Distribution CostExplained & Defined

Written By:
Lisa Borga

Distribution costs, also called distribution expenses, are the costs that a company incurs to make its products or services available to its end users.

For a manufacturer, this would include any expenses which the manufacturer would incur to get the product to the end-user, whether this is the final customer, a wholesale, or a retailer.

This could include costs, such as warehousing, transportation fees, and maintenance of transportation, among others.

Understanding Distribution Expenses

If a product is manufactured at a factory or other production facility, it will incur a number of expenses in addition to shipping costs in order to deliver the product to the end-user.

All of these expenses are a part of distribution costs.

Most manufacturers will add these costs to the price of the product.

Examples of Distribution Expenses

Here are some common examples of distribution expenses.

• Transportation Costs: This is the freight cost, the cost of transporting the product from the manufacturing facility to the location of the customer. This cost is sometimes incurred directly by the customer, or it could be incurred by the manufacturer and then included in the price of the product.
• Storage Costs: After the products are manufactured, they need to be stored until it is time to ship them to the end-user. This means there are storage costs for keeping the products in a warehouse, such as the rent, and this would be included in distribution costs.
• Product Handling Costs: Handling costs are the costs that are necessary to maintain the products while they are at the warehouse. This would include the cost of keeping the products in good condition.
• Direct Selling Expenses: These are expenses that are incurred to secure a customer’s order, such as advertising, order processing, commissions, training costs, and the salaries of marketing personnel, among others. However, it does not include rent, administrative costs, and other costs not directly connected to attracting customers or selling the product.
• Advertising Costs: Advertising expenses are the costs necessary to attract customers, such as promoting the products on radio, television, social media, or in other ways. These expenses are sometimes considered part of distribution costs since they are necessary to get people to purchase the product. However, they can be included as part of marketing costs instead.
• Managerial Personnel Cost: These costs consist of any costs related to employing management personnel related to the distribution of the product. This would include compensation as well as any other costs of employing these people.

Advantages of an Efficient Distribution System

All companies want to keep their distribution costs low, but spending enough to put an effective distribution system in place is important.

Here are a few benefits of a good distribution system.

• An efficient distribution system can make a manufacturer more competitive. It can allow the manufacturer to deliver its products more quickly and at a better price.
• An effective distribution system will not only keep distribution costs under control but also help maintain the quality of the products.
• When a customer receives their products in a timely manner and in good condition, it can help create a good reputation for the manufacturer.

Keeping Distribution Costs Under Control

Distribution costs are necessary for manufacturers, but there are some things that can be done to help keep them under control, such as:

• Making use of technology and automating tasks could help lower distribution costs in the long run.
• Try to use large shipments instead of several small shipments when possible.
• Avoid storing items for long periods of time when possible as this can increase distribution costs.
• Frequently review your contract with your logistics provider, and see if you can get a better deal. Don’t be afraid to change providers if necessary.

Final Thoughts

Distribution costs are a necessary part of doing business.

They get products to the customer in good condition in a timely manner which can make customers happy and increase sales.

However, with some research and work, it may be possible to lower these costs while still keeping customers happy.