
thegoodsmovethroughdistributioncenters,wholesalers,andretailersiscalledthechannelof
distribution.

Figure13.1Supplychain(logisticssystem).

ChannelsofDistribution
Achannelofdistributionisoneormorecompaniesorindividualswhoparticipatein
theflowofgoodsand/orservicesfromtheproducertothefinaluserorconsumer.
Sometimesacompanydeliversdirectlytoitscustomers,butoftenitusesother
companiesorindividualstodistributesomeorallofitsproductstothefinalconsumer.
Thesecompaniesorindividualsarecalledintermediaries.Examplesofintermediaries
arewholesalers,agents,transportationcompanies,andwarehouses.
Therearereallytworelatedchannelsinvolved.Thetransactionchannelisconcerned
withthetransferofownership.Itsfunctionistonegotiate,sell,andcontract.The
distributionchannelisconcernedwiththetransferordeliveryofthegoodsor
services.Thesameintermediarymayperformbothfunctions,butnotnecessarily.

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Figure13.2showsanexampleoftheseparationofdistributionandtransaction
channels.Theexamplemightbeforacompanydistributingamajorappliancesuchas
arefrigeratororstove.Insuchasystemtheretailerusuallycarriesonlydisplay
models.Whenthecustomerordersanappliance,deliveryismadefromeitherthe
regionalwarehouseorthepublicwarehouse.
Inthistextweareconcernedwiththedistributionchannel.
Althoughitcanbearguedthatonefirmsphysicalsupplyisanotherfirmsphysical
distribution,frequentlythereareimportantdifferences,particularlyastheyrelatetothe
bulkandphysicalconditionofrawmaterialsandfinishedgoods.Thelogistics
problemsthatoccurinmovingandstoringironorearequitedifferentfromthosethat
occurinmovingsheetsteel.Thesedifferencesinfluencethedesignofalogistics
systemandareimportantindecidingthelocationofdistributioncentersandfactories.
Thistextreferstobothphysicaldistributionandphysicalsupplyasphysical
distribution,butthedifferencesforanyparticularcompanyshouldberemembered.

Figure13.2Separationofdistributionandtransactionchannels.
Physicaldistributionisvitalinourlives.Usually,manufacturers,customers,and
potentialcustomersarewidelydispersedgeographically.Ifmanufacturersserveonly
theirlocalmarket,theyrestricttheirpotentialforgrowthandprofit.Byextendingits
market,afirmcangaineconomiesofscaleinmanufacturing,reducethecostof
purchasesbyvolumediscounts,andimproveitsprofitability.However,toextend
marketsrequiresawellrundistributionsystem.Manufacturingaddsformvaluetoa
productbytakingtherawmaterialsandcreatingsomethingmoreuseful.Breadis
madefromgrainandisfarmoreusefultohumansthanthegrainitself.Distribution
addsplacevalueandtimevaluebyplacinggoodsinmarketswheretheyareavailable
totheconsumeratthetimetheconsumerwantsthem.
Thespecificwayinwhichmaterialsmovedependsuponmanyfactors.Forexample:
Thechannelsofdistributionthatthefirmisusing.Forexample,producertc
wholesalertoretailertoconsumer.
Thetypesofmarketsserved.Marketcharacteristicssuchasthegeographic
dispersionofthemarket,thenumberofcustomers,andthesizeoforders.
Thecharacteristicsoftheproduct.Forexample,weight,density,fragility,and
perishability.
Thetypeoftransportationavailabletomovethematerial.Forexample,trains
ships,planes,andtrucks.
Allarecloselyrelated.Forinstance,floristssellingaperishableproducttoalocal
marketwillselldirectlyandprobablyusetheirowntrucks.However,anational
canningcompanysellinganonperishableproducttoanationalmarketthrougha
distributionchannelcomposedofwholesalersandretailersmayusetrucksandrail
transport.

2.PhysicalDistributionSystem
Physicaldistributionisresponsiblefordeliveringtothecustomerwhatiswantedontimeandat
minimumcost.Theobjectiveofdistributionmanagementistodesignandoperateadistribution
systemthatattainstherequiredlevelofcustomerserviceanddoessoatleastcost.Toreachthis
objective,allactivitiesinvolvedinthemovementandstorageofgoodsmustbeorganizedintoan
integratedsystem.

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ActivitiesinthePhysicalDistributionSystem
Asystemisasetofcomponentsoractivitiesthatinteractwitheachother.Acar
engineisasystemifanypartmalfunctions,theperformanceofthewholeengine
suffers.Inadistributionsystem,sixinterrelatedactivitiesaffectcustomerserviceand
thecostofprovidingit:

a.

Transportation.Transportationinvolvesthevariousmethodsofmovinggoods
outsidethefirmsbuildings.Formostfirms,transportationisthesinglehighest
costindistribution,usuallyaccountingfor30%to60%ofdistributioncosts.
Transportationaddsplacevaluetotheproduct.

b.

Distributioninventory.Distributioninventoryincludesallfinishedgoods
inventoryatanypointinthedistributionsystem.Incostterms,itisthesecond
mostimportantitemindistribution,accountingforabout25%to30%ofthecost
ofdistribution.Inventoriescreatetimevaluebyplacingtheproductclosetothe
customer.

c.

Warehouses(distributioncenters).Warehousesareusedtostoreinventory.
Themanagementofwarehousesmakesdecisionsonsiteselection,numberof
distributioncentersinthesystem,layout,andmethodsofreceiving,storing,
andretrievinggoods.

d.

Materialshandling.Materialshandlingisthemovementandstorageofgoods
insidethedistributioncenter.Thetypeofmaterialshandlingequipmentused
affectstheefficiencyandcostofoperatingthedistributioncenter.Materials
handlingrepresentsacapitalcost,andatradeoffexistsbetweenthiscapital
costandtheoperatingcostsofthedistributioncenter.

e.

Protectivepackaging.Goodsmovinginadistributionsystemmustbe
contained,protected,andidentified.Inaddition,goodsaremovedandstoredin
packagesandmustfitintothedimensionofthestoragespacesandthe
transportationvehicles.

f.

Orderprocessingandcommunication.Orderprocessingincludesall
activitiesneededtofillcustomerorders.Orderprocessingrepresentsatime
elementindeliveryandisanimportantpartofcustomerservice.Many
intermediariesareinvolvedinthemovementofgoods,andgoodcommunication
isessentialtoasuccessfuldistributionsystem.

TotalCostConcept
Theobjectiveofdistributionmanagementistoprovidetherequiredlevelofcustomer
serviceattheleasttotalsystemcost.Thisdoesnotmeanthattransportationcostsor
inventorycostsoranyoneactivitycostshouldbeaminimum,butthatthetotalofall
costsshouldbeaminimum.Whathappenstooneactivityhasaneffectonother
activities,totalsystemcost,andtheservicelevel.Managementmusttreatthesystem
asawholeandunderstandtherelationshipsamongtheactivities.

ExampleProblem
Acompanynormallyshipsaproductbyrail.Transportbyrailcosts$200,andthe
transittimeis10days.However,thegoodscanbemovedbyairatacostof$1000
andwilltakeonedaytodeliver.Thecostofinventoryintransitforaparticular
shipmentis$100perday.Whatarethecostsinvolvedintheirdecision?

Answer
RailAir
TransportationCost$200$1000
InTransitInventoryCarryingCost1000100
Total$1200$1100

Therearetworelatedprinciplesillustratedhere:

a.

Costtradeoff.Thecostoftransportationincreasedwiththeuseofairtransport,butthecostof
carryinginventorydecreased.Therewasacosttradeoffbetweenthetwo.

b.

Totalcost.Byconsideringallofthecostsandnotjustanyonecost,thetotalsystemcostis
reduced.Notealsothateventhoughnocostisattributedtoit,customerserviceisimprovedby
reducingthetransittime.Thetotalcostshouldalsoreflecttheeffectofthedecisiononother
departments,suchasproductionandmarketing.
Theprecedingexampledoesnotmeanthatusingfastertransportalwaysresult~insavings.For
example,ifthegoodsbeingmovedareoflowvalueandinventory

3.Interfaces
Bytakingthegoodsproducedbymanufacturinganddeliveringthemtothecustomer,physical
distributionprovidesabridgebetweenmarketingandproduction.Assuch,thereareseveralimportant
interfacesamongphysicaldistributionandproductionandmarketing.

Marketing

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Althoughphysicaldistributioninteractswithalldepartmentsinabusiness,itsclosest
relationshipisprobablywithmarketing.Indeed,physicaldistributionisoftenthoughtof
asamarketingsubject,notaspartofmaterialsmanagementorlogistics.
Themarketingmixismadeupofproduct,promotion,price,andplace,andthelatter
iscreatedbyphysicaldistribution.Marketingisresponsiblefortransferringownership.
Thisisaccomplishedbysuchmethodsaspersonalselling,advertising,sales
promotion,merchandising,andpricing.Physicaldistributionisresponsibleforgiving
thecustomerpossessionofthegoodsanddoessobyoperatingdistributioncenters,
transportationsystems,inventories,andorderprocessingsystems.Ithasthe
responsibilityofmeetingthecustomerservicelevelsestablishedbymarketingandthe
seniormanagementofthefirm.
Physicaldistributioncontributestocreatingdemand.Promptdelivery,product
availability,andaccurateorderfillingareimportantcompetitivetoolsinpromotinga
firmsproducts.Thedistributionsystemisacost,soitsefficiencyandeffectiveness
influencethecompanysabilitytopricecompetitively.Alloftheseaffectcompany
profits.

Production
Physicalsupplyestablishestheflowofmaterialintotheproductionprocess.The
servicelevelmustusuallybeveryhighbecausethecostofinterruptedproduction
schedulescausedbyrawmaterialshortageisusuallyenormous.
Therearemanyfactorsinvolvedinselectingasiteforafactory,butanimportantone
isthecostandavailabilityoftransportationforrawmaterialstothefactoryandthe
movementoffinishedgoodstothemarketplace.Sometimes,thelocationoffactories
isdecidedlargelybythesourcesandtransportationlinksofrawmaterials.
Thisisparticularlytruewheretherawmaterialsarebulkyandofrelativelylowvalue
comparedtothefinishedproduct.ThelocationofsteelmillsontheGreatLakesisa
goodexample.Thebasicrawmaterial,ironore,isbulky,heavy,andoflowunitvalue.
Transportationcostsmustbekeptlowtomakeasteelmillprofitable.Ironorefrom
minesineithernorthernQuebecorMinnesotaistransportedtothemillsbyboat,the
leastcostlymodeoftransportation.Inothercases,theavailabilityoflowcost
transportationmakesitpossibletolocateinareasremotefrommarkets,butwhere
laborisinexpensive.
Unlessafirmisdeliveringfinishedgoodsdirectlytoacustomer,demandonthe
factoryiscreatedbythedistributioncenterordersandnotdirectlybythefinal
customer.AsnotedinChapter11,thiscanhavesevereimplicationsonthedemand
patternatthefactory.Althoughthedemandfromcustomersmayberelativelyuniform,
thefactoryreactstothedemandfromthedistributioncentersforreplenishmentstock.
Ifthedistributioncentersareusinganorderpointsystem,thedemandonthefactory
willnotbeuniformandwillbedependentratherthanindependent.Thedistribution
systemisthefactoryscustomer,andthewaythatthedistributionsysteminterfaces
withthefactorywillinfluencetheefficiencyoffactoryoperations.

4.Transportation
Transportationisanessentialingredientintheeconomicdevelopmentofanyarea.Itbringstogether
rawmaterialsforproductionofmarketablecommoditiesanddistributestheproductsofindustrytothe
marketplace.Assuch,itisamajorcontributortotheeconomicandsocialfabricofasocietyandaids
economicdevelopmentofregionalareas.

a.
b.
c.
d.
e.

Rail.
Road,includingtrucks,buses,andautomobiles.
Air.
Water,includingoceangoing,inland,andcoastalships.
Pipeline.
Eachmodehasdifferentcostandservicecharacteristics.Thesedeterminewhichmethodis
appropriateforthetypesofgoodstobemoved.Certaintypesoftrafficaresimplymorelogically
movedwithinonemodethantheyareinanother.Forexampletrucksarebestsuitedtomovingsmall
quantitiestowidelydispersedmarkets,butrainsarebestsuitedtomovinglargequantitiesofbulky
cargosuchasgrain.

CostsofCarriage
Toprovidetransportationservice,anycarrier,whatevermode,musthavecertainbasic
physicalelements.Theseelementsareways,terminals,andvehicles.Eachresultsin
acosttothecarrierand,dependingonthemodeandthecarrier,maybeeithercapital
(fixed)oroperating(variable)costs.Fixedcostsarecoststhatdonotchangewiththe
volumeofgoodscarried.Thepurchasecostofatruckownedbythecarrierisafixed
cost.Nomatterhowmuchitisused,thecostofthevehicledoesnotchange.
However,
manycostsofoperation,suchasfuel,maintenance,anddriverswages,dependon
theusemadeofthetruck.Thesearevariablecosts.
Waysarethepathsoverwhichthecarrieroperates.Theyincludetherightofway(land
areabeingused),plusanyroadbed,tracks,orotherphysicalfacilitiesneededonthe
rightofway.Thenatureofthewayandhowitispaidforvarywiththemode.Theymay
beownedandoperatedbythegovernmentorbythecarrierorprovidedbynature.
Terminalsareplaceswherecarriersloadandunloadgoodstoandfromvehiclesand

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makeconnectionsbetweenlocalpickupanddeliveryserviceandlinehaulservice.
Otherfunctionsperformedatterminalsareweighingconnectionswithotherroutesand
carriersvehiclerouting,dispatching,andmaintenanceandadministrationand
paperwork.Thenature,size,andcomplexityoftheterminalvarieswiththemodeand
sizeofthefirmandthetypesofgoodscarried.Terminalsaregenerallyownedand
operatedbythecarrierbut,insomespecialcircumstances,maybepubliclyownedand
operated.
Vehiclesofvarioustypesareusedinallmodesexceptpipelines.Theyserveas
carryingandpowerunitstomovethegoodsovertheways.Thecarrierusuallyownsor
leasesthevehicles,althoughsometimestheshipperownsorleasesthem.
Besidesways,terminals,andvehicles,acarrierwillhaveothercostssuchas
maintenance,labor,fuel,andadministration.Thesearegenerallypartofoperating
costsandmaybefixedorvariable.

Rail
Railwaysprovidetheirownways,terminals,andvehicles,allofwhichrepresentalarge
capitalinvestment.Thismeansthatmostofthetotalcostofoperatingarailwayis
fixed.Thus,railwaysmusthaveahighvolumeoftraffictoabsorbthefixedcosts.
Theywillnotwanttoinstallandoperateraillinesunlessthereisalargeenoughvolume
oftraffic.Trainsmovegoodsbytrainloadscomposedofperhapsahundredcarseach
withacarryingcapacityintheorderof160,000pounds.
Therefore,railwaysarebestabletomovelargevolumesofbulkygoodsoverlong
distances.Theirfrequencyofdeparturewillbelessthantrucks,whichcanmovewhen
onetruckisloaded.Railspeedisgoodoverlongdistances,theserviceisgenerally
reliable,andtrainsareflexibleaboutthegoodstheycancarry.Trainserviceischeaper
thanroadforlargequantitiesofbulkycommoditiessuchascoal,grain,potash,and
containersmovedoverlongdistances.

Road
Trucksdonotprovidetheirownways(roadsandhighways)butpayafeetothe
governmentaslicense,gasoline,andothertaxesandtollsfortheuseofroads.
Terminalareusuallyownedandoperatedbythecarrierbutmaybeeitherprivately
ownedorownedbythegovernment.Vehiclesareowned,orleased,andoperatedby
thecarrier.Ifowned,theyareamajorcapitalexpense.However,incomparisonto
othermodes,thecostofavehicleissmall.Thismeansthatforroadcarriersmostof
theircostsareoperating(variable)innature.
Truckscanprovidedoortodoorserviceaslongasthereisasuitablesurfaceonwhich
todrive.IntheUnitedStatesandCanada,theroadnetworkissuperb.Theunitof
movementisatruckload,whichcanbeuptoabout100,000pounds.Thesetwofactors
theexcellentroadsystemandtherelativelysmallunitofmovementmeanthat
truckscanprovidefastflexibleservicealmostanywhereinNorthAmerica.Trucksare
particularlysuitedtodistributionofrelativelysmallvolumegoodstoadispersed
market.

Air
Airtransportdoesnothavewaysinthesenseoffixedphysicalroadbeds,butitdoes
requireanairwaysystemthatincludesairtrafficcontrolandnavigationsystems.
Thesesystemsareusuallyprovidedbythegovernment.Carrierspayausercharge
thatisavariablecosttothem.Terminalsincludealloftheairportfacilities,mostof
whichareprovidedbythegovernment.However,carriersareusuallyresponsiblefor
providingtheirowncargoterminalsandmaintenancefacilities,eitherbyowningor
rentingthespace.Thecarrierprovidestheaircrafteitherthroughownershiporleasing.
Theaircraftareexpensiveandarethesinglemostimportantcostelementforthe
airline.Sinceoperatingcostsarehigh,airlinescostsaremainlyvariable.
Themainadvantageofairtransportisspeedofservice,especiallyoverlong
distances.Mostcargotravelsinpassengeraircraft,andthusmanydeliveryschedules
aretiedtothoseofpassengerservice.Theserviceisflexibleaboutdestination
providedthereisasuitablelandingstrip.Transportationcostforaircargoishigherthan
forothermodes.Forthesereasons,airtransportismostoftensuitableforhighvalue,
lowweightcargoorforemergencyitems.

Water
Waterwaysareprovidedbynatureorbynaturewiththeassistanceofthegovernment.
TheSt.LawrenceSeawaysystemisanexampleofthis.Thecarrierthushasno
capitalcostinprovidingthewaysbutmayhavetopayafeeforusingthewaterway.
Terminalsmaybeprovidedbythegovernmentbutareincreasinglyprivatelyowned.In
eithercase,thecarrierwillpayafeetousethem.Thus,terminalsaremainlyavariable
cost.Vehicles(ships)areeitherownedorleasedbythecarrierandrepresentthemajor
capitalorfixedcosttothecarrier.
Themainadvantageofwatertransportiscost.Operatingcostsarelow,andsincethe
shipshavearelativelylargecapacity,thefixedcostscanbeabsorbedoverlarge
volumes.Shipsareslowandaredoortodooronlyiftheshipperandtheconsigneeare
onawaterway.Therefore,watertransportationismostusefulformovinglowvalue,
bulkycargooverrelativelylongdistanceswherewaterwaysareavailable.

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Pipelines
Pipelinesareuniqueamongthemodesoftransportationinthattheymoveonlygas,
oil,andrefinedproductsonawidespreadbasis.Assuch,theyareoflittleinterestto
mostusersoftransportation.Capitalcostsforwaysandpipelinesarehighandare
bornebythecarrier,butoperatingcostsareverylow.

5.LegalTypesofCarriage
Carriersarelegallyclassifiedaspublic(forhire)orprivate(notforhire).Inthelatter,individualsor
firmsownorleasetheirvehiclesandusethemtomovetheirowngoods.Publictransport,ontheother
hand,isinthebusinessofhaulingforothersforpay.Allmodesoftransporthavepublicandforhire
carriers.
Forhirecarriersaresubjecttoeconomicregulationbyfederal,state,ormunicipalgovernments.
Dependingonthejurisdiction,economicregulationmaybemoreorlesssevere,andinrecentyears,
therehasbeenastrongmovebygovernmenttoreduceregulations.Economicregulationhascentered
onthreeareas:

a.

Regulationofrates.

b.

Controlofroutesandservicelevels.

c.

Controlofmarketentryandexit.
Privatecarriersarenotsubjecttoeconomicregulationbut,likepubliccarriers,areregulatedinsuch
mattersaspublicsafety,licensefees,andtaxes.

ForHire
Aforhirecarriermaycarrygoodsforthepublicasacommoncarrierorundercontract
toaspecifiedshipper.
CommoncarriersmakeastandingoffertoservethepublicThismeansthatwhatever
productstheyoffertocarrywillbecarriedforanyonewantingtheirservice.Withsome
minorexceptions,theycancarryonlythosecommoditiestheyarelicensedtocarry.
Forinstance,ahouseholdmovercannotcarrygravelorfreshvegetables.Common
carriersprovidethefollowing:
Serviceavailabletothepublic.
Servicetodesignatedpointsorindesignatedareas.
Scheduledservice.
Serviceofagivenclassofmovementorcommodity.
Contractcarriershaulonlyforthosewithwhomtheyhaveaspecificformalcontract
ofservice,notthegeneralpublic.Contractcarriersofferaserviceaccordingtoa
contractualagreementsignedwithaspecificshipper.Thecontractspecifiesthe
characteroftheservice,performance,andcharges.

Private
Privatecarriersownorleasetheirequipmentandoperateitthemselves.Thismeans
investmentinequipment,insurance,andmaintenanceexpense.Acompanynormally
onlyconsidersoperatingitsownfleetifthevolumeoftransportishighenoughto
justifythecapitalexpense.

ServiceCapability
Servicecapabilitydependsontheavailabilityoftransportationservice,whichinturn
dependsonthecontrolthattheshipperhasoverthetransportationagency.The
shippermustgotothemarketplacetohireacommoncarrierandissubjecttothe
schedulesandregulationsofthatcarrier.Leastcontrolisexercisedovercommon
carriers.Shipperscanexercisemostcontrolovertheirownvehiclesandhavethe
highestservicecapabilitywithprivatecarriage.

OtherTransportationAgencies
Thereareseveraltransportationagenciesthatusethevariousmodesorcombinations
ofthemodes.Someofthesearethepostoffice,freightforwarders,couriers,and
shippers.Theyallprovideatransportationservice,usuallyasacommoncarrier.They
mayownthevehicles,ortheymaycontractwithcarrierstomovetheirgoods.Usually,
theyconsolidatesmallshipmentsintolargeshipmentstomakeeconomicloads.

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6.TransportationCostElements
Therearefourbasiccostelementsintransportation.Knowledgeofthesecostsenablesashipperto
getabetterpricebyselectingtherightshippingmode.Thefourbasiccostsareasfollows:

a.

Linehaul.

b.

Pickupanddelivery.

c.

Terminalhandling.

d.

Billingandcollecting.
Wewillusemotortransportasanexample,buttheprinciplesarethesameforallmodes.
Goodsmoveeitherdirectlyfromtheshippertotheconsigneeorthroughaterminal.Inthelatter,they
arepickedupinsomevehiclesuitableforshorthaullocaltravel.Theyarethendeliveredtoaterminal
wheretheyaresortedaccordingtodestinationandloadedontohighwayvehiclesfortraveltoa
destinationterminal.There,theyareagainsorted,loadedonlocaldeliverytrucks,andtakentothe
consignee.Figure13.3showsthispatternschematically.

Figure13.3Shippingpatterns.

LineHaulCosts
Whengoodsareshipped,theyaresentinamovingcontainerthathasaweightand
volumecapacity.Thecarrier,privateorforhire,hasbasiccoststomovethis
container,whichexistwhetherthecontainerisfullornot.Foratruck,theseinclude
suchitemsasgasoline,thedriverswages,anddepreciationduetousage.These
costsvarywiththedistancetraveled,nottheweightcarried.Thecarrierhas
essentiallythesamebasiccostswhetherthetruckmovesfullorempty.Ifitishalffull,
thebasiccostsmustbespreadoveronlythosegoodsinthetruck.
Therefore,totallinehaulcostsvarydirectlywiththedistanceshipped,notonthe
weightshipped.Forexample,ifforagivencommodity,thelinehaulcostis$3permile
andthedistanceis100miles,thetotallinehaulcostis$300.Iftheshippersends
50,000pounds,thetotallinehaulcostisthesameasif10,000poundsissent.
However,thelinehaulcosts(LHC)perhundredweight(cwt.)isdifferent.

300
LHC/cwt=.
500
=$0.60percwt.[for
50,000lb.(500cwt.)

300
LHC/cwt=.
500
=$3percwt.[for
10,000lb.(100cwt.)
Thus,thetotallinehaulcostvarieswith(a)thecostpermileand(b)thedistance
moved.However,thelinehaulcostperhundredweightvarieswith(a)thecostper
mile,(b)thedistancemoved,and(c)theweightmoved.

ExampleProblem
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Foraparticularcommodity,thelinehaulcostis$2.50permile.Foratripof500miles
andashipmentof600cwt.,whatisthecostofshippingpercwt.?Iftheshipmentis
increasedto1000cwt.,whatisthesavingincostpercwt.?

Answer
Totallinehaulcost=$2.5X500=$1250
Costpercwt.=$1250600=$2.083
If1000cwt.isshipped:
Costpercwt.=$12501000=$1.25
Savingpercwt.=$2.08$1.25=$0.83

Thecarrierhastwolimitationsorcapacityrestrictionsonhowmuchcanbemovedonanyonetrip:the
weightlimitationandthecubicvolumelimitationofthevehicle.Withsomecommodities,theirdensity
issuchthatthevolumelimitationisreachedbeforetheweightlimitation.Iftheshipperwantstoship
more,amethodofincreasingthedensityofthegoodsmustbefound.Thisisonereasonthatsome
lightweightproductsaremadesotheynest(forexample,disposablecups)andbicyclesand
wheelbarrowsareshippedinanunassembledstate.Thisisnottofrustrateuspoormortalswhotryto
assemblethembuttoincreasethedensityoftheproductsomoreweightcanbeshippedinagiven
vehicle.Thesameprincipleappliestogoodsstoredindistributioncenters.Themorecompactthey
are,themorecanbestoredinagivenspace.Therefore,ifshipperswanttoreducetransportationcost,
theyshould(a)increasetheweightshippedand(b)maximizedensity.

ExampleProblem
Acompanyshipsbarbecuesfullyassembled.Theaveragelinehaulcostpershipment
is$12.50permile,andthetruckcarries100assembledbarbecues.Thecompanyde
cidestoshipthebarbecuesunassembledandfigurestheycanship500barbecuesin
truck.Calculatethelinehaulcostperbarbecueassembledandunassembled.Ifthe
averagetripis300miles,calculatethesavingperbarbecue.

Answer
Linehaulcostassembled=$12.50100=$0.125perbarbecuepermile
Linehaulcostunassembled=$12.50500=$0.025perbarbecuepermile
Savingpermile=$0.1250.025=$0.10
Tripsaving=300x$0.10=$30.00perbarbecue

PickupandDeliveryCosts
Pickupanddeliverycostsaresimilartolinehaulcostsexceptthatthecostdepends
moreonthetimespentthanonthedistancetraveled.Thecarrierwillchargeforeach
pickupandtheweightpickedup.Ifashipperismakingseveralshipments,itwillbe
lessexpensiveiftheyareconsolidatedandpickedupononetrip.

TerminalHandling
Terminalhandlingcostsdependonthenumberoftimesashipmentmustbeloaded,
handled,andunloaded.Iffulltruckloadsareshipped,thegoodsdonotneedtobe
handledintheterminalbutcangodirectlytotheconsignee.Ifpartloadsareshipped,
theymustbetakentotheterminal,unloaded,sorted,andloadedontoahighway
vehicle.Atthedestination,thegoodsmustbeunloaded,sorted,andloadedontoa
localdeliveryvehicle.
Eachindividualparcelmustbehandled.Ashipperwhohasmanycustomers,each
orderingsmallquantities,willexpecttheterminalhandlingcoststobehighbecause
therewillbeahandlingchargeforeachpackage.
Thebasicruleforreducingterminalhandlingcostsistoreducehandlingeffortby
consolidatingshipmentsintofewerparcels.

BillingandCollecting
Everytimeashipmentismade,paperworkmustbedoneandaninvoicemadeout.
Billingandcollectingcostscanbereducedbyconsolidatingshipmentsandreducing
thepickupfrequency.

TotalTransportationCosts
Thetotalcostoftransportationconsistsoflinehaul,pickupanddelivery,terminal
handling,andbillingandcollectingcosts.Toreduceshippingcosts,theshipperneeds
todothefollowing:
Decreaselinehaulcostsbyincreasingtheweightshipped.
Decreasepickupanddeliverycostbyreducingthenumberofpickups.Thiscar

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bedonebyconsolidatingandincreasingtheweightperpickup.
Decreaseterminalhandlingcostsbydecreasingthenumberofparcelsby
consolidatingshipments.
Decreasebillingandcollectingcostsbyconsolidatingshipments.
Foranygivenshipment,thelinehaulcostsvarywiththedistanceshippedHowever,
thepickupanddelivery,terminalhandling,andbillingcostsarefixed.Thetotalcostfor
anygivenshipmentthushasafixedcostandavariablecostassociatedwithit.This
relationshipisshowninFigure13.4.Thecarrierwillconsiderthisrelationshipandeither
chargeafixedcostplussomuchpermileorofferataperedrate.Inthelatter,thecost
permileforshortdistancesfarexceedsthatforlongerdistances.

Figure13.4Distanceversuscostofcarriage.
Theratechargedbyacarrierwillalsovarywiththecommodityshippedandwilldepend
uponthefollowing:
Value.Acarriersliabilityfordamagewillbegreaterthemorevaluabletheitem.
DensityThemoredensetheitem,thegreatertheweightthatcanbecarriedina
givenvehicle.
Perishability.Perishablegoodsoftenrequirespecialequipmentandmethodsof
handling.
Packaging.Themethodofpackaginginfluencestheriskofdamageand
breakage.
Inaddition,carriershavetworatestructures,onebasedonfullloadscalledtruckload
(TL)orcarload(CL)andonebasedonlessthantruckload(LTL)andlessthancarload
(LCL).Foranygivencommodity,theLTLratescanbeupto100%higherthantheTL
rates.Thebasicreasonforthisdifferentialliesintheextrapickupanddelivery,
terminalhandlingandbilling,andcollectioncosts.Truckers,airlines,andwatercarriers
acceptlessthanfullloads,butusuallytherailwaysdonotacceptLCLshipments.

6.Warehousing
Thelastchapterdiscussedthemanagementofwarehouses.Thissectionisconcernedwiththeroleof
warehousesinaphysicaldistributionsystem.
Warehousesincludeplantwarehouses,regionalwarehouses,andlocalwarehouses.Theymaybe
ownedandoperatedbythesupplierorintermediariessuchaswholesalers,ormaybepublic
warehouses.Thelatterofferageneralservicetotheirpublicthatincludesprovidingstoragespaceand
warehouseservices.Somewarehousespecializeinthekindsofservicestheyofferandthegoods
theystore.Afreezerstorageisanexample.Theservicefunctionswarehousesperformcanbe
classifiedintotwokinds:

a.

1.Thegeneralwarehousewheregoodsarestoredforlongperiodsandwheretheprime
purposeistoprotectgoodsuntiltheyareneeded.Thereisminimalhandling,movement,and
relationshiptotransportation.Furniturestorageoradepositoryfordocumentsareexamplesof
thistypeofstorage.Itisalsothetypeusedforinventoriesaccumulatedinanticipationof
seasonalsales.

b.

Thedistributionwarehousehasadynamicpurposeofmovementandmixing.Goodsare
receivedinlargevolumeuniformlots,storedbriefly,andthenbrokendownintosmallindividual
ordersofdifferentitemsrequiredbythecustomerinthemarketplace.Theemphasisison
movementandhandlingratherthanonstorage.Thistypeofwarehouseiswidelyusedin
distributionsystems.Thesizeofthewarehouseisnotsomuchitsphysicalsizeasitisthe
throughput,orvolumeoftraffichandled.
Asdiscussedinthelastchapter,warehouses,ordistributioncenters,areplaceswhererawmaterials,
semifinished,orfinishedgoodsarestored.Theyrepresentaninterruptionintheflowofmaterialand
thusaddcosttothesystem.Itemsshouldbewarehousedonlyifthereisanoffsettingbenefitgained
fromstoringthem.

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Warehousesservethreeimportantroles:transportationconsolidation,productmixing,
andservice.

Transportationconsolidation
Asshowninthelastsection,transportationcostscanbereducedby
usingwarehouses.Thisisaccomplishedbyconsolidatingsmall(LTL)
shipmentsintolarge(TL)shipments.
Consolidationcanoccurinboththesupplyanddistributionsystems.
Inphysicalsupply,LTLshipmentsfromseveralsupplierscanbe
consolidatedatawarehousebeforebeingshippedTLtothefactory.
Inphysicaldistribution,TLshipmentscanbemadetoadistant
warehouseandLTLshipmentsmadetolocalusers.Figure13.5
showsthetwosituationsgraphically.Transportationconsolidationin
physicaldistributionissometimescalledbreakbulk,whichmeansthe
bulk(TL)shipmentsfromfactoriestodistributioncentersarebroken
downintosmallshipmentsgoingtolocalmarkets.

Productmixing
Whiletransportationconsolidationisconcernedwithreductionof
transportationcosts,productmixingdealswiththegroupingof
differentitemsintoanorderandtheeconomiesthatwarehousescan
provideindoingthis.Whencustomersplaceorders,theyoftenwanta
mixofproductsthatareproducedindifferentlocations.
Withoutadistributioncenter,customerswouldhavetoorderfrom
eachsourceandpayforLTLtransportfromeachsource.Usinga
distributioncenter,orderscanbeplacedanddeliveredfromacentral
location.Figure13.6illustratestheconcept.

Figure13.5Transportationconsolidation.

Figure13.6Productmixing.

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Service
Distributioncentersimprovecustomerservicebyprovidingplace
utility.Goodsarepositionedclosetomarketssothemarketscanbe
servedmorequickly.

WarehousingandTransportationCosts
Anydistributionsystemshouldtrytoprovidethehighestservicelevel(thenumberof
ordersdeliveredinaspecifiedtime)atthelowestpossiblecost.Theparticularshipping
patternwilldependlargelyuponthefollowing:
Numberofcustomers.
Geographicdistributionofthecustomers.
Customerordersize.
Numberandlocationofplantsanddistributioncenters.
Suppliershavelittleornocontroloverthefirstthreebutdohavesomecontroloverthe
last.Theycanestablishlocaldistributioncentersintheirmarkets.Withrespectto
transportation,itthenbecomesaquestionofthecostofservingcustomersdirectfrom
thecentraldistributioncenterorfromtheregionaldistributioncenter.Iftruckload
shipmentsaremade,thecostislessfromthecentraldistributioncenter,butifLTL
shipmentsaremade,itmaybecheapertoservethecustomerfromthelocal
distributioncenter.

ExampleProblem
SupposeacompanywithaplantlocatedinTorontoisservingamarketinthe
northeasternUnitedStateswithmanycustomerslocatedinBoston.Iftheyshipdirect
tocustomersfromtheTorontoplant,mostshipmentswillbelessthantruckload.
However,iftheylocateadistributioncenterinBoston,theycanshiptruckload(TL)to
Bostonanddistributebylocalcartage(LTL)tocustomersinthatarea.Whetherthisis
economicalornotdependsonthetotalcostofshippingdirectcomparedwithshipping
viathedistributioncenter.Assumethefollowingfiguresrepresenttheaverage
shipmentstotheBostonarea:
PlanttocustomerLTL:$100/cwt.
PlanttodistributioncenterTL:$50/cwt.
Inventorycarryingcost(distributioncenter):$1O/cwt.
DistributioncentertocustomerLTL:$20/cwt.
IsitmoreeconomicaltoestablishthedistributioncenterinBoston?Iftheannual
shippedvolumeis10,000cwt.,whatwillbetheannualsaving?

Answer
Costsifadistributioncenterisused:
TLTorontotoBoston=$50percwt.
Distributioncentercosts=$10percwt.
LTLinBostonarea=$20percwt.
Totalcost=$80percwt.
Savingpercwt.=$100$80=$20
Annualsaving=$20x10,000=$200,000

MarketBoundaries
supplycustomersinotherlocationsdirectlyfromthefactoryinTorontoorthroughthe
distributioncenterinBoston.Thequestionistodecidewhichlocationsshouldbe
suppliedfromeachsource.Theanswer,ofcourse,isthesourcethatcanservicethe
locationatleastcost.
Laiddowncost(LDC)isthedeliveredcostofaproducttoaparticulargeographic
point.ThedeliveredcostincludesallcostsofmovingthegoodsfromAtoB.Inthe
previousexampleproblem,thelaiddowncostofdeliveringfromTorontowouldbethe
transportationcostpermilexthemilestoaparticulardestination.TheLDCfrom
BostonwouldincludeallcostsofgettingthegoodstoBoston,inventorycostsinthe
Bostondistributioncenter,andthetransportationcostsingettingtoaparticular
destination.
LDC=P+TX
Where
P=productcosts
T=transportationcostspermile
X=distance

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Theproductcostincludesallcostsingettingtheproducttothesupplylocationand
storingitthere.Tnthepreviousexample,theproductcostatBostonincludestheTL
costofdeliverytoBostonandtheinventorycostatBoston.

ExampleProblem
Syracuseis300milesfromToronto.Theproductcostforanitemis$10percwt.,and
thetransportationcostpermilepercwt.is$0.20.Whatisthelaiddowncostpercwt.?

Answer
LDC=Productcost+(transportationcostpermile)(distance)
=$10+($0.20X300)=$70percwt.

Marketboundary
Themarketboundaryisthelinebetweentwoormoresupplysourceswherethelaid
downcostisthesame.ConsiderFigure13.7.Therearetwosourcesofsupply:Aand
B.ThemarketboundaryoccursatYwheretheLDCfromAisthesameasB.
IntheexampleshowninFigure13.7,thedistancebetweenAandBis100miles.Ifwe
letthedistancefromAtoYbeXmiles,thenthedistancefromBtoYis(100X)
miles.AssumesupplyAisthefactoryandsupplyBisadistributioncenter.Assume
theproductcostatAis$100andproductcostfromBis$100plusTLtransportation
fromAtoBandinventorycostsatB.Forthisexample,assumetheTLtransportation
andinventorycarryingcostsare$10perunitsotheproductcostfromBis$110.
TransportationcostsfromeitherAorBare$0.40perunitpermile.
PointYoccurswhere:
LDCA=LDCB
100+0.40X=110+0.40(100X)
X=62.5
ThusapointY,62.5milesfromA,marksthemarketboundarybetweenAandB.

ExampleProblem
ThedistancebetweenTorontoandBostonisabout500miles.Giventhecoststructure
inthepreviousexampleproblemsandanLTLtransportationcostof$0.20percwt.,
calculatethelocationofthemarketboundarybetweenTorontoandBoston.Assume
theproductcostatTorontois$10percwt.

Answer
TheproductcostatBostonisthesumoftheproductcostatToronto,
plusthecostofTLshipmentfromTorontotoBoston,plusthehandling
costsatBoston.
ProductcostatBoston=productcostatA+TLtransportation+
handlingcosts
=$10+$50+$10
=$70
Themarketboundaryoccurswhere
LDCT=LDCB
$10+$0.20X=$70+$0.20(500X)
0.4X=160
X=400
Themarketboundaryis400milesfromTorontoor100milesfromBoston.

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Wehaveseenfromthepreviousexamplethatestablishingadistributioncenterin
Bostonreducestotaltransportationcosts.Similarly,ifaseconddistributioncenteris
established,perhapsinCleveland,weexpecttotaltransportationcoststobereduced
further.
Generally,asmoredistributioncentersareaddedtothesystem,wecanexpectthe
following:
Thecostoftruckload(andcarload)shipmentstothedistributioncenterstoincrease.
ThecostofLTLshipmentstocustomerstodecrease.
Thetotalcostoftransportationtodecrease.
Asexpected,themajorsavingsisfromtheadditionofthefirstfewdistributioncenters.
Eventually,asmoredistributioncentersareadded,thesavingsdecrease.Thefirst
distributioncenteraddedtothesystemislocatedtoservethelargestmarketthe
seconddistributioncenter,thesecondlargestmarket,andsoon.Thenumberof
customersservedbyadditionaldistributioncentersdecreases,andthevolumethat
canbeshippedTLtotheadditionaldistributioncentersislessthantothefirst
distributioncenters.Figure13.8showstherelationshipthatexistsbetween
transportationcostsandthenumberofdistributioncentersinasystem.

Figure13.8Transportationcostversusnumberofwarehouses.

Packaging
Thebasicroleofpackaginginanyindustrialorganizationistocarrythegoodssafely
throughadistributionsystemtothecustomer.Thepackagemustdothefollowing:
Identifytheproduct.
Containandprotecttheproduct.
Contributetophysicaldistributionefficiency.
Forconsumerproducts,thepackagemayalsobeanimportantpartofthemarketing
program.
Physicaldistributionmustnotonlymoveandstoreproductsbutalsoidentifythem.
Thepackageservesasameansofidentifyingtheproductinawaynotpossiblefrom
itsoutwardappearance.Whenshoesareofferedintensizes,thepackagebecomesan
importantidentifier.
Packagingmustcontainandprotecttheproduct,oftenagainstawiderangeofhazards
suchasshock,compression,vibration,moisture,heat,solarradiation,oxidation,and
infestationbyanimals,insects,birds,mold,orbacteria.Packagesaresubjectto
distributionhazardsinloadingandoffloading,inmovement,intransportation,andin
warehousingandstorage.Thepackagemustberobustenoughtoprotectandcontain
theproductthroughallphasesofdistribution.
Packagingisapurecostthatmustbeoffsetbytheincreasedphysicaldistribution
efficiencythatthepackagecanprovide.
Thereareusuallyatleastthreelevelsofpackagingrequiredinadistributionsystem.
Firstisaprimarypackagethatholdstheproducttheboxofcornflakes.Next,for
smallpackages,ashippingcontainersuchasacorrugatedboxisneeded.Finally,
thereisathirdlevelofpackagingwhereseveralprimaryorsecondarypackagesare
assembledintoaunitload.

Unitization
Unitizationistheconsolidationofseveralunitsintolargeunits,calledunitloads,so
thereislesshandling.Aunitloadisaloadmadeupofanumberofitems,orbulky
material,arrangedorconstrainedsothemasscanbepickedupormovedasasingle
unittoolargeformanualhandling.Materialhandlingcostsdecreaseasthesizeofthe
unitloadincreases.Itismoreeconomicaltomovetheproductbycartonsratherthan
individuallyandstillmoreeconomicaltomoveseveralcartonsinoneunitload.
Thisprincipleisusedwhenwegoshoppingandputanumberofarticlesintobagsand
thenputthebagsintothetrunkofthecar.Inindustry,unitloadsareusedinsteadof
shoppingbags.
Thereareanumberofunitloaddevicessuchassheets,racks,orcontainers.Oneof

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themostcommonisthepallet.
Thepalletisaplatformusuallymeasuring48x40x4anddesignedsothatitcanbe
liftedandmovedbyaforkliftindustrialtruck.Packagesarearrangedonitsothat
severalpackagesmaybemovedatonetime.Loadedwithpackages,itformsacube
thatisaunitload.

Figure13.9Stableandunstablepalletloads.
Unitizationcanbesuccessive.Shippersplacetheirproductsintoprimarypackages,
thepackagesintoshippingcartons,thecartonsontopallets,andthepalletsinto
warehouses,trucks,orothervehicles.
Tousethecapacityofpallets,trucks(orothervehicles),andwarehouses,thereshould
besomerelationshipbetweenthedimensionsoftheproduct,theprimarypackage,the
shippingcartons,thepallet,thetruck,andthewarehousespace.Thepackagesshould
bedesignedsospaceonthepalletisfullyutilizedandsothecartonsinterlocktoform
astableload.Figure13.9showstwounitloadseachusingthetotalspaceofthepallet.
However,loadBdoesnotinterlockandisnotstable.
Palletsfitintotrucksandrailwaycars.Thedimensionsmentionedearlierwereselected
sopalletswouldfitintonominal50railwaycarsand40trucktrailerswithaminimum
oflostspace.Figure13.10showsthelayoutinrailcarsandtrailers.
Thustogetthehighestcubeutilization,considerationmustbegiventothedimensions
oftheproduct,thecarton,thepallet,thevehicle,andthewarehouse.

7.MaterialsHandling
Materialshandlingistheshortdistancemovementthattakesplaceinoraroundabuildingsuchasa
plantordistributioncenter.Foradistributioncenter,thismeanstheunloadingandloadingoftransport
vehiclesandthedispatchandrecallofgoodstoandfromstorage.Inaddition,therackingsystems
usedindistributioncentersareusuallyconsideredaspartofmaterialshandling.
Someobjectivesofmaterialshandlingareasfollows:

a.

Toincreasecubeutilizationbyusingtheheightofthebuildingandbyreducingtheneedfor
aislespaceasmuchaspossible.

b.

Toimproveoperatingefficiencybyreducinghandling.Increasingtheloadpermovewillresultin
fewermoves.

c.

Toimprovetheservicelevelbyincreasingthespeedofresponsetocustomerneeds.

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Figure13.10Railcarandtrailerpalletpositionplan.
Therearemanytypesofmaterialshandlingequipment.Forconvenience,the)canbegroupedinto
threecategories:conveyors,industrialtrucks,andcranesandhoists.
Conveyorsaredevicesthatmovematerial(orpeople)horizontallyorverticallybetweentwofixed
points.Theyareexpensive,createafixedroute,andoccupyspacecontinuously.Asaresult,theyare
usedonlywherethereissufficientthroughputbetweenfixedpointstojustifytheircost.
Industrialtrucksarevehiclespoweredbyhand,electricity,orpropane.Dieselandgasolinearenot
usedindoorsbecausetheyarenoxiousandlethal.Industrialtrucksaremoreflexiblethanconveyorsin
thattheycanmoveanywherethereisasuitablesurfaceandnoobstructions.Theydonotoccupy
spacecontinuously.Forthesereasons,theyarethemostoftenusedformofmaterialshandlingin
distributioncentersandinmanufacturing.
Cranesandhoistscanmovematerialsverticallyandhorizontallytoanypointwithintheirareaof
operation.Theyuseoverheadspaceandareusedtomoveheav3orlargeitems.Withintheirareaof
operation,theyareveryflexible.

8.MultiWarehouseSystems
Thissectionwilllookattheresultofaddingmoredistributioncenterstothesystem.Asmightbe
expected,thereisaneffectonthecostofwarehousing,materialshandling,inventories,packaging,
andtransportation.Ourpurposewillbetolookathowallofthesecostsandthetotalsystemcost
behave.Wealsowanttoknowwhathappenstotheservicelevelasmoredistributioncentersare
addedtothesystem.Tomakevalidcomparisons,wemustfreezethesalesvolume.Wecanthen
comparecostsasweadddistributioncenterstothesystem.

TransportationCosts
Inthesectionontransportation,wesawthatifshipmentstocustomersareinless
thanfullvehiclelots,thetotaltransportationcostisreducedbyestablishinga
distributioncenterinamarketarea.Thisisbecausemoreweightcanbeshippedfor
greaterdistancesbytruckorcarloadandtheLTLshipmentscanbemadeover
relativelyshortdistances.Generally,then,asmoredistributioncentersareaddedtoa
system,weexpectthefollowing:
ThecostofTLshipmentsincreases.
ThecostofLTLshipmentsdecreases.
Thetotalcostoftransportationdecreases.
Themajorsavingsaremadewiththeadditionofthefirstdistributioncenters.
Eventually,asmoredistributioncentersareadded,themarginalsavingsdecrease.

InventoryCarryingCost
Theaverageinventorycarrieddependsontheorderquantityandthesafetystock.The

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averageorderquantityinventoryinthesystemshouldremainthesamesinceit
dependsondemand,thecostofordering,andthecostofcarryinginventory.
Thetotalsafetystockwillbeaffectedbythenumberofwarehousesinthesystem.
Safetystockiscarriedtoprotectagainstfluctuationsindemandduringtheleadlime
anddepends,inpart,onthenumberofunitssold.InChapter11,itwasshownthatthe
standarddeviationvariesasthesquarerootoftheratiooftheforecastandleadtime
intervals.Similarly,forthesameSKU,thestandarddeviationvariesapproximatelyas
thesquarerootoftheratioofthedifferentannualdemands.Supposethattheaverage
demandis1000unitsand,foraservicelevelof90%,thesafetystockis100units.If
the1000unitsisdividedbetweentwodistributioncenterseachhavingademandof
500units,thesafetystockineachis:

Withtwodistributioncentersandthesametotalsales,thetotalsafetystockin
creasesto142from100.Thus,withaconstantsalesvolume,asthenumberof
distributioncentersincreases,thedemandoneachdecreases.Thiscausesan
increaseinthetotalsafetystockinalldistributioncenters.

WarehousingCosts
Thefixedcostsassociatedwithdistributioncentersarespaceandmaterialshandling.
Thespaceneededdependsontheamountofinventorycarried.Aswehaveseen,as
moredistributioncentersareaddedtothesystem,moreinventoryhastobecarried,
whichrequiresmorespace.
Inaddition,therewillbesomeduplicationofnonstoragespacesuchaswashrooms
andoffices.Soasthenumberofdistributioncentersincreases,therewillbeagradual
increaseindistributioncenterspacecosts.
Operatingcostsalsoincreaseasthenumberofdistributioncentersincreases.
Operatingcostsdependlargelyonthenumberofunitshandled.Sincethereisno
increaseinsales,thetotalnumberofunitshandledremainsthesame,asdoesthe
costofhandling.However,thenondirectsupervisionandclericalcostsincrease.

MaterialsHandlingCosts
Materialshandlingcostsdependuponthenumberofunitshandled.Sincethesales
volumeremainsconstant,thenumberofunitshandledshouldalsoremainconstant.
Therewillbelittlechangeinmaterialshandlingcostsaslongasthefirmcanshipunit
loadstothedistributioncenter.However,ifthenumberofdistributioncenters
increasestothepointthatsomenonunitizedloadsareshipped,materialshandling
costsincrease.

PackagingCosts
Perunitpackagingcostswillremainthesame,butsincetherewillbemoreinventory,
totalpackagingcostswillrisewithinventory.

PackagingCosts
Perunitpackagingcostswillremainthesame,butsincetherewillbemoreinventory,
totalpackagingcostswillrisewithinventory.

TotalSystemCost
Wehaveassumedthattotalsystemsalesremainthesame.Figure13.11shows
graphicallyhowthecostsoftransportation,warehousing,materialshandlinginventory,
andpackagingbehaveasdistributioncentersareaddedtothesystem.Uptoapoint,
totalcostsdecreaseandthenstarttoincrease.Itistheobjectiveoflogisticsto
determinethisleastcostpoint.

SystemServiceCapability
Theservicecapabilityofthesystemmustalsobeevaluated.Onewayofassessing
thisisbyestimatingthepercentageofthemarketservedwithinagivenperiod.Figure
13.12representssuchanestimate.
Asexpected,theservicelevelincreasesasthenumberofdistributioncenters
increases.Itincreasesrapidlyfromonetotwodistributioncentersandmuchless
rapidlyasthenumberisfurtherincreased.Thefirstdistributioncenterisbuilttoserve
thebestmarket,thenexttoservethesecondbestmarket,andsoon.Letusassume
thatastudyhasbeenmadeofasystemofonetotendistributioncentersandthe
costsanasshowninFigure13.13.

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Figure13.11Totalsystemcost.

NumberofWarehouses

PercentageofReached
inIDay

30

70

87

10

95

Figure13.12Estimateofmarketreachedversusnumberofwarehouses.

Cost($1000)

Transportation

NumberofLocations
1

10

$8,000

$6,000

$5,000

$4,500

Warehousing

500

600

700

900

MaterialsHandling

1000

1000

1100

1400

Inventory

400

425

460

700

Packaging

100

100

100

100

$10,000

$8,125

$7,360

$7,600

TotalCost

Figure13.13Costversusnumberofwarehouses.
Athreedistributioncentersystemwouldprovidetheleasttotalcost.Figure1showsthatbymoving
fromthreetotendistributioncenters,theonedayservice1increasesby8%.Managementmust
decidewhichsystemtoselect.Thedecisionribebasedonadequateanalysisofthechoicesavailable
andacomparisonofthcreaseincostsandservicelevel.

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