Product and Distribution Strategies

Products and Services

Most people respond to the question “What is a product?” by listing its physical features. In contrast, marketers take a broader view. To them, a product is a bundle of physical, service, and symbolic characteristics designed to satisfy consumer wants. The chief executive officer of a major tool manufacturer once startled his stockholders with this statement: “Last year our customers bought over 1 million quarter-inch drill bits, and none of them wanted to buy the product. They all wanted quarter-inch holes.” Product strategy involves considerably more than just producing a good or service; instead, it focuses on benefits. The marketing conception of a product includes decisions about package design, brand name, trademarks, warranties, product image, new product development, and customer service.

CLASSIFYING CONSUMER GOODS AND SERVICES

The classification that marketers typically use for products that consumers buy for their own use and enjoyment and not for resale is based on consumer buying habits. Convenience products are items the consumer seeks to purchase frequently, immediately, and with little effort. Items stocked in gas station markets, vending machines, and local newsstands are usually convenience products—for example, newspapers, snacks, candy, coffee, and bread. Shopping products are those typically purchased only after the buyer has compared competing products in competing stores. A person intent on buying a new sofa or dining room table may visit many stores, examine perhaps dozens of pieces of furniture, and spend days making the final decision. Specialty products are those that a purchaser is willing to make a special effort to obtain. The purchaser is already familiar with the item and considers it to have no reasonable substitute. The nearest Lexus dealer may be 75 miles away, but if you have decided you want one, you will make the trip.

The interrelationship of marketing mix factors is shown in FIGURE 12.1. By knowing the appropriate classification for a specific product, the marketing decision maker knows quite a bit about how the other mix variables will adapt to create a profitable, customer-driven marketing strategy.

CLASSIFYING BUSINESS GOODS

Business products are goods and services used in operating an organization. They can be as simple as paper towels and coffee filters for the break room to machinery, tools, raw materials, components, and buildings. Consumer products are classified by buying habits, and business products are classified based on how they are used and by their basic characteristics. Products that are long-lived and relatively expensive are called capital items. Less costly products that are consumed within a year are referred to as expense items.

CLASSIFYING SERVICES

Services can be classified as intended for the consumer market or the business market. Child- and elder-care centers and auto detail shops provide services for consumers; the Pinkerton security patrols at a local factory and Kelly Services' temporary office workers are examples of business services. In some cases, a service can accommodate both consumer and business markets. For example, ServiceMaster may clean the upholstery in a home or spruce up the painting system and robots in a manufacturing plant.

Like tangible goods, services can also be considered “convenience,” “shopping,” or “specialty,” depending on customers' buying patterns. However, services are distinguished from goods in several ways. First, unlike goods, services are intangible. In addition, they are perishable because firms cannot stockpile them in inventory. Services are also difficult to standardize because they must meet individual customers' needs. Finally, from a buyer's perspective, the service provider is the service; the two are inseparable in the buyer's mind.

PRODUCT LINES AND PRODUCT MIX

Few firms operate with a single product. If their initial entry is successful, they often try to increase their profit and growth chances by adding new offerings. A company's product line is a group of related products marked by physical similarities or intended for a similar market. A product mix is the assortment of product lines and individual goods and services that a firm offers to consumers and business users. The Coca-Cola Company and PepsiCo both have product lines that include old standards—Coke Classic and Diet Coke, Pepsi and Diet Pepsi. But recently, PepsiCo announced it would start distributing Tampico Plus in selected states. Unlike other products from Tampico Beverages, Tampico Plus drinks contain vitamins A, C, and E. They also have half as much sugar as regular Tampico drinks. Thus, they meet the guidelines for beverages that can be sold in U.S. high schools, which want to limit the amount of sugar in drinks available to students.²

Marketers must assess their product mix continually to ensure company growth, to satisfy changing consumer needs and wants, and to adjust to competitors' offerings. To remain competitive, marketers look for gaps in their product lines and fill them with new offerings or modified versions of existing ones. A helpful tool frequently used in making product decisions is the product life cycle.

Product Life Cycle

Once a product is on the market, it typically goes through four stages known as the product life cycle: introduction, growth, maturity, and decline. As FIGURE 12.2 shows, industry sales and profits vary depending on the life cycle stage of an item.

Product life cycles are not set in stone; not all products follow this pattern precisely, and different products may spend different periods of time in each stage. However, the concept helps marketers anticipate developments throughout the various stages of a product's life. Profits assume a predictable pattern through the stages, and promotional emphasis shifts from dispensing product information in the early stages to heavy brand promotion in the later ones.

STAGES OF THE PRODUCT LIFE CYCLE

In the introduction stage, the firm tries to stimulate demand for its new offering; inform the market about it, give free samples, and explain its features, uses, and benefits. Sales are limited in this phase, and new product development costs and extensive introductory promotions are expensive and commonly lead to losses in the introductory stage. Figure 12.2 shows an introduction phase of smoothly increasing sales, but this is not always the case. Sometimes an introduction begins well but quickly runs out of steam as product pricing or production issues restrict the number of buyers. Plasma televisions, Apple's Maps app, and Google Buzz are all examples of products that didn't quite make it through the introduction stages as planned.

During the growth stage, sales climb quickly as new customers join early users who now are repurchasing the item. Word-of-mouth referrals and continued advertising and other special promotions by the firm induce others to make trial purchases. At this point, the company begins to earn profits on the new product. This success may encourage competitors to enter the field with similar offerings, and if a number of new competitors come into the market, price competition develops. After its initial success with the Kindle, Amazon faced competition from Barnes & Noble's Nook. In the evolving market for e-readers and tablets, a move by one of the market players elicits a response by the others. After Amazon rushed to launch its Kindle for the iPad, Barnes & Noble countered with its popular Nook Color. These two competitors plus Apple, Google, and others continue to release new models with additional features.³

In the maturity stage, industry sales at first increase but eventually reach a saturation level at which further expansion is difficult. Competition also intensifies, increasing product availability. Firms concentrate market share, trying to capture their competitors' customers, often by dropping prices to increase the appeal of their product. Manufacturers of mature products look to product line extension to redesign their products to appeal to smaller and smaller groups of customers. Soft drink and beer producers are constantly bringing out new products: low calorie, no-calorie, colored, uncolored, flavors, and more. Cell phones are also in the maturity stage: companies compete not only on price but also on features such as calendars, e-mail and attachments, messaging capability, full-color screens, keyboards, and fax and word-processing functions. Sales volume fades late in the maturity stage, and weaker competitors may leave the market.

Sales continue to fall in the decline stage. Profits decline and may become losses as further price cutting occurs in the reduced overall market for the item. Competitors gradually exit, making some profits possible for the remaining firms in the shrinking market. The decline stage usually is caused by a product innovation or a shift in consumer preferences. Sometimes technology change can hasten the decline stage for a product. For example, although more than 90 percent of U.S. homes contain at least one DVD player, DVDs have now been superseded by Blu-ray technology and online streaming sites. Carbon paper, film cameras, CDs, and newspaper want ads are examples of products that have declined because of changes in technology.

STAGES IN NEW PRODUCT DEVELOPMENT

So, what does it take to develop a successful new product? Most of today's newly developed items are aimed at satisfying specific consumer demands. New product development is becoming increasingly efficient and cost effective because marketers use a systematic approach to developing new products. As FIGURE 12.3 shows, the new product development process has six stages. Each stage requires a “go/no-go” decision by management before the idea can move to a subsequent stage. Significant investments of time and money are involved in products as they go through each development stage—sometimes only to be rejected at one of the final stages. For this reason, the sooner decision makers can identify a marginal product and drop it from further consideration, the less time and money will be wasted.

The starting point in the new product development process is generating ideas. Ideas come from many sources, including customer suggestions, suppliers, employees, research scientists, marketing research, inventors outside the firm, and competitors' products. The most successful ideas are directly related to satisfying customer needs. Procter & Gamble's Febreze eliminates odors in the home and leaves a fresh scent. When P&G researchers discovered that cars often need freshening up, too—from transporting well-used athletic equipment, small children, and carryout meals—the company added Febreze CAR Vent Clips to the product line. The clip attaches to a car's air vent and comes in five scents.⁴

In the second stage, screening eliminates ideas that do not mesh with overall company objectives or that cannot be developed, given the company's resources. Some firms hold open discussions of new product ideas with specialists who work in different functional areas in the organization.

Further screening occurs during the concept development and business analysis phase. The analysis involves assessing the new product's potential sales, profits, growth rate, and competitive strengths and determining whether it fits with the company's product, distribution, and promotional resources. Concept testing—marketing research designed to solicit initial consumer reaction to new product ideas—may be used at this stage. For example, potential consumers might be asked about proposed brand names and other methods of product identification. Focus groups are sessions in which consumers meet with marketers to discuss what they like or dislike about current products and perhaps test or sample a new offering to provide some immediate feedback.

Next, an actual product is developed, subjected to a series of tests, and revised. Functioning prototypes or detailed descriptions of the product may be created. These designs are the joint responsibility of the firm's development staff and its marketers, who provide feedback on consumer reactions to the proposed product design, color, and other physical features.

Sometimes prototypes do not meet the stated requirements. When the U.S. military began looking for an improved helmet, it asked four companies to submit prototypes for helmets that would be 35 percent more effective against fragmentation and handgun and small-arms bullets. But all four prototypes failed. A couple of years later, one firm submitted a prototype so strong that the military's test equipment could not penetrate the shell. The Army wasn't satisfied with the first series of prototypes and made sure that the new helmets would offer better performance than existing helmets. The Advanced Combat Helmet (ACH), as they are now known, is demonstrating this improved capability as an Iowa National Guard member found out while on deployment in Afghanistan. His new helmet stopped an AK-47 round.⁵

Test marketing introduces a new product supported by a complete marketing campaign to a selected city or TV coverage area. Marketers look for a location with a manageable size, where residents match their target market's demographic profile, to test their product. During the test-marketing stage, the item is sold in a limited area while the company examines both consumer responses to the new offering and the marketing effort used to support it. Test-market results can help managers determine the product's likely performance in a full-scale introduction. Some firms skip test marketing, however, because of concerns that the test could reveal their strategies to the competition. Also, the expense of doing limited production runs of complex products such as a new auto or refrigerator is sometimes so high that marketers skip the test-marketing stage and move directly to commercialization.

In the final stage, commercialization, the product is made available in the marketplace. Sometimes this stage is referred to as a product launch. Considerable planning goes into this stage because the firm's distribution, promotion, and pricing strategies must all be geared to support the new product offering. Video game maker Electronic Arts announced a new distribution strategy for future products. The company will release premium downloadable content for a game before releasing the complete, packaged version. The company will invite comments from reviewers and players and make changes to the final version prior to release.⁶

Product Identification

A major aspect of developing a successful new product involves methods for identifying a product and distinguishing it from competing offerings. Both tangible goods and intangible services are identified by brands, brand names, and trademarks. A brand is a name, term, sign, symbol, design, or some combination that identifies the products of one firm and differentiates them from competitors' offerings. Tropicana, Pepsi, and Gatorade are all made by PepsiCo, but a unique combination of name, symbol, and package design distinguishes each brand from the others.

A brand name is that part of the brand consisting of words or letters included in a name used to identify and distinguish the firm's offerings from those of competitors. The brand name is the part of the brand that can be vocalized. Many brand names, such as Coca-Cola, McDonald's, American Express, Google, and Nike, are famous around the world. Likewise, the “golden arches” brand mark of McDonald's also is widely recognized.

A trademark is a brand that has been given legal protection. The protection is granted solely to the brand's owner. Trademark protection includes not only the brand name but also design logos, slogans, packaging elements, and product features such as color and shape. A well-designed trademark, such as the Nike “swoosh,” can make a difference in how positively consumers perceive a brand.

BRAND CATEGORIES, LOYALTY, AND EQUITY

A brand offered and promoted by a manufacturer is known as a manufacturer's (or national) brand. Examples are Tide, Cheerios, Windex, Fossil, and Nike. But not all brand names belong to manufacturers; some are the property of retailers or distributors. A private (or store) brand identifies a product that is not linked to the manufacturer but instead carries a wholesaler's or retailer's label. Sears's Craftsman tools and Walmart's Ol' Roy dog food are examples.

Marketers measure brand loyalty in three stages: brand recognition, brand preference, and brand insistence. Brand recognition is brand acceptance strong enough that the consumer is aware of the brand but not strong enough to cause a preference over other brands. Brand preference occurs when a consumer chooses one firm's brand over a competitor's if the favored brand is available. Brand insistence is the ultimate degree of brand loyalty, in which the consumer will look for it at another outlet, special-order it from a dealer, order by mail, or search the Internet for it.

Brand loyalty is at the heart of brand equity, the added value that a respected and successful name gives to a product. This value results from a combination of factors, including awareness, loyalty, and perceived quality, as well as any feelings or images the customer associates with the brand. High brand equity offers financial advantages to a firm because the product commands a relatively large market share and sometimes reduces price sensitivity, generating higher profits. FIGURE 12.4 shows the world's ten most valuable brands and their estimated worth.

PACKAGES AND LABELS

Packaging and labels are important in product identification. They also play an important role in a firm's overall product strategy. Packaging affects the durability, image, and convenience of an item and is the biggest cost in many consumer products. Due to a growing demand to produce smaller, more environmentally friendly packages, box manufacturers and chemical companies are now working harder to create packaging that uses less material, is made from renewable sources, and is recyclable.

Choosing the right package is especially crucial in international marketing because marketers must be aware of such factors as language variations and cultural preferences. Package size can vary according to a country's purchasing patterns and market conditions. In countries with small refrigerators, people may want to buy their beverages one at a time rather than in six-packs. Package weight is another important issue because shipping costs are often based on weight.

Labeling is an integral part of the packaging process. In the United States, federal law requires companies to provide enough information on labels to allow consumers to make value comparisons among competing products. In the case of food packaging, labels must also provide nutrition information. Companies who ship products to other countries must comply with labeling requirements in those nations.

Another important aspect of packaging and labeling is the Universal Product Code (UPC), the bar code read by optical scanners that print the name of the item and the price on a receipt. For many stores, these identifiers are useful not just for packaging and labeling but also for simplifying and speeding retail transactions and for evaluating customer purchases and controlling inventory. Industry observers believe that radio-frequency identification technology—embedded chips that can broadcast their product information to receivers—may ultimately replace UPC bar codes.

A relatively new technology akin to bar codes, Quick Response codes used in product packaging allow companies to create electronic paths directly to a company's Web site, providing consumers with information about the product or company.

Distribution Strategy

The next element of the marketing mix, distribution, deals with the marketing activities and institutions involved in getting the right good or service to the firm's customers. Distribution decisions involve modes of transportation, warehousing, inventory control, order processing, and selection of marketing channels. Marketing channels typically are made up of intermediaries such as retailers and wholesalers that move a product from producer to final purchaser.

The two major components of an organization's distribution are distribution channels and physical distribution. Distribution channels are the paths that products—and legal ownership of them—follow from producer to consumer or business user. They are the means by which all organizations distribute their goods and services. Physical distribution is the actual movement of products from producer to consumers or business users. Physical distribution covers a broad range of activities, including customer service, transportation, inventory control, materials handling, order processing, and warehousing.

DISTRIBUTION CHANNELS

In their first decision for distribution channel selection, marketers choose which type of channel will best meet both their firm's marketing objectives and customers' needs. As shown in FIGURE 12.5, marketers can choose either a direct distribution channel, which carries goods directly from producer to consumer or business user, or distribution channels that involve several different marketing intermediaries. A marketing intermediary (also called a middleman) is a business firm that moves goods between producers and consumers or business users. Marketing intermediaries perform various functions that help the distribution channel operate smoothly, such as buying, selling, storing, and transporting products; sorting and grading bulky items; and providing information to other channel members. The two main categories of marketing intermediaries are wholesalers and retailers.

• Direct Distribution The shortest and simplest means of connecting producers and customers is direct contact between the two parties. Consumers who buy fresh fruits and vegetables at rural roadside stands or farmers markets use direct distribution, as do services ranging from banking and 10-minute oil changes to ear piercing and Mary Kay Cosmetics.
• Using Marketing Intermediaries Although direct channels allow simple and straightforward connections between producers and their customers, the list of channel alternatives in Figure 12.5 suggests that direct distribution is not the best choice in every instance. Some products sell in small quantities for relatively low prices to thousands of widely scattered consumers. Makers of such products cannot cost effectively contact each of their customers, so they distribute products through specialized intermediaries called wholesalers and retailers.

Wholesaling

How do retailers get the products that fill their shelves? A wholesaler is the distribution channel member that sells primarily to retailers, other wholesalers, or business users. For instance, Sysco is a wholesaler that buys food products from producers and then resells them to restaurants, hotels, and other institutions across North America.

Wholesaling is a crucial part of the distribution channel for many products, particularly consumer goods and business supplies. Wholesaling intermediaries can be classified on the basis of ownership; some are owned by manufacturers, some are owned by retailers, and others are independently owned. The United States has about 486,000 wholesalers, two-thirds of which have fewer than 20 employees.⁷

MANUFACTURER-OWNED WHOLESALING INTERMEDIARIES

A manufacturer may decide to distribute goods directly through company-owned facilities to control distribution or customer service. Firms operate two main types of manufacturer-owned wholesaling intermediaries: sales branches and sales offices.

A sales branch stocks the products it distributes and fills orders from its inventory. It also provides offices for sales representatives. Sales branches are common in the chemical, petroleum products, motor vehicle, and machine and equipment industries.

A sales office is exactly what its name implies: an office for a producer's salespeople. Manufacturers set up sales offices in various regions to support local selling efforts and improve customer service. Some kitchen and bath fixture manufacturers maintain showrooms to display their products. Builders and decorators can visit these showrooms to see how the items would look in place. Unlike sales branches, however, sales offices do not store any inventory. When a customer orders from a showroom or other sales office, the merchandise is delivered from a separate warehouse.

INDEPENDENT WHOLESALING INTERMEDIARIES

An independent wholesaling intermediary is a business that represents a number of different manufacturers and makes sales calls on retailers, manufacturers, and other business accounts. Independent wholesalers are classified as either merchant wholesalers or agents and brokers, depending on whether they take title to the products they handle.

A merchant wholesaler, like apparel wholesaler WholesaleSarong.com, is an independently owned wholesaling intermediary that takes title to the goods it handles. Within this category, a full-function merchant wholesaler provides a complete assortment of services for retailers or industrial buyers, such as warehousing, shipping, and even financing. A subtype of full-function merchant is a rack jobber, such as Choice Books, which handles distribution of inspirational books to retail stores. This type of firm stocks, displays, and services particular retail products, such as calendars, books, and note cards, in drug stores and gift shops. Usually, the retailer receives a commission based on actual sales as payment for providing merchandise space to a rack jobber.

A limited-function merchant wholesaler also takes legal title to the products it handles, but it provides fewer services to the retailers to which it sells. Some limited-function merchant wholesalers only warehouse products but do not offer delivery service. Others warehouse and deliver products but provide no financing. One type of limited-function merchant wholesaler is a drop shipper such as Kate Aspen, a wholesaler of wedding favors. Drop shippers also operate in such industries as coal and lumber, characterized by bulky products for which no single producer can provide a complete assortment. They give access to many related goods by contacting numerous producers and negotiating the best possible prices. Cost considerations call for producers to ship such products directly to the drop shipper's customers.

Another category of independent wholesaling intermediaries consists of agents and brokers. They may or may not take possession of the goods they handle, but they never take title, working mainly to bring buyers and sellers together. Stockbrokers such as Charles Schwab and real estate agents such as RE/MAX perform functions similar to those of agents and brokers, but at the retail level. They do not take title to the sellers' property; instead, they create time and ownership utility for both buyer and seller by helping carry out transactions.

A manufacturers' rep acts as an independent sales force by representing the manufacturers of related but noncompeting products. This agent intermediary, sometimes referred to as a manufacturers' agent, receives commissions based on a percentage of sales.

RETAILER-OWNED COOPERATIVES AND BUYING OFFICES

Retailers sometimes band together to form their own wholesaling organizations. Such organizations can take the form of either a buying group or a cooperative. Participating retailers set up the new operation to reduce costs or to provide some special service that is not readily available in the marketplace. To achieve cost savings through quantity purchases, independent retailers may form a buying group that negotiates bulk sales with manufacturers. Ace Hardware is a retailer-owned cooperative. The independent owners of it 4,600 stores have access to bulk merchandise purchases that save them—and their customers—money.⁸ In a cooperative, an independent group of retailers may decide to band together to share functions such as shipping or warehousing.

Retailing

The retailer is the distribution channel member that sells goods and services to individuals for their own use rather than for resale. Consumers usually buy their food, clothing, shampoo, furniture, and appliances from some type of retailer. The supermarket where you buy your groceries may have bought some of its items from a wholesaler such as Unified Grocers and then resold them to you. Retailers are a critical element—the so-called “last three feet”—in the distribution channel. Because retailers are often the only channel member that deals directly with consumers, manufacturers rely heavily on them to get their products into the hands of consumers.

Retailers can be classified in two categories: nonstore and store.

NONSTORE RETAILERS

As FIGURE 12.6 shows, nonstore retailing includes four forms: direct-response retailing, Internet retailing, automatic merchandising, and direct selling. Direct-response retailing reaches prospective customers through catalogs, telemarketing, and even magazine, newspaper, and television ads. Internet retailing, another form of nonstore retailing, has grown rapidly. Tens of thousands of retailers have set up shop online, with sales growing at a rate of about 15 percent a year (as compared to total retail sales growing at about 3.7 percent per year). Today, online sales account for about 5.5 percent of total retail sales.⁹

Automatic merchandising provides retailing convenience through vending machines. As banks find new ways to compete for customers, their ATMs will operate more like vending machines. Already some ATMs offer extra services, cashing checks and selling stamps, road maps, and even concert tickets. Future ATMs will be able to connect wirelessly to cell phones to allow customers to download and pay for games and music. Direct selling includes direct-to-consumer sales by Pampered Chef kitchen consultants and salespeople for Silpada sterling silver jewelry through party-plan selling methods. Both are forms of direct selling.

STORE RETAILERS

In-store sales still outpace nonstore retailing methods like direct-response retailing and Internet selling. Store retailers range in size from tiny newsstands to multi-story department stores and multi-acre warehouse-like retailers such as Sam's Club. TABLE 12.1 lists different types of store retailers.

CHOOSING A LOCATION

A good location often marks the difference between success and failure in retailing. The location decision depends on the retailer's size, financial resources, product offerings, competition, and, of course, its target market. Traffic patterns, parking, the visibility of the store's signage, and the location of complementary stores also influence the choice of a retail location.

A planned shopping center is a group of retail stores planned, coordinated, and marketed as a unit to shoppers in a geographical trade area. By providing convenient locations with free parking, shopping centers have replaced downtown shopping in many urban areas. But time-pressed consumers are increasingly looking for more efficient ways to shop, including catalogs, Internet retailers, and one-stop shopping at large free-standing stores such as Walmart Supercenters. To lure more customers, shopping centers are recasting themselves as entertainment destinations, with movie theaters, restaurants, art displays, carousel rides, and musical entertainment. The giant Mall of America in Bloomington, Minnesota, features a seven-acre amusement park and an aquarium.

Large regional malls have witnessed a shift in shopping center traffic to smaller strip centers, name-brand outlet centers, and lifestyle centers, open-air complexes containing retailers that often focus on specific shopper segments and product interests.¹⁰

CREATING A STORE ATMOSPHERE

A successful retailer closely aligns its merchandising, pricing, and promotion strategies with store atmospherics, the physical characteristics of a store and its amenities, to influence consumers' perceptions of the shopping experience. Atmospherics begin with the store's exterior, which may use eye-catching architectural elements and signage to attract customer attention and interest. Interior atmospheric elements include store layout, merchandise presentation, lighting, color, sound, and cleanliness. A high-end store such as Nordstrom, for instance, features high ceilings in selling areas that spotlight tasteful and meticulously cared-for displays of carefully chosen items of obvious quality. Dick's Sporting Goods, on the other hand, carries an ever-changing array of moderately priced clothing and gear in its warehouse-like settings furnished with industrial-style display hardware.

Distribution Channel Decisions and Logistics

A firm's choice of distribution channels creates the final link in the supply chain, the complete sequence of suppliers that contribute to creating a good or service and delivering it to business users and final consumers. The supply chain begins when the raw materials used in production are delivered to the producer and continues with the actual production activities that create finished goods. Finally, the finished goods move through the producer's distribution channels to end customers.

The process of coordinating the flow of goods, services, and information among members of the supply chain is called logistics. The term originally referred to strategic movements of military troops and supplies. Today, however, it describes all of the business activities involved in the supply chain, with the ultimate goal of getting finished goods to customers.

PHYSICAL DISTRIBUTION

A major focus of logistics management—identified earlier in the chapter as one of the two basic dimensions of distribution strategy—is physical distribution, the activities aimed at efficiently moving finished goods from the production line to the consumer or business buyer. As FIGURE 12.7 shows, physical distribution is a broad concept that includes transportation and numerous other elements that help link buyers and sellers. An effectively managed physical distribution system can increase customer satisfaction by ensuring reliable movements of products through the supply chain. Walmart studies the speed at which goods can be shelved once they arrive at the store because strategies that look efficient at the warehouse—such as completely filling pallets with goods—may actually be time-consuming or costly in the aisles.

The form of transportation used to ship products depends primarily on the kind of product, the distance involved, and the cost. The logistics manager can choose from a number of companies and modes of transportation. As TABLE 12.2 shows, the five major transport modes are—in order of total expenditures—trucks (with about 75 percent of total expenditures), railroads (approximately 12 percent), water carriers (6 percent), air freight (4 percent), and pipelines (3 percent). The faster methods typically cost more than the slower ones. Speed, reliable delivery, shipment frequency, location availability, handling flexibility, and cost are all important considerations when choosing the most appropriate mode of transportation.

About 15.5 million trucks operate in the United States, carrying most finished goods all or part of the way to the consumer. Nearly 2 million of these are tractor trailers.¹¹ But railroads, which compete with many truck routes, despite their recent loss of market share, are a major mode of transportation. The 567 freight railroads in the United States operate across nearly 168,000 miles of track and employed more than 175,000 people.¹²

Warehousing is the physical distribution activity that involves the storage of products. Materials handling is moving items within factories, warehouses, transportation terminals, and stores. Inventory control involves managing inventory costs, such as storage facilities, insurance, taxes, and handling. The physical distribution activity of order processing includes preparing orders for shipment and receiving orders when shipments arrive.

Radio-frequency identification (RFID) technology relies on a computer chip implanted somewhere on a product or its packaging that emits a low-frequency radio signal identifying the item. The radio signal doesn't require a line of sight to register on the store's computers the way a bar code does, so a handheld RFID reader can scan crates and cartons before they are unloaded. Because the chip can store information about the product's progress through the distribution channel, retailers can efficiently manage inventories, maintain stock levels, reduce losses, track stolen goods, and cut costs.

The wide use of electronic data interchange (EDI) and the constant pressure on suppliers to improve their response time have led to vendor-managed inventory, in which the producer and the retailer agree that the producer (or the wholesaler) will determine how much of a product a buyer needs and automatically ship new supplies when needed.

NOTES

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3. John Falcone, “Kindle vs. Nook vs. iPad: Which E-book Reader Should You Buy?” CNET, December 17, 2012, accessed September 18, 2013. http://news.cnet.com.

4. Company Web site, http://www.febreeze.com, accessed June 6, 2013; company Web site, “Drive Away Odors and Experience Freshness with Febreze CAR Vent Clips,” press release, January 10, 2012, http://news.pg.com.

5. James Plafke, “Advanced Combat Helmet Stops an AK-47 Head Shot,” GEEK, January 22, 2013, http://www.geek.com.

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8. Company Web site, http://www.acehardware.com, accessed May 8, 2013.

9. U.S. Census Bureau, “Quarterly Retail E-Commerce Sales, 1st Quarter 2013,” May 15, 2013, http://www.census.gov.

10. John Coleman and David T. Whitaker, “Is There Life after Malls?” Smart Growth Maryland, Maryland Department of Planning, March 25, 2013, http://smartgrowthmd.wordpress.com.

11. Association Web site, “Trucking Statistics,” http://www.truckinfo.net, accessed May 8, 2013.

12. Association Web site, “U.S. Freight Railroad Statistics,” http://www.aar.org, accessed May 8, 2013.