Finding the most efficient and cost-effective way to move product from maker to consumer is a common concern for most businesses.
Distribution costs accrue when transporting a product from its place of manufacture to its final destination, the customer. Examples of distribution costs can be found in retail, the energy market, and in imports and exports.
An Example: Energy Markets
Power markets can impact distribution costs of other industries.
Energy companies generate power or refine it from natural resources, but there are several stops in the route to the customer. For example, a power plant creates electricity, and before it arrives at a customer's wall outlet, it has to go through substations. Maintaining this level of infrastructure is a type of distribution cost.
Potential Volatility
Distribution costs can be calculated and budgeted. However, unforeseen circumstances can happen, which can alter that value. For example, the retail industry depends on trucking. Goods have to be manufactured and then sent to a warehouse before ending up on a store's shelf. An unexpected spike in the cost of gasoline alters the cost of getting the truck to the store.
Impact on Consumer Prices
Distribution costs, especially unforeseen expenses like gas hikes, are part of the rationale for setting a final price on a product. Shelf tag prices must reflect more than just the resources to physically create something. However, there are other contributing factors. If the item is imported, tariffs might possibly apply. Companies also pay insurance and taxes. A company must take all of that into account when setting prices.
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