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Physical Distribution Case Study
Branchwater
The marketing management of Branchwater were reviewing the next year's marketing
plan. It would concentrate on how changes to the physical distribution system could help
the company achieve greater profitability so that resources could be allocated elsewhere:
on trade and consumer divisions; or on making the product more price competitive; or on
improving the level of customer service via better availability; or a combination of all three.
Branchwater had started operations in the early 1980s as a regional bottled water
company in the north western part of the United States. As market demand grew, the
company increased the volume it sold within the existing area and expanded its area of
supply. It achieved a turnover of $10 million in the previous year. As Branchwater grew, it
faced steadily greater problems of profitability and customer service. Though the company
had a number of enquiries from new customers in three areas adjacent to the current sales
area, it was uncertain as to how these could be profitably exploited, given the steadily
rising distribution costs involved in servicing more distant market areas.
The company
Branchwater had a spring, high up in the Appalachian mountains, about 10 miles from the
nearest main town which had an interstate highway, and one of the main railway lines in
the country. The spring was 80 miles inland from a sea port serving the eastern seaboard
of the United States. It was approximately 100 miles from the nearest point at which there
was a navigable river, which could be used for the transport of product within the country.
The spring water met all the government regulations concerning purity and had been
certified satisfactory by the public health authorities ever since the company had started
manufacturing. Near the spring, the company had a simple bottling plant and warehouse.
Clear plastic bottles with attached labels were filled with spring water, sealed with tamper
proof tape, collected and stacked in cardboard cartons. A sample of each production batch
was removed for bacteriological inspection. Each of the cartons passed from the bottling
plant into the warehouse by conveyor belt. Here the cartons were stacked onto pallets and
stored, by fork lift trucks, on simple racking systems. The variable costs of manufacture
were $0.10 cents for each bottle.
The advantage of the site used by Branchwater was that it was very cheap, could be
extended easily should sales require it, and provided continuous volumes of high quality
spring water. But the site was poorly situated for distribution of the product, and this had
meant that costs tended to be higher than the competition. Overall fixed costs of the
operation, including all manufacturing labour, bank interest on the outstanding loan, was
$2.7 million.
The market
With the increase in disposable income and growing awareness of some of the
contaminates in municipal water, the market for pure bottled water had grown
substantially. Year on year volume increases were around 5 per cent, though consumption
patterns were erratic with substantial seasonal variations.
There were two separate components of the bottled water market, the restaurant / cafe
sector and retail. The restaurant sector was dominated by premium brands, like Perrier,
which were often imported. Packaging and attitudinal investment was all important in this
sector, and consumers were prepared to pay substantial prices for premium products. The
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