Distribution Cost (Expense) - Definition, Importance, Types & Example
Published in Marketing and Strategy Terms by MBA Skool Team
What is Distribution Cost (Expense)?
Distribution Cost is the expense incurred to make the product reach from the manufacturer's location to the end user's location through the various supply chain stakeholders like distributor, wholesaler, retailer or online. Most of these costs are incurred by the stakeholder who stands to earn the most from the sales of the goods e.g. Manufacturer but many times these can spread across different stakeholders where there is an exchange of ownership.
These expenses are critical in making sure that the product reaches the end customer at right place and at the right time.
Importance of Distribution Costs
A product cannot reach the end customer directly from the manufacturer's location free of cost. Most of the time the manufacturing is done far from the demand and end users. A product may be manufactured in a different city, country or even continent in the modern world. Eventually it reaches the location or channel where the end customer needs it. Without incurring a distribution cost, the goods won't move through the supply chain. This is part of the business but it is very important to know and assess these costs so as to optimize them so that the product can reach in a best possible state and the least possible cost.
Companies track the distribution costs including the inventory costs to make sure that the business is optimized for revenue and profit. If this cost is ignored, high costs in distribution can lead to heavy losses and product damage as well.
Varieties of costs are included in this and are not only limited to freight expenses.
1. Freight Costs
These are the most important type of costs incurred during distribution. It includes the expenses in transportation and transfer of goods through various channels like Air, Rail, Road, Water etc. These can be incurred multiple times before reaching end customers e.g. from manufacturer to warehouse 1 and then warehouse 2 then to the customer.
2. Inventory Costs
Storing the products temporarily in warehouses as inventory accumulates costs in terms of handling, ordering, maintenance and transportation costs. Warehouses also incur lot of costs in themselves which add to the cost of distribution.
3. Packaging costs
Special packaging may be required for certain products to reach from one location to another. Many products may be fragile in nature and may require costly packaging to keep them from breaking or getting spoilt.
Many times the products are to be transported across days in ships and they need to be properly packaged to make them resistant to weather changes or any other turbulence. Also special storage units might be required for certain products like food, dairy etc. to preserve them.
The distribution happens through a lot of personnel working across different stages to make the movement of the products happen. Salary has to be paid to these personnel every month including the variable cost also to keep the supply chain moving.
5. Administrative Costs
There has to be proper documentation and administration done at every point of product exchange and transfer. A lot of shipping documents, clearances, invoices have to be in place to keep the process smooth and transparent. Software systems are used to streamline this but then they will also incur license costs which would be added to the administrative costs.
A lot of above mentioned costs are interlinked with each other and it is very important to use this links to find the lowest possible cost for the required level of efficiency and flexibility in a distribution system.
Example of Distributions Cost
Let us say a fruit juice making company based in Ohio needs to ship juice boxes to many cities across the US. They will start with sending the juice box cartons in special packaging of 20 packs each to their main warehouse. This will lead to costs in packaging and transport by trucks. After that from this warehouse, the cartons needs to reach to all cities across US which would require transfer to multiple warehouses in multiple cities.
The transportation may be handled through Air mostly as the Juice needs to be quickly moved and kept in optimum transfer without lot of handling. This all would incur freight costs, handling costs, salaries etc. to make this happen. Local distributors would also take part once the cartons reach their respective location. From there they would take boxes to individual retailers across these cities. All this movement would be tracked across systems and documents to make it completely transparent. This entire process of movement of juice boxes would incur costs known as distributions costs.
Hence, this concludes the definition of Distribution Cost (Expense) along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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