A major factor in the success of any business is the ability to isolate and control costs. In many industries, such as energy exploration and product manufacturing, these costs can be divided into those the company incurs prior to the production process, also known as "upstream" costs, and those that the company takes on after the finished product is ready for delivery, also called "downstream" costs.
Definition of Upstream Costs
As a company prepares to start its production process, it incurs upstream costs. These upstream costs can range from raw materials to research and development to product design. Upstream costs can have a significant impact on the efficiency and profitability of the production process. If raw materials are too expensive or if the design of a new product takes too long, the upstream costs can limit a company's potential profits before a single unit becomes available for sale.
Examples of Upstream Costs
In the petroleum industry, upstream costs include costs associated with exploration of oil reserves, construction of oil and gas wells, and extraction of the reserves to the surface. A pharmaceutical company can incur upstream costs from research on disease symptoms, laboratory analysis of potential treatments and small-scale tests prior to clinical trials. Manufacturing plants take on upstream costs in the acquisition and transportation of raw materials, product design and prototyping, and developing the production process.
Definition of Downstream Costs
After a company has completed its production process, it must still get that product to its customers. The processes involved in delivering those products to the customers is the source of the company's downstream costs. These downstream costs can range from distribution expenses to marketing plans to sales channels. Downstream costs also act as a determining factor in the company's profitability. If distribution costs are too high or sales efforts are ineffective, the downstream costs will eat away at expected revenues.
Examples of Downstream Costs
In the petroleum industry, downstream costs include costs associated with pipeline distribution, refinery processes and retail operations. A pharmaceutical company can incur downstream costs from clinical trials, marketing materials and distribution to healthcare facilities. Manufacturing plants take on downstream costs by packaging their products, shipping those products to wholesalers and retailers, and marketing those products to potential customers.
- Managerial Accounting; Garrison, et al.
- Institution of Engineers of Ireland - Cork Region: Overview of Upstream and Downstream Processing of Biopharmaceuticals
- InvestingAnswers: Downstream
- TheStreet: Downstream Definition
- ConocoPhillips. "ConocoPhillips' Board of Directors Approves Spin-Off of Phillips 66." Accessed Aug. 4, 2020.
Living in Houston, Gerald Hanks has been a writer since 2008. He has contributed to several special-interest national publications. Before starting his writing career, Gerald was a web programmer and database developer for 12 years.