True Costing in Logistics & Supply Chain Management: How do we make decisions based on True Economic Trade-Offs (T-ETOs)?

Abstract

Decision-making in logistics (including /supply chain management) is often based on traditional cost-price information from a company's accounting department. Externalities, like social and environmental impact, are usually not included in decision-making. To include a more integrated trade-off, the cost-price information should include information on the traditional costs and the costs of externalities like fair wages (social costs) and costs of damage, pollution, etc. (environmental costs). The article provides an overview of traditional costs and attempts to monetise externalities (by using the concept of shadow prices and the Lagrange multiplier or λ) as a base for decision-making in logistics. Some case studies are presented from the last decade and an example of a true economic trade-off for buying a diesel truck-tractor or an electric truck-tractor. In the previous example, much decision data is missing because no track record has yet been developed in this industry. The key issue is making external effects measurable so that business practices can make sound decisions based on financial, social, and environmental data. The author ends the contribution with a call for further (applied) research into true pricing in logistics.