"We are very pleased to announce that the relocation of our inventory, which had been located in four different warehouses throughout the country, to a single new warehouse near Company headquarters in Boston.  This consolidated location will cut the comp

The argument that the profitability will increase the same amount the warehouse costs decrease is too short-sighted and bases on the assumption that all other factors influencing the profitability will remain same. The statement that follows the announcement of warehouse consolidation is trying to advocate the consolidation by an overly simplified profit calculation. The decrease of warehouse costs to its half is not enough to conclude that the profitability will increase by the same amount.

A consolidation of warehouses could have a huge impact on other parts of the supply chain. Warehouses could be used to store both raw material for production or products for customers. Decentralized warehouses may have advantages in both cases which are not considered by the author. In case the warehouses were to store products, a consolidation of warehouses could cause longer shipping times to customers and thus to a decreased customer satisfaction. Generally, a decrease in customer satisfaction leads to a drop in revenues. Considering that the profit equals costs subtracted from revenues, a revenue drop would distort the positive effect expected from the cost-savings due to warehouse consolidation.

If the warehouses were to store raw material, the decentralized structure could be due to the short expiration period of raw materials or their sensitivity to transportation damages. In case of a centralized warehouse, long transportation distances and thus transportation times might lead to higher raw material drop-outs due to transportation damages or expiration of the raw material. This might increase the material costs substantially, which also would have an effect on the profitability of the company. Taking the profit equation again into account, higher material costs could diminish the cost-savings expected from the warehouse consolidation.

On the other hand, the consolidation of warehouses is actually a step some companies successfully take in order to save costs. However, such a step can be justified only after considering its impact on the whole company. Running an impact analysis -from suppliers to customers- on the whole supply chain would generate the necessary information in order to estimate the profit gain from such a warehouse consolidation.

In summary, the author misses the fact that a warehouse consolidation can have a huge impact on the production side as well as on the customer side. Since the profit is dependent on revenues as well as on costs, the company should estimate the profitability gain only after taking all aspects into account.