Developing an economic cost model for quantifying supply chain costs

Supply Chain Management (SCM) has become a very powerful tool for any business because it aims to provide a win‐win situation for all members by maximising the profitability of the whole chain. However, some benefits from joining the chain are difficult to quantify in monetary terms. If these benefits and savings of supply chain coordination cannot be detected, it would result in a productivity paradox and failure to justify the benefits of building trust and coordination in the supply chain. The proposed classification of supply chain costs with an economic cost model expands the cost concept beyond typical logistics costs by breaking overhead costs according to their cost centre and introducing opportunity cost to estimate the neglected cost of non‐value added activities. With this proposed cost model, companies would be able to quantify hidden benefits and their savings as well as to realise the true costs if they choose to join and cooperate in the chain, whereas these savings would be ignored and overlooked by the traditional costing methods, resulting in the possibility of collaboration in such projects (of building the chain) being turned down.