Distribution cost

From CEOpedia | Management online

The distribution logistics costs of a company are among the most complex phase costs and concern all the costs of goods and information flows related to the sale of finished products. This is due to the fact that the range of material processes in the area of distribution is very wide (H. Voordijk, 2010, pp. 456).

In order to achieve specific effects of the logistics system, the participants in the distribution channel shall incur costs which may be included in the following blocks (H. Voordijk, 2010, pp. 456-457):

  • order handling costs,
  • costs of storing supplies,
  • maintenance costs of warehouses,
  • transport costs,
  • packaging costs.

Main distribution costs

The most important costs related to the implementation of logistic distribution processes are related to (S. Parkhi, D. Jagadeesh, R. A. Kumar, 2014, pp. 31-38): Inflow of finished and cooperative products to the enterprise:

  • cost of physical flows of finished goods in the distribution channels from production to warehouses,
  • costs of movement of finished goods from the producer to the final consumer (wholesaler, intermediary, retailer),
  • costs of handling orders,
  • costs of manipulation activities,
  • transport costs,
  • salary costs.

Receipt and storage of materials in warehouses of finished products (S. Ketola, 2017, pp. 26-29):

  • costs of constructing and using distribution channels in accordance with the adopted distribution system,
  • costs of assembling and maintaining stocks of finished products in distribution channels,
  • costs of manipulation activities,
  • costs of packing of finished goods,
  • storage costs,
  • salary costs.

Organisation of material flow from the finished goods warehouses to the final consumer (S. Ketola, 2017, pp. 26-29):

  • costs of handling information streams controlling physical processes of distribution of finished products,
  • costs of manipulation activities,
  • transport costs,
  • salary costs.

Some studies on distribution logistics include in the scope of logistics distribution costs the costs of promotional and marketing activities, which are more related to the market strategy. Company than strictly with logistic processes (J. Aitken, 2002, pp. 59-74).

Total logistic costs

The total cost of distribution logistics is the sum of costs of execution of all activities comprising the physical flow of the product from the manufacturer to the final buyer (i.e. handling orders, storing inventories, maintaining warehouses, transporting packaging), increased by the estimated amount of lost sales opportunities due to a malfunctioning distribution system (H. Garnett, P. Smith, 1973, pp. 355-364).

A logistic approach to distribution enables the elimination of errors resulting from separate treatment of particular functions related to the movement of goods in time and space (H. Garnett, P. Smith, 1973, pp. 355-364).

Total logistics costs are often unknown as most companies do not identify the costs arising from the physical distribution of goods. However, the determination of these costs is essential for effective and efficient distribution management (R. Lekashman, J. F. Stolle, 1965, pp. 33-46). Many undertakings consider their physical distribution system to be efficient because each of its components produces specific effects in relation to costs (BS. Hill, S. Econ, 1973, pp. 12-13). This does not mean, however, that total logistics costs are minimised under a given, assumed customer service standard (R. Lekashman, J. F. Stolle, 1965, pp. 33-46).

Direct product profit

The development of modern information processing technologies, implementation of automatic goods identification systems and uniform standards of cost accounting along the entire route of the product from manufacturer to buyer, enable to obtain information showing the costs of distribution of individual products (G. T. Stoops, M. Pearson, 1988, pp. 10-13). The Direct Product Profit method serves this purpose). It consists in allocating distribution costs to each item. This makes it possible to calculate the so-called contribution to cover those costs that can be directly attributed to individual articles and the profit (G. T. Stoops, M. Pearson, 1988, pp. 10-13).

The criterion for including certain costs in a given article is their relationship with the functions performed in the sphere of distribution, e.g. transport, receiving goods, maintaining space, using technical aids or interest on the capital of a given stock of goods (G. T. Stoops, M. Pearson, 1988, pp. 10-13).

Joint actions of producers and intermediaries in the development of the DPP model may be treated as an introduction to the calculation of Total System Efficiency (BS. Hill S. Econ, 1973, pp. 12-13). This will provide companies with a basis for assessing alternative distribution channels and taking action to minimise the total cost of logistics at a given level of delivery service (S. Ketola, 2017, p. 26).

Examples of Distribution cost

  • Transportation Costs: This includes the cost of shipping the finished products to the customer, as well as the cost of fuel and other costs associated with the transportation of the goods.
  • Warehousing Costs: This includes the cost of maintaining a warehouse facility to store the finished products until they are shipped out to customers. This also includes the cost of insurance, taxes, and other costs associated with the warehouse facility.
  • Inventory Management Costs: This includes the cost of managing inventory levels, including the costs associated with tracking inventory levels, ordering and receiving new inventory, and disposing of expired or out of date inventory.
  • Packaging Costs: This includes the cost of packaging the finished products for shipping and storage, including the cost of materials and labor associated with packaging the goods.
  • Order Fulfillment Costs: This includes the cost of processing orders, including the cost of labor associated with order entry and processing, as well as the cost of materials associated with packaging the orders for shipment.
  • Return Logistics Costs: This includes the cost of returning products to the company, including the cost of returning the product to the company and the cost of disposing of the product.

Advantages of Distribution cost

One advantage of distribution costs is that they can help a company better understand the cost of selling, delivering, and managing their products. Here are a few more advantages of distribution costs:

  • Optimizing distribution costs can help a company save money, as it allows for better resource management and the ability to select the most cost-effective transportation and delivery methods.
  • Distribution costs can also help a company better track and analyze the performance of their supply chain, as they can identify areas where they can make cost savings or improvements.
  • Distribution costs help a company plan their inventory more efficiently, as they can predict customer demand and stock levels more accurately.
  • Distribution costs can also help a company forecast their future needs and plan accordingly, as they can anticipate customer demand and plan for any potential disruptions.
  • Lastly, distribution costs can help a company improve customer service, as they can ensure timely and accurate delivery.

Limitations of Distribution cost

  • The most common limitations of distribution costs are related to the complexity of the supply chain. This complexity can include a variety of factors such as the number of suppliers, the number of distributors, the geographical distance between them, the cost of transportation, the availability of storage facilities and the cost of inventory management.
  • In addition, the cost of distribution can be affected by the rate of customer demand, the amount of customer service required, the number of orders, the number and type of products being sold, the cost of warehousing and the cost of returns and refunds.
  • The cost of distribution can also be increased due to the need to comply with regulations, the need to manage customer relationships, the need to manage multiple channels, and the need to manage customer complaints.
  • Finally, the cost of distribution can be affected by the cost of marketing and advertising, the cost of customer service, and the cost of customer satisfaction surveys.

Other approaches related to Distribution cost

Other approaches related to distribution cost include:

  • Freight cost: This includes all costs associated with the transport of goods from a supplier to the company and then to the customer. It includes costs such as fuel, insurance, driver wages and loading/unloading fees.
  • Warehouse cost: This includes all costs associated with running and managing a warehouse, such as rent, salaries, maintenance, utilities and taxes.
  • Inventory cost: This includes all costs associated with the stocking and maintaining of inventory, such as storage fees, taxes, insurance, and shrinkage.
  • Order processing cost: This includes all costs associated with processing customer orders, such as ordering software, labour, shipping, and handling.
  • Returns cost: This includes all costs associated with handling customer returns, such as restocking, returns processing, and handling fees.

In summary, distribution costs are complex and involve a range of material processes, including freight costs, warehouse costs, inventory costs, order processing costs, and returns costs. Each of these must be managed carefully to ensure maximum efficiency and cost savings.

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Author: Sara Pilch