South-Western EconNews

Sometimes, Bigger is Better--Especially for Warehouses

Subject

Reduction of Costs by Increasing Size of Warehouse

Topic

Production and Costs

Key Words

Costs, Profit, Economies of Scale

News Story

Unilever, a company that makes personal care and other products, needed to increase profit. Unable to raise prices in a competitive market, it turned to reducing distribution costs.

Unilever turned to ProLogis, a real estate firm, to help it streamline the Unilever distribution system. Over a span of almost three years, ProLogis helped Unilever move from 15 warehouses across the country to only 5. Each new warehouse features 1-mile perimeters and 32-foot ceilings (with boxes stacked to the top) and provides about one million square feet of storage. All warehouses are able to stock every item in Unilever's 2,000 unit product catalog, and enables Unilever to deliver products within one day to all of its customers.

Unilever was able to create economies of scale by turning over all of its warehouse plans to one development firm, so that blueprints, land purchases and lease contracts were standard. As a result of the streamlining of the distribution system, Unilever has saved approximately $20 million each year, with the biggest savings in freight transport.

(Updated April, 2004)

Questions

1.	Are these short run or long run cost changes for Unilever? Why?
2.	From the information above, in which direction did Unilever move along its average cost curve? Why.
3.	Unilever was forced to reduce costs instead of raising prices to increase its profit. Why would a competitive market prevent a firm from raising prices to increase profit? Explain in terms of the definitions of various market structure.

Source

Terry Pristin, "The Supersizing of Warehouses." The New York Times, 4 February 2004.