Economy of Scale

Smaller companies are at a bit at a disadvantage when it comes to economies of scale. In a very basic nutshell, economies of scale is based on the assumption that the cost per unit remains the same regardless of output. The advantage comes when marginal costs are spread over a higher number of units produced. For example, marginal costs encompass fixed and veritable costs and problems may occur when the marginal costs increases because of price changes in those fixed or veritable costs. Smaller companies may not have the negations power because of lower volumes of productions, so when per unit costs increase, profits decrease.

Larger companies may be able to keep per unit costs lower because they may be able to organize production more effectively. In addition, output necessary to afford greater purchasing in volume, allows negotiation for decreased unit cost relating to raw goods, labor, and parts. This theory applies to transportation and fright costs because rates usually decrease as volume increases.

Established warehouses have the advantage of monopsony, which affects all areas of productivity and giving them the advantage of bargaining power due to volume of production such as purchasing in bulk, long-term contract, labor, lower interest rates, and specialization of managers. Ultimately, warehouses offer the ability to negotiate certain costs that smaller firms could not. If you're looking to open a warehouse or find a fulfillment service, consider these factors first.

Sources:
linfo.org