* Is High or Low Best: Lower is Better
Distribution Expense as a Percentage of COGS measures the portion of costs attributed to distribution of goods vs. the direct costs incurred to produce those goods. A high value for this KPI may suggest small order sizes, excessive equipment maintenance costs, ineffective inventory management, costly vendor selection, poor materials handling, expensive warehouse facilities, overstaffed Distribution functions or slow shipment/delivery cycle times. Companies that incur high distribution costs may pass those expenses on to customers in the form of shipping charges, which may cause customer dissatisfaction. Companies can reduce their distribution expenses by consolidating customer orders, setting productivity goals, optimizing packaging materials for different types of shipments, minimizing order errors, etc. While a low value is typically desired for this KPI, excessively low numbers may also suggest that there are inefficient controls in place for managing the direct materials and labor costs of produced goods.
Total distribution expense incurred by the company divided by the total cost of goods sold (COGS) over the same time period, as a percentage.
Two values are used to calculate this KPI: (1) the total distribution expense incurred by the company, and (2) the total cost of goods sold (COGS) during the same measurement period. Distribution expenses should include management activities, receiving and warehousing inbound deliveries, monitoring product availability, picking and shipping products for delivery, inventory storage, and shipping/transportation. Do not include procurement expenses in this calculation. COGS includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. Do not include indirect expenses such as distribution costs and sales force costs in the denominator.
(Total Distribution Expense / Total Cost of Goods Sold) * 100
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