Source: adapted from McKinnon, A. “The Effects of Transport Investment on Logistical Efficiency”, Logistics Research Centre, Heriot-Watt University, Edinburgh, UK.

Total Logistics Costs Tradeoff

Total logistics costs consider the totality of costs associated with logistics, which includes transport and warehousing costs, but also inventory carrying, administration and order processing costs. The above graph portrays a simple relationship between total logistics costs and two important components; transport and warehousing. Based upon the growth in the shipment size (economies of scale) or the number of warehouses (lower distances) a balancing act takes place between transport costs and warehousing (inventory carrying) costs. This function differs according to the nature of freight distribution. There is a cutting point representing the lowest total logistics costs, implying an optimal shipment size or number of warehouses for a a specific freight distribution system. Finding such a balance is a common goal in logistical operations.