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Chain Costing
Prof. Costas Panou
Lecture #5 in M.Sc
New Technologies in Shipping and


Understand the importance of costing SC

Understand the SC costs
Know the methods of logistics costing
Know ways by which logistics cost can be

Costing SC

It is important to understand that the costs will

become value creators to customers or consumers of
products and services.
It is therefore important to control and contain some
of the operating costs through appropriate
management techniques.
Equally important is for partners in a chain to
implement some cost control techniques that will
ensure a least cost supply chain.

Logistical costing
An important activity of Logistics
Management in order to reduce logistical
costs is to improve performance

Supply Chain Cost Areas

Grouping of SC costs

Supply chain costs accrue from time or

activities undertaken during pipeline flows.
These costs can be grouped into:
time based (fixed) and
activity based (variable)

Reason for the classification is to be able to

apply appropriate cost control techniques

Grouping of SC costs
Hines (2004) defines time related costs as
overheads cost that are predominantly fixed.
e.g. the cost of storing and holding inventory
requiring space to be rented or acquired over a
given period. Fixed cost do not vary according
to changes in volume or production output
whereas variable costs will change as the level
of output or volume changes.

Types of costs

Direct or operating costs: Transportation, material

handling, warehousing and some aspects of order
processing and inventory can be allocated to a
customers order
Indirect costs: indirect costs are cost of capital resources
of logistics allocation is difficult, generally discretionary
Overhead costs: an organizations spending centrally. The
benefits are availed by all entities in the organization allocation is difficult and generally left out in modern
costing methods

Importance of cost

It is important that cost reduction is coordinated

along the supply chain in order to obtain
This can be achieved through influencing the cost
levels, cost structures, and behaviour of supply
chain partners because these costs contribute to the
final price charged to the customer.

Methods of logistical

Activity Based Costing (ABC)

Total cost method
Conventional (traditional) approach
Mission Based Costing

Activity Based Costing


Enables the exact cost of products and/or

service to be ascertained.
By allocating costs to activities rather than
functions, it is possible to identify the true cost
involved in the delivery of the product or

Activity Based

ABC costing activities

An activity here represents a repetitive action
performed in the fulfilment of business
functions, such as designing, purchasing,
production set-up, assembly, quality control

Total cost approach

Modern approach to logistical costing
Focus on reduction of cost of output of the system [product delivery
to customer]
Provides competitive edge to the company
Includes costs like inventory, warehousing, production,
distribution, transportation, packaging and customer service
Reveals several trade off points in the system & further areas of
Transportation Inventory
Warehousing Customer service
FTL/LTL and cost of transportation
FTL/LTL and cost of inventory

Ways to Reduce Supply Chain

Management Costs
1. Develop or enhance existing vendor managed inventory
(VMI) and just-in-time (JIT) programs to increase
inventory velocity and smooth ordering patterns.
Receive material as you need it instead of buying
periodically in large, fixed lots. This reduces inventory
carrying costs, space requirements, obsolescence,
damage, spoilage, and shrinkage. When properly
managed, these programs result in inventory reduction
benefits for customers and suppliers.

Ways to Reduce Supply Chain

Management Costs
2. Use electronic commerce to reduce transaction
processing costs
Transferring data between companies electronically,
instead of in hard copy, decreases labor, time, and
the potential for error and speeds up the processing
cycle. This results in reduced costs and improved

Ways to Reduce Supply Chain

Management Costs
3. Centralize forecasting and inventory planning
functions using forecasting
In a multiplant/DC environment, demand
forecasting, inventory planning, and production
planning should be done centrally. The people doing
the work should have a corporate perspective in
balancing supply and demand across the supply
chain and across the company.

Ways to Reduce Supply

Chain Management Costs
4. Continually review the cost of adding manufacturing
capacity or outsourcing against the cost of building and
holding inventory.
5. Identify and target non-profitable customers and product
lines to increase margins or eliminate that business.
6. Integrate production planning, inventory planning,
customer service, distribution and transportation
functions to improve information availability, reduce
inventory, and improve service.