Also known as a distribution cost, a distribution expense is a type of business cost that has to do with the process of transporting any finished goods from the facilities of the manufacturer to the locations in which they will ultimately be consumed. This type of expense may take on several different forms, depending on the strategies used to complete sales and any intermediaries that may be utilized as part of the delivery process. In addition to goods, it is also possible to incur distribution expenses when delivering services to a buyer.
One of the most simplistic examples of distribution expense can be seen when a direct sale is involved. The process of a direct sale means interaction between the manufacturer as the seller and a consumer as a buyer. With this application, the buyer places the order directly with the seller, without any retailer or wholesaler functioning as part of the medium of exchange. Once the seller accepts the order, arrangements are made to deliver the purchased goods directly to the buyer, usually through means of using the post, a courier service or a freight line. Those costs may be absorbed by the seller, or passed on to the buyer as part of the purchase arrangement.
The scope of distribution expense may include costs other than simply transportation charges. In the event that some sort of special handling is required during the transit, those additional costs may also be assessed. For situations involving expedited shipping, such as overnight delivery, those costs are usually considered above and beyond the normal process. Even in situations that require special packaging in order to ensure that the goods arrive undamaged at the location of the buyer, those charges may be considered part of the distribution expense.
Depending on the nature of the business operation, some or all of the distribution expense may be absorbed by the manufacturer. This is sometimes the case with direct sales, in which the seller will offer free shipping to the consumer as part of the incentive for doing business with the manufacturer. With this type of arrangement, the seller has usually entered into some sort of volume purchase contract that makes it possible to ship items for significantly reduced rates, which in turn helps to limit the expense of distribution. Other companies also negotiate special transportation rates with various vendors, but pass the reduced cost on to their customers as shipping and handling fees that are assessed at the time the order is placed and accepted.