Profitability of freight consolidation facilities: A detailed cost analysis based on theoretical modelling

Abstract

Consolidated delivery schemes are suggested as policy solutions to address negative externalities caused by growth in last mile deliveries. However, freight consolidation initiatives lack a focus on financial viability early in project design. Dependence on government subsidies is a typical long-term outcome. Thus, this study presents a theoretical cost model to explore the profitability of an inner-city freight consolidation facility and determine the operational variables that derive a profitable facility. The analytical approach develops a mixed integer linear programming cost model to optimise the facility's profitability. A unique aspect is that the model considers the stochastic demand for consolidated delivery services from other freight carriers The numerical solution of the model produced using a genetic algorithm estimated that personnel costs comprise the largest share of total costs. Comprehensive sensitivity analysis reveals that the vehicle fill-in rate has the greatest effect on profitability. Unlike other studies in the literature, this study provides evidence that these facilities could be profitable without government subsidies. The findings offer valuable insights about the development of financial and non-financial incentives to support freight consolidation venture. As a guide for the future, the model provides a theoretical basis to evaluate planned consolidation facilities.