True costing in supply chain management: how do we make decisions based on True Economic Trade-Offs?

Decision-making in logistics and supply chain management often relies on traditional cost and price information provided by a company’s accounting department. However, these decisions typically do not consider externalities, such as social and environmental impacts.

To achieve a more integrated trade-off, cost-price information should encompass both traditional costs and the costs associated with externalities, such as fair wages (social costs) and damage and pollution (environmental costs). ‘True costs’ have been introduced to calculate relatively new economic trade-offs, as so-called external effects are usually not included in cost price calculations.

True pricing is defined as taking action to transition to a sustainable economy with true prices through transparency about true prices, transformation of products to prevent external costs, transactions to pay and remediate external costs, taxation of external costs, and taking out unacceptable external costs by prohibition.’

A new paper by Jan Jansen offers an overview of traditional costs. It explores methods to monetize externalities using concepts like shadow prices and the Lagrange multiplier as a foundation for decision-making in logistics. It includes case studies from the past decade and presents an example comparing the true economic trade-off between purchasing a diesel truck-tractor and an electric truck-tractor. In this example, much of the decision data is missing due to the industry’s lack of an established track record.

The critical issue is making external effects measurable so businesses can make informed decisions based on comprehensive financial, social, and environmental data.

Source: Jan Jansen


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Walther Ploos van Amstel  

Passie in logistiek & supply chain management