Question

Which of the following activity costs tends to decrease as we add warehouses to a distribution network and, then, increases such that it forms a U shape?

a) warehouse costs
b) inventory costs
c) transportation costs
d) cost of lost sales
e) order processing costs

Answer 1

Transportation costs decrease initially as warehouses are added, due to reduced delivery travel distances. However, after an optimal point, these costs begin to increase, forming a U-shaped curve due to factors such as coordination complexity and redundant inventory.

Step-by-step explanation:

Transportation costs are a significant factor in the distribution network of any business. Initially, as we add warehouses to a distribution network, transportation costs will tend to decrease because goods are closer to the customers, and the travel distances for delivery are reduced. However, as the number of warehouses continues to increase, the costs can begin to rise due to factors such as increased complexity in coordination, redundant stock across locations, and less-than-optimal flows of goods. Eventually, this leads to a U-shaped cost curve, reflecting an optimal number of distribution points for cost efficiency before costs start to rise again.