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ANALYSIS OF THE CONTRIBUTION OF PHYSICAL DISTRIBUTION COST TO PRICE IN MARKETING IN NIGERIA

10,000 3,000

(A STUDY OF NIGERIA BOTTLING COMPANY PLC AND EMENITE LIMITED)

Product Description

CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

Physical distribution is concerned with the transporting of merchandise, raw materials, or by-products, from the source to the customer. Physical distribution of products is a process employed by manufacturers and service providers to ensure an economic placement of their products and services at the reach of the target consumers. Physical distribution functions put the right product in the right place at the right time to meet demand requirements. A manager of physical distribution must also assess and control the cost of transporting these goods and materials, as well as to determine the most efficient way to store them, which usually involves some form of warehousing. Hence, physical distribution is concerned with inventory control, as well as with packaging and handling. Customer relations, order processing, and marketing are also related activities of physical distribution (Charles, 2008:68). In essence, physical distribution management involves controlling the movement of materials and goods from their source to their destination. It is a highly complex process, and one of the most important aspects of any business. Physical distribution management is the “other” side of marketing. While marketing creates demand, physical distribution manager’s goal is to satisfy demand as quickly, capably, and cheaply as possible.

James (1998:132) maintains that physical distribution is as old as civilization. Even merchants in ancient times had to move goods and raw materials to their destination, and to engage in storage and inventory control. Until the Industrial Revolution, however, these activities were carried out inefficiently, goods usually were replenished slowly, and there were far fewer goods than in the era of mass production. If marketing was conducted at all, it was usually done at the point of purchase. The Industrial Revolution ushered in mass production and, by the late 19th century, the beginning of mass marketing, goods and raw materials also were conveyed over greater distances. Nonetheless, until World War II, physical distribution was far less important than production and marketing. Physical distribution of goods and materials also remained basically unchanged, carried out as separate, unrelated activities-transportation handling, storage, and inventory control.

According to Donald F. et al (2000:73), the post war years witnessed an unprecedented explosion of consumer goods and brands, thanks to modern mass marketing, the population explosion, and the increasing sophistication of the average consumer. The sheer volume and variety of goods enormously complicated their distribution and storage. A wholesaler of breakfast cereals, for instance, no longer handled a few cereal brands, but dozens of them, and with the proliferation of supermarkets, was confronted with the problem of greater demand and continuous product turnover. The cost of distribution escalated as well, further adding to the complexity of distribution. A seminal article on physical distribution (“New Strategies to Move Goods”), appearing in a September 1966 issue of Business Week, for the first time fostered an awareness of physical distribution as a separate category of business. This eventually generated textbooks on physical distribution management, as well as courses in business schools. For the first time, physical distribution, as well as cost control, became central concerns of upper management.

By this time, computers had slowly entered the realm of physical distribution, at least in the United States. It was not until the 1970s, however, that computers were fully utilized. Their effect over time was to integrate the hitherto disparate categories of physical distribution-transportation, storage, inventory, and distribution—into closely related activities. Currently, computerization is performing the major functions of physical distribution management, from long-range strategic planning to day-to-day logistics, inventory, and market forecasting. The best of these systems are tightly integrated with inventory and other logistics systems, and may even be linked to customers’ systems, as is the case with efficient consumer response (ECR) systems. ECR systems which have been criticized by some as being too narrowly focused, attempt to maximize distribution efficiency by delivering inventory on a just-in-time basis. Advanced distribution systems may employ satellite tracking and routing of trucks, electronically tagged pallets or cargo containers, and elaborate data monitoring and storage capabilities. Data collected from these activities are used to identify weak spots in the chain and benchmark improvements. Often upstart companies and even some large ones as well, rely on third-party distributors for at least some of their physical distribution, and hence there is an entire industry of third-party logistics services. These and other outsourcing services received a great deal of attention during the 1990s, as manufacturing companies sought to eliminate peripheral activities when they could do so at cost savings. Smaller companies, on the other hand, frequently lack the expertise or resources to perform their own distribution. Nonetheless, some distribution analysts criticize the outsourcing movement because the net cost savings may be less than anticipated and the quality of the logistics service may be hard for the manufacturer to control. Up to now, PDM has been concerned with the movement of physical objects. In the future, however, it will have to accommodate itself to the increasing shift of the economy away from manufacturing and toward service industries. In this new realm, environmental cleanup and the disposal of waste undoubtedly will be increasingly important to PDM. The expansion of global markets is also affecting PDM, requiring enormous technical and operational refinement.

Why do marketing people consider physical distribution function to be part of marketing function? The answer lies in the basic mission of marketing as practiced by most firms that is to generate revenue for the firm. Physical distribution functions contribute to this mission (McCarthy 2004: 75). The success or otherwise of this process influences the profit potentials. Therefore it is of great economic importance on a national scale (Uti 2006:25 in Pearreault et al 2004).   The role of physical distribution functions has changed in that it now plays a major part in the success of many different operations and organization. In essence, the underlying concepts and rationale for physical distribution are not new; there have been several distinct stages in the development of physical distributions functions.

1950s and early 1960s

In this period, physical distribution functions were planned and unformulated. Manufacturers manufactured, retailers retailed, and in some way or the other the goods reached the shops. Physical distribution functions were broadly represented by the haulage industry and manufacturers’ own account fleets. There was little positive control and no real liaison between the various physical distribution–related functions.

 

1960s and early 1970s

In the 1960s and 1970s, the concept of physical distribution functions was developed with the gradual realization that the “dark continent” was indeed a valid area for managerial involvement.  This consisted of the recognition that there was a series of interrelated physical activities/ functions such as transport, storage, materials handling and packaging that could be linked together and managed more effectively. In particular there was recognition of relationship between the various functions, which enabled a systems approach and total cost perspective to be used. Under the auspices of a physical distribution manager, a number of distribution trade – offs could be planned and managed to provide both improved services and reduced cost. Initially the benefit was recognized by manufacturers who developed distribution operations to reflect the flow of their product through the supply chain (Rushton 2005:8). The year 1970 was an important decade in the development of the physical distribution functions; one major change was the recognitions by some companies of the need to include physical distribution in the functional management structure of an organization. The decade also saw a change in the structure and control of the physical distribution chain. There was a decline in the power of the manufacturers and suppliers, and a marked increase in that of the major retailers. The larger retail chains developed their own physical distribution structures, based initially on the concept of regional or local distribution depots to supply their stores.

1980s

Fairy rapid cost increases and the clearer definitions of the true costs of physical distribution contributed to a significant increase in professionalism came a move towards longer- term planning and attempts to identify and pursue cost- saving measures. These measures included centralized distribution, severe reductions in stock- holding and the use of the computer to provide improved information and control. The growth of the third-party distribution service industry was also of major significance, with these companies spear heading development in information and equipment technology. The concept of and need for integrated physical distribution functions were recognized by forward- looking companies that participated in physical distribution activities. In 1980s and early 1990s, and linked very much to advances in information technology, organizations began to broaden- their perspectives in terms of the functions that could be integrated (Rushton 2005:9).   In short, this covered the combining of materials management (the inbound side) with physical distribution (the out bound side). The term “Physical Distribution” was used to describe this concept. Once again this led to additional opportunities to improve customer service and reduce the associated costs. One major emphasis recognized during this period was the importance of the informational aspects as well as the physical aspects of physical distribution.

1990s

In the1990s the process was developed even further to encompass not only the key functions within an organization’s own boundaries, but also those functions outside that also contribute to the provision of a product to a final customer( Hesket 2007). This is known as supply chain management. The supply chain concept thus recognizes that there may be several different organizations involved in getting a product to the market- place. Thus for example, manufacturers and retailers should act together in partnership, to help create a physical distribution pipeline that enables an efficient and effective flow of the right products through to final customer. These partnerships or alliances should also include other intermediaries within the supply chain, such as third-party contractors.

2000 and Beyond

According to Rushton et al (2005) business organizations face many challenges as they endeavor to maintain or improve their position against their competitors, bring new products to the market and increase the profitability of their operations. This led to the development of many new ideas for improvement, specifically recognized in the redefinition of business goals and the re- engineering of entire systems. Indeed, for many organizations, changes in physical distribution functions have provided the catalyst for major enhancements to their business. Leading organizations have recognized that there is a positive “Value Added” role physical distribution functions can offer, rather than the traditional view that the various functions with physical distributions are merely a cost burden that must be minimized regardless of any other implication.

 

 

Physical distribution Cost

Physical distribution costs are those costs associated with physical movement of goods. The finished goods of a manufacturer or producer- which may be component parts, raw materials, or expendable supplies for another manufacturer- must be moved and usually stored before they have economic value or utility. There is a tendency to think of the costs of physical distribution as being comprised of transportation and warehousing costs only. However, there are other costs which must be considered when attempting to analyze and improve physical distribution activities. The nature of these costs varies with different companies but the following list includes the most common costs associated with physical distribution.

  • Transportation by common carriers, contract carriers or company-owned equipment
  • Warehousing in public or private facilities
  • Order- handling
  • Packaging
  • Inventory control insurance, inventory taxes, inventory handling, inventory obsolescence and inventory capital costs

It is regrettable that the accounting systems of most companies do not permit an accurate determination of these costs individually. Without this determination, it is extremely difficult to evaluate the alternative methods of performing the physical distribution functions. Also, it should be apparent that any steps that can be taken to reduce the amount of inventory have an immediate and significant effect upon physical distribution costs.   According to Ploss et al (2006: 49), the growing relative significance of the cost of physical distribution is the control of physical distribution costs within the company.  It is sometimes thought that the costs of physical distribution amount to only two or three percent of turnover.  Emphasis was placed upon finding ways to reduce prevailing physical distribution costs (Bower sox 2005:67). According to Bowersox et al (2006:77), the analysis of customer and product cost variations is important in physical distribution cost, the analysis on a geographic basis is equally important. The importance of geographic variability of costs has been recognized in the physical distribution literature as witnessed by the following statement. If these variations within the average are neglected, then a standard uniform cost is assessed against all geographic markets. Neglecting the variations of spatially separated markets will mean that no market is accurately measured as to be precise cost of serving it (Heskett 2007: 37).

  • Statement of the Problem

As can be seen from the foregoing, the growth in scope of the physical distribution function and the realization of the strategic importance of that function in the competitiveness of marketing organizations developed overtime driven by high levels of economic activities. The same can also be said about the concern with the physical distribution costs, their nature, their determination and the need for the control of these costs. These costs contribute to the price the consumers pay for goods and services (Uti 2006: 27). Each element of the physical distribution function- order processing, inventory management, warehousing, transportation, tends to be more or less important as a major source of cost contribution in marketing.(Hedden 2008: 255). This investigation of the physical distribution function shifts the interest from the traditional areas of cost determinants, cost reduction and cost management, to a more urgent issue in the Nigerian environment of necessary areas emphasis in physical distribution functions and costs, to marketers in decision making. In other words, while stock out cost, for example, is a relevant physical distribution cost in an economy of abundance, should it be a relevant cost of physical distribution in a scarcity economy? Again, while transportation cost is said to constitute 20 to 50% of price consumers pay for goods, in most developed economies (Kollat et al 1972: 304), can the same be true in a developing economy like Nigeria?, Again, what elements of transportation function are critical in the above regard?

The issue then goes beyond the recognition of physical distribution as an important area of cost in marketing, to the determination and understanding of the relative importance of the different physical distribution functions to cost determination and the ultimate price paid by the consumers for goods and services. There is a gap in knowledge as to the understanding of factor relevance and relative contributions to marketing cost in physical distribution functions as environmentally determined. This study will therefore, attempt to close this gap focusing on physical distribution in Nigeria as a developing economy.

 

  • Objectives of the Study

This research is set to analyze the contribution of physical distribution cost to price in Marketing in Nigeria. Specifically, the study set out to achieve the following objectives:

  1. To determine the contribution of physical distribution function to marketing organizations overall cost in Nigeria.
  2. To ascertain the effect of environmental factors on physical distribution cost of marketing by manufacturing firms in Nigeria.
  3. To evaluate the impact of physical distribution function on the prices consumers pay for their product.
  4. To examine the impact of inventory management on physical distribution of manufacturing firms.

 

 

1.4  Research Questions

Arising from the above objectives, this research will seek answers to the following challenging Questions.

  1. To what extent does physical distribution function performed by marketing organization contribute to their overall cost?
  2. What is the level of contribution of environmental factors to physical distribution cost of marketing by manufacturing firms in Nigeria?
  3. To what extent do physical distribution function impact on the prices consumers pay for their product?
  4. What level of impact does inventory management have on physical distribution of manufacturing firms?

 

  • Research Hypotheses

In Consistence with the statement of the problem, the research objectives, and research questions, this research formulates the following null hypotheses;

  1. Physical distribution functions performed by marketing organization do not contribute significantly to firms’ overall cost in Nigeria.
  2. Environmental factors do not contribute significantly to physical distribution cost of marketing by manufacturing firms in Nigeria.
  3. Physical distribution functions do not have any impact on prices consumers pay for their products.
  4. Inventory management does not have any impact on physical distribution of manufacturing firms

 

1.6       Area of Study    

This study covers two big companies in Enugu, Nigeria Bottling Company plc in Udi Local Government Area and Emenite Limited in Enugu East Local Government Area.

1.7       Scope of the Study

A study of this nature ought to be carried out in all manufacturing companies in Enugu. However given the limitation experienced by the researcher, in form of inadequate fund to execute the study across all manufacturing companies, the study scope was limited to two big manufacturing companies in Enugu state. This study looked at the contribution of physical distribution cost to price in marketing of Nigeria Bottling Company plc and Emenite Limited, all in Enugu State.

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