CHOOSING A LOGISTICS SUPPLY CHAIN ON THE BASIS OF OPPORTUNITY COST

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Abstract

The total logistics cost (TLC) is the traditional expenditure-approach method of calculating the logistics cost of a supply chain as the goods are moved from the source to the end destination. This method uses the sum of all expenditure associated with the movement of goods (i.e. transport and handling), in-transit storage of goods and the generation of information to enable these movements to occur. As logistics chains become more complex and longer, calculating the TLC becomes increasingly difficult. The question that this paper answers is how to define and calculate the four logistics supply chain economic, or opportunity, cost factors of (1) physical movement (i.e. transport and handling); (2) in-transit cost of holding the stock while not available to the end customer; (3) the cost of the information needed to enable the movement; and (4) the effect of the reliability of the logistics chain on the safety stock. A practical method is developed whereby the TLC, incorporating these four aspects, is shown for a hypothetical movement. The costs highlight the total logistics opportunity cost (TLOC) for a multiple-leg voyage and the costs associated with all four aspects of the movement. The most attractive logistics supply chain would be the one with the lowest TLOC, and the choice can be made with confidence, as it incorporates the full economic logistics cost of the chain. (‘Economic cost’ and ‘opportunity cost’ are terms used synonymously in this work.)

Keywords: Reliability, Safety Stock, Supply Chain, Total Logistics Cost, Total Logistics Opportunity Cost

How to cite this paper: Vogt, J. J., & Pienaar, W. J. (2013). Choosing a logistics supply chain on the basis of opportunity cost. Corporate Ownership & Control, 10(4-2), 291-296. https://doi.org/10.22495/cocv10i4c2art6