Page 389 - Introduction to Business

CHAPTER 10 Developing the Promotion and Distribution Mixes 363

strategy (EDLP) that helped the company become the largest firm in the world in
2002, with revenues of about $254 billion annually.
How was this drastic reduction in costs achieved? Operating the logistics function
more efficiently was a major contributor. Transportation and inventory costs were
significantly pared and suppliers were forced to operate more efficiently. Heavy use
of computers and satellite technology undergirded the entire cost reduction effort.

LEARNING OBJECTIVE 7
Explain the difference between materials management and physical distribution.
Exhibit 10.10 provides an important overview of what logistics is all about. There,
we see that logistics has two main components. Materials management is the logistics The materials management
movement of raw materials, in-process materials, and semifinished goods to a and physical distribution activities of
a firm
manufacturer from a supplier. The manufacturer will either store the goods and
materials management The movement
then move them into the production process or move them immediately into the
of raw materials, in-process materials,
production process. Once the finished goods have been produced, they will be sent and semifinished goods to a
to the customers—physical distribution. Thus, materials management deals with manufacturer from a supplier
the inward flow of components goods, whereas physical distribution involves the physical distribution The movement of
finished goods from manufacturers to
outward flow of finished goods. Logistics is the totality of the inward and outward
their customers
flows.
reality The next time you visit a supermarket, drug store or mass merchandiser
CH ECK like Wal-Mart, see what examples of physical distribution you can
identify.

Logistics involves two main responsibilities: transportation and storage.

Transportation. The five major modes of transportation that a firm can choose
from are pipeline, water, rail, truck, and air. Each alternative has advantages and
disadvantages that should be considered. The advantages and disadvantages must
be related to the kinds of products a company is shipping and the service require-
ments of customers. Each mode should also be evaluated on the basis of cost.

LEARNING OBJECTIVE 8
Compare the advantages and disadvantages of the five modes of transportation.
Natural gas and petroleum are moved through pipelines. Pipelines are very inex-
pensive forms of transportation, but they are not as cheap as barges. Barges trans-
port heavy, nonperishable items such as coal, iron ore, and grain on navigable
rivers, the Great Lakes, and the St. Lawrence Seaway. Freighters are used for ship-
ping similar goods to overseas markets. Although water transportation is the
cheapest, it is also the slowest. Railroads are used primarily for the shipment of
bulky goods that are low in value in relation to their weight, such as coal, sand, and
agricultural products. However, other products like automobiles and chemicals are
EXHIBIT 10.10
also frequently transported by railroad. The major advantages of flexibility and
speed encourage many manufacturing firms to ship a large percentage of their Overview of the Logistics
products by truck. Although the cost may be Function
higher than by rail, the flexibility and speed of
Materials Physical
trucks are so important in providing good cus- management distribution
tomer service that trucks are used anyway. It
should be pointed out, however, that the railroad
cost advantages usually exist on longer hauls Supplier Manufacturer Customers
and that the shipment by truck for short dis-
tances (300 miles or less) may cost less than rail. Logistics

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