This page teaches how a buyer decides who should hold and move its goods once they land from the factory: its own distribution centre, built and staffed by the buyer, or a third-party logistics provider, a company paid to store and ship goods it does not own. This is mainly a decision, made once for a buyer's whole flow of orders rather than order by order. A buyer that never revisits this choice can end up paying for an empty warehouse it barely uses, or paying a third-party logistics provider a rate that only made sense at a smaller volume.
A buyer that assumes its own distribution centre is always cheaper can build a warehouse it cannot fill, carrying rent and staff costs that a lower, more sporadic volume never needed. A buyer that assumes a third-party logistics provider is always cheaper can keep paying a per-piece rate long after its own volume has grown large enough that owning the operation would now cost less.
You need: the landed cost and volume of the goods a buyer receives, no earlier lesson in this course.
By the end of this lesson you can:
Not covered here: choosing the shape of a distribution network (Lesson 5.2), checking whether a third-party logistics provider's quote already covers every real cost (Lesson 5.3), and building the complete decision tool (Lesson 5.4).
| Term | Meaning |
|---|---|
| Distribution centre | A retailer's own dedicated stock location built for shipping online orders, separate from its store network. |
| Third-party logistics provider | A company paid to store and ship goods it does not own, instead of the buyer building and staffing its own warehouse. |
| Fixed distribution cost | The part of running a distribution centre that stays the same no matter how many pieces pass through it, such as rent and permanent staff. |
| Variable distribution cost | The part of a distribution cost that rises with every extra piece handled, such as picking and packing labor. |
| Break-even volume | The volume at which running an in-house distribution centre costs the same as paying a third-party logistics provider; above it, owning is cheaper, below it, paying is cheaper. |
Running a distribution centre in-house means paying its fixed distribution cost, rent, permanent staff and equipment, no matter how much stock actually passes through it, plus a smaller variable distribution cost for every extra piece. A third-party logistics provider charges only for the volume it actually handles, with no fixed cost to the buyer, but its per-piece rate is usually higher than an in-house operation's own variable cost once its own margin is included. Which option costs less depends entirely on the buyer's own volume compared against the break-even volume where the two costs meet.
| What can differ | The shapes you meet | Why it matters |
|---|---|---|
| Export vs. domestic buyer | An export buyer such as Northline Apparel usually receives large, consolidated shipments at one destination port, favouring its own distribution centre once volume is high enough; a domestic brand receiving smaller, more frequent local deliveries often stays with a third-party logistics provider longer | The volume needed to justify an in-house distribution centre is usually reached sooner by an export buyer's own consolidated flow |
| Make to order vs. make to stock | A make-to-order buyer's volume moves with confirmed orders and can be predicted from its own order book; a make-to-stock brand's volume depends on its own forecast, which can be wrong in either direction | A buyer with unpredictable volume risks building a distribution centre sized for a forecast that does not happen |
| Stable volume vs. growing or shrinking volume | A buyer with steady annual volume can commit to fixed distribution costs with confidence; a buyer still growing, or one that has just lost a customer, faces more risk from committing to fixed costs it may later regret | A third-party logistics provider's variable-only cost suits a buyer whose own volume is still changing |
| A single destination vs. several destinations | A buyer shipping to one country can justify one distribution centre there; a buyer shipping to several countries may need either several distribution centres or several third-party logistics providers, or one of each | Splitting volume across destinations lowers the volume at each site, pushing each below its own break-even point |
| Product families | The same in-house-versus-provider comparison applies whether the goods are apparel, socks and hosiery, knit-to-garment, terry and towels, or home textiles and bedding | A buyer new to this decision can apply the same fixed-versus-variable comparison regardless of which product family it distributes |
Northline Apparel buys its own T-shirt from Delta Garments under Order A, 15,000 pieces landed at USD 3.70 each, one order inside a wider annual flow of about 200,000 pieces a year through the same destination country. Northline Apparel's buyer must decide whether to build and staff its own distribution centre to receive, store and ship this flow to its own shops, or to pay a third-party logistics provider to do the same work.
Building its own distribution centre commits Northline Apparel to a fixed annual cost regardless of volume; paying a third-party logistics provider avoids that fixed cost but usually costs more for every piece once volume is high.
The worked numberAt Northline Apparel's actual annual volume of 200,000 pieces, its own distribution centre costs USD 0.90 per piece against the third-party logistics provider's USD 1.10, a saving of USD 0.20 per piece. This only holds because Northline Apparel's own volume, 200,000 pieces, sits above the break-even volume of about 157,895 pieces; at a lower volume, the third-party logistics provider would be the cheaper choice.
A common mistake is treating this choice as permanent instead of tied to volume. A buyer that built its own distribution centre when volume was high can keep paying its fixed cost even after volume falls below the break-even point, when a third-party logistics provider would now cost less. The fix is recalculating the break-even volume whenever a buyer's own annual volume changes materially, not assuming the original decision still holds.
A buyer receiving goods from a factory must decide who stores and ships them: its own warehouse or a company paid to do that work instead. Running an own warehouse costs a fixed amount every year no matter how much passes through it, plus a smaller cost for each piece. Paying an outside company avoids that fixed cost, but its rate per piece usually costs more. Above a certain volume, owning the warehouse becomes cheaper; below it, paying the outside company is cheaper. Northline Apparel's own volume, 200,000 pieces a year, sits above that point, so its own distribution centre costs USD 0.90 per piece against USD 1.10 for the outside company.
Northline Apparel's buyer is asked by its own finance team whether closing the distribution centre and switching to a third-party logistics provider makes sense now that a customer has been lost. The facts in front of the buyer:
The question relayed to the buyer:
Should Northline Apparel switch to the third-party logistics provider at its new lower volume? Decide before you open the decision.
Yes, switching to the third-party logistics provider now costs less, since the new volume of 140,000 pieces sits below the break-even volume.
Two facts decide this. First, at 140,000 pieces, the in-house distribution centre's cost per piece rises to 150,000 / 140,000 + 0.15 = USD 1.22 per piece, above the third-party logistics provider's USD 1.10. Second, this lesson's own break-even volume of about 157,895 pieces has not changed, and the new volume of 140,000 pieces now sits below it, on the side where paying the provider is cheaper.
The fixed cost of USD 150,000 does not fall just because volume fell; spreading it over fewer pieces raises the cost per piece, which is exactly why this decision must be revisited whenever volume changes.
The USD 16,800 figure is the extra annual cost of continuing to run the distribution centre at the lower volume rather than switching; it does not include any one-time cost of closing the facility or moving stock to the third-party logistics provider, which a buyer must add separately before deciding exactly when to switch. Weighed against a one-time transition cost, the annual saving still favours switching within a year or two.
Use the T24-C05 Distribution network and 3PL decision tool. For a given buyer, enter the distribution centre's own fixed annual cost, its variable cost per piece, the third-party logistics provider's quoted rate, and the buyer's own actual volume; the sheet calculates the break-even volume and recommends the cheaper option.
[Download the Distribution network and 3PL decision tool](../../templates/T24-C05-distribution-network-and-3pl-decision-tool.xlsx)
Download the Distribution network and 3PL decision tool (Excel)
1. Why can an in-house distribution centre be cheaper at high volume but more expensive at low volume?
2. A buyer's distribution centre has a fixed cost of USD 80,000 a year and a variable cost of USD 0.20 per piece. A provider quotes USD 0.90 per piece. What is the break-even volume?
3. A buyer's volume has fallen well below its own break-even volume, but it still owns its distribution centre. What should it do?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Distribution centre | مركز التوزيع | Centre de distribution | Dağıtım merkezi | A retailer's own dedicated stock location built for shipping online orders, separate from its store network. |
| Third-party logistics provider | مزود الخدمات اللوجستية الخارجي | Prestataire logistique tiers | Üçüncü taraf lojistik sağlayıcısı | A company paid to store and ship goods it does not own, instead of the buyer building and staffing its own warehouse. |
| Fixed distribution cost | تكلفة التوزيع الثابتة | Coût de distribution fixe | Sabit dağıtım maliyeti | The part of running a distribution centre that stays the same no matter how many pieces pass through it, such as rent and permanent staff. |
| Variable distribution cost | تكلفة التوزيع المتغيرة | Coût de distribution variable | Değişken dağıtım maliyeti | The part of a distribution cost that rises with every extra piece handled, such as picking and packing labor. |
| Break-even volume | حجم التعادل | Volume d'équilibre | Başabaş hacmi | The volume at which running an in-house distribution centre costs the same as paying a third-party logistics provider; above it, owning is cheaper, below it, paying is cheaper. |
You now know how to compare running your own distribution centre against paying a third-party logistics provider. The next lesson widens the question to the shape of the network itself, and how an export order and a domestic order call for different shapes. Back to the course map