Friday, March 4, 2022

Delivery economies of scale

Firms that deliver a lot of stuff have a huge advantage over smaller rivals because they can design more efficient routes. In the figures above, we plot the shortest delivery routes for randomly distributed customers on a 1x1 square. The length of two independent routes on the left is 5.68.  When the routes are combined on the right, as they would be if one firm outsourced its delivery to the other, route length goes down to 3.73, a reduction of 34%. 

Such route consolidation not only reduces cost, but it also reduces traffic and pollution.  You may recognize this as the "Traveling Salesman Problem" from your Ops class.  It is the source of big economies of scale, as the average cost per delivery goes down the more deliveries a firm makes in a given area.  


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