The distance setting is for time delay. It does not affect the speaker volume, there is a separate set options for that.
Ideally you'd have all the speakers equidistance from the main listening position so there would be no need for delays to time-align the speakers. But obviously many speakers are in rooms that don't facilitate this kind of placement, often surround speakers are much closer to the listening position than the mains. Delaying those channels appropriately makes it so that things stay time-aligned.
You usually can't add whole system delay because the receiver will usually figure out the relative delay between channels, not absolute delay. Though some processors may have additional delay capabilities to stay in sync with delayed video for instance, but this is usually different from the individual channel delays which are usually relative, not absolute.