Source: adapted from McKinnon, A. “The Effects of Transport Investment on Logistical Efficiency”, Logistics Research Centre, Heriot-Watt University, Edinburgh, UK.
Total logistics costs consider the whole range of costs associated with logistics, including transport and warehousing costs and inventory carrying, administration, and order processing costs. Administration and order processing costs are relative to the total volume being handled. However, for the same volume being handled, transport and warehousing costs will vary according to the adopted distribution strategies. The above graph portrays a simple relationship between total logistics costs and two important cost 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. There is a cutting point representing the lowest total logistics costs, implying an optimal shipment size or number of warehouses for a specific freight distribution system. Finding such a balance is a common goal in logistical operations. It depends on numerous factors, such as if the good is perishable, the required lead time, and the market density.