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Logistics and Supply Chain Management

Notes carrier can legally transport in the equipment being used. The second, often called the tapering
principle, is that large shipments should be transported distances as long as possible. Both of
these principles serve to spread the fixed cost related to transportation over as many pounds and
as many miles as possible.

Tasks Economies of transportation consolidation may justify establishment of a single
warehouse or may be achieved across a network of warehouses.

12.3.2 Cost-based Warehouse Justification

The basic economic principle justifying establishment of a warehouse is transportation
consolidation. Manufacturers typically sell products over a broad geographical market area. If
customer orders tend to be small, then the potential cost savings of consolidated transportation
may provide economic justification for establishing a warehouse.
To illustrate, assume a manufacturer’s average shipment size is 500 pounds and the applicable
freight rate to a customer is $7.28 per hundred weight. Each shipment made direct from the
manufacturing location to the market would have a transportation cost of $36.40. The quantity
or volume transportation rate for shipments 20,000 pounds or greater is $2.40 per hundred
weight. Finally, local delivery within the market area is $1.35 per hundred weight. Under these
conditions, products shipped to the market via quantity rates and distributed locally would cost
$3.75 per hundred weight, or $18.75 per 500-pound shipment. If a warehouse could be established,
stocked with inventory, and operated for a total cost of less than $17.65 per 500-pound shipment
($36.40 – $18.75) or $3.53 per hundred weight, the overall cost of distributing to the market using
a warehouse would be lower. Given these economic relationships, establishment of a warehouse
offers the potential to reduce total logistics cost.

Figure 12.1: Economic Justification of a Warehouse Facility based on Transportation Cost

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Source: Donald J. Bowersox, David J. Closs, M. Bixby Cooper, “Supply Chain Logistics Management,”
Michigan State University

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