Distribution Cost: What You Should Know

Distribution Cost, also called distribution expenses, are costs that are incurred to deliver your product from the production unit to the end user (your customer).

Examples Of Distribution Cost

Distribution costs can refer to a number of different expenses, such as;

  • Costs of handling
  • Costs of shipping
  • Costs of packing
  • Costs of distribution employees
  • Costs of freight
  • Costs of storage

If your distributor will be the one shipping a product to a retailer and that retailer sells it to the end user, all the individual distribution expenses at each stage would be included in the total distribution cost. In some cases, manufacturers will have a production unit at one place and product pick up is forwarded to another place. Any cost for moving the product from production to the pick up point is also added to the total distribution cost.

There’s other types of expenses that can be defined as distributions costs. A good example to use is handling cost, these costs can include;

  • Production place
  • Sales point
  • Storehouse
  • Packing costs
  • Managerial costs
  • Freight

Freight cost is usually the most important component of distribution costs. If the product is manufactured and sold in same country, freight cost usually refers to the “Trucking” or such transport fare to deliver the product.

If a product is sold internationally, it may include Air Freight, Less than container load (LCL), Day-Definite LCL or Full container load (FCL). In cases where products are transported by air, the cost would be higher and if it is transported through LCL, the cost would be lower but you also have to think about transit time. The transit time for LCL is longer and the transit time for moving by air is smaller.

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When you’re determining distribution costs, you need a comparative analysis between product demand and transport cost. If a product is urgently needed and the shipper is losing sales due to it,  that’s going to be a scenario where we would likely pay the additional expenses so we’re not worrying about stock outs.

If it cost $10,000 to ship your products but you’re going to lose out on $40,000 in sales, which is the greater expense? Empty shelves, right? When you’re thinking about distribution expenses, you have to weigh out everything and come up with the best game plan for your current situations.