Distribution costs (also known as “Distribution Expenses”) are usually defined as the costs incurred to deliver the product from the production unit to the end user.
It is a broad terminology and it includes several costs. Some of the costs are discussed below.
If the shipper is a distributor and it further sells to the retailer and the retailer sells to the end user then all the separate distribution costs at each stage would be included in the total distribution cost. Moreover, in some cases the manufacturer has a production unit at one place and the “product pick up place” by the forwarder at another place. The cost of moving the product from the place of production to the pick up point is also included in distribution cost.
There are other types of costs as well that that are included in the distributions costs. Handling cost of inventory at all points for example production place, storehouse, sales point is part of distribution cost. Packing costs are also part of distribution costs. Distribution managerial cost such as the salary expense of distribution manager and his/her office expenses are also part of distribution costs.
Freight cost is usually the most important component of distribution costs. If the product is manufactured and sold in same country then freight cost refers to the “Trucking” or such transport fare to deliver the product.
If the product is sold internationally then it may include “Air Freight, Less than container load (LCL), Day-Definite LCL or Full container load (FCL).” In case the product is transported by air the cost would be higher and if it is transported through LCL the cost would be lower but there is one further point to contemplate i.e. “Transit Time”. The transit time for LCL is longer and the transit time for moving by air is smaller. Covering all ends there is a need for comparative analysis between the product demand urgency and transport cost. If the product is urgently needed and the shipper is losing sales revenue then it is optimum to reduce transit time and increase the freight expense. For example the sale loss is $10,000 and moving by air increase the freight to $20,000 then it is not recommended to move by Air. But it is recommended to move by Air if the sale loss is $30,000.