Distribution cost

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Distribution cost
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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).


Author: Sara Pilch