Sales Are Growing, But Profits Are Not Necessarily Following Suit. The Hidden Cost of Volatility in Logistics

Sales growth does not always translate into a higher net income. A good example is when – with sales volumes remaining unchanged – shifting from 16-piece to 8-piece sets doubles your co-packing operations. This is one of the case studies discussed in FM Logistic’s e-book “When Growth Ceases to Be Profitable: The Hidden Cost of Volatility and When to Change Your Operating Model.” It demonstrates how a commercial decision can increase the operational workload, even though sales volume remains unchanged.

Promotions, short production runs, or new product variants often disrupt operational processes, generating costs that are not apparent at first glance.

Sales growth is a natural goal of any business. From a logistics perspective, however, it’s not just about how many products need to be handled – it’s about how much effort it takes to prepare them. Promotions, short production runs, new product variants, or custom packaging requirements may result in the need to repackage goods, carry out extra handling steps, and make changes to schedules.

Under steady conditions, a higher volume usually translates into a proportional increase in workload. With high volatility, however, this relationship rarely stays linear – a single shift can cascade across subsequent tasks and multiply the workload on the entire operation.

It’s easiest to quantify what is immediately apparent: labour time, materials, and equipment used. Based on these alone, it’s simple to compare, for example, the cost of in-house repacking versus outsourcing it to a 3PL operator. Such a baseline calculation, however, fails to capture how executing that task affects other processes.

In his e-book “When Growth Ceases to Be Profitable: The Hidden Cost of Volatility and When to Change Your Operating Model,” Michał Wawrzyńczak categorises costs into three levels: execution cost, disruption cost, and decision cost. Execution cost covers the direct inputs required to complete a task. Disruption cost, on the other hand, arises when an additional operation affects other processes – for example, by tying up staff, taking up part of the warehouse space, or requiring a change to the schedule.

Decision cost is the most elusive. It arises when operational constraints force a company to pass on revenue opportunities, such as an extra promotion or a rush order that cannot be fulfilled without derailing other operations. In such a case, the cost is not the work performed, but the lost business opportunity.

The more changes required during execution, the harder it becomes to maintain the scheduled operational workflow. A single delay can easily trigger a domino effect. If, for example, a packaging delivery gets pushed back, the promotional campaign deadline must be moved. This shift may overlap with the next scheduled project, meaning two initiatives that were supposed to be handled in different weeks suddenly compete for the exact same resources at the same time. A bottleneck that started with a missing component quickly spreads across other operational areas. As a result, the cost of the initial disruption is no longer limited to a simple timeline delay.

Not every wave of volatility means your current way of operating needs to be altered. If additional processes are repetitive, easy to schedule, and do not disrupt your core operations, managing them in-house may remain the most cost-effective solution. The tipping point comes when limited production runs, promotions, or expanding product variants regularly force you to reorganize your workflow. In such cases, outsourcing selected processes to a logistics service provider could be a viable solution. This can include services, such as repacking, labeling, creating promotional sets, or handling the end-to-end management of short production runs.