How can innocent choices double warehouse costs?
The answer: cost discontinuities.

In my previous blog about the service paradox, I showed how an excessive service focus can paralyze warehouses. But when does service actually go too far? Let’s take a look.

Small decisions, big consequences

In supply chains, customers, suppliers, carriers, and colleagues make decisions daily. Sometimes consciously, sometimes out of habit. Choices about what, when, and how. Without the chain realizing it, such decisions can lead to extraordinary efforts, high costs, or outright chaos in the warehouse.

A textbook example is customer ordering behavior. Suppose an item comes 20 to a box and 20 boxes to a pallet. You can deliver 400 units in one order of 400, in 20 orders of 20, or even in 400 orders of 1 unit. Activity-based costing shows how dramatically warehouse costs for delivering these 400 units vary.

The chart shows a sawtooth pattern where costs drop when orders match full boxes or pallets. It’s shocking to realize that a full-pallet delivery is nearly a hundred times cheaper than the same quantity in single-piece orders. And that’s leaving transportation costs aside. Behind such differences lies an interesting mechanism.

What is a cost discontinuity?

This is what we call a cost discontinuity. A small variation in service – such as order size or frequency – causes a disproportionate jump in logistics costs. Now, a customer ordering one loose unit won’t quickly be inclined to order full pallets. But by rounding to full boxes or pallets, halving logistics costs is easily within reach. Customers will notice something, but it’s questionable whether they experience it as a problem.

In management accounting literature, this is known as cost discontinuity: costs that don’t behave linearly but change in steps. In warehouses, you see the same effect. A small change in ordering behavior or service level can double the work, while the customer hardly benefits.

More than just costs

Cost discontinuities can manifest in all kinds of ways. Last-minute rush orders, special packaging requirements, or artificial quarterly peaks cause major disruptions. Seemingly innocent service choices can lead to substantial extra work, severe peaks and valleys, or moments of extreme time pressure. All these effects ultimately translate into disproportionate cost increases: overtime, stress, errors, and delays.

Top 10% warehouses recognize these patterns. They see that such jumps don’t arise spontaneously: what happens on the floor originates in the chain.

What smart warehouses do

• Process: Map costs and performance sharply. Identify where cost discontinuities occur and quantify the impact.
• IT: Investigate shortcomings in systems, such as incomplete master data or missing integrations.
• Chain: Talk with colleagues and chain partners about what truly adds value for customers – and what mainly causes waste.

By making these jumps visible and jointly addressing them, you prevent waste and create room for structural improvements in the chain.

Do you recognize big jumps in your warehouse costs? Or choices in the chain that lead to unnecessary chaos?

About the author
Jeroen van den Berg is the author of Highly Competitive Warehouse Management and holds a PhD in warehouse algorithms from the University of Twente. He has been advising companies on warehouse optimization and WMS since 1997, running his own consultancy since 2001. He develops Metrica, a Warehouse Optimization System.