Fixed and Variable Costs

In logistics cost analysis, we use two types of costs: fixed (or standing, capital) costs versus variable (or running, operational, recurrent) costs.

Fixed costs are costs that do not vary with quantity or volume of output provided in the short run (typically, one year). These costs usually vary with time.

Variable costs are costs that vary with changes in quantity or output volume. Variable costs monetarily quantify those supply chain resources that vary or change with changes in volume of goods to be distributed and/or the distance to be covered for delivering those goods. For example, fuel costs required to operate the delivery vehicle would be considered a variable cost.

Unlike variable costs, fixed costs describe resources—such as vehicles, drivers, and warehouse buildings—that are in place to prepare for the distribution of products. These resources typically do not vary in the short run (e.g., in a year) with variations in volume or distance.

To evaluate the cost of the logistics system, both fixed and variable costs are added to determine the total cost of logistics. While a distinction is being made between the types of resources, fixed and variable costs are interdependent in logistics management. For instance, the size of a vehicle (fixed cost) to be used for distribution will affect the operating cost of making a delivery (variable cost); the heavier or larger the vehicle, the higher the fuel costs to cover a given distance.

Also, fixed and variable resources are affected by the same factors, although in different ways. For example, significantly increasing the number of delivery points will affect variable costs by increasing the distance to be covered (fuel cost will increase for example). Fixed costs may also be affected if the available vehicle fleet is not sufficient to cover the distance within a certain delivery time window (e.g., an additional vehicle may be required and added). Further on in the analysis of transport problems/scenarios, we describe how to more systematically assess the trade-offs between total fixed and variable costs.