Supply Chain as Applied Economics: Why “Not Opposed to Profit” Isn’t Enough
For most companies, “supply chain” is introduced as a mixture of logistics, planning processes, and software. We talk about warehouses, lead times, forecasts, S&OP meetings, dashboards, and vendor scorecards. The implicit promise is that if we orchestrate these elements well, the business will be healthier.
Yet when I look at how supply chain is usually taught and practiced, I see a striking omission. The very field that spends its days allocating production capacity, freight space, working capital, and managerial attention seldom describes itself as what it really is: applied economics.
I explore this argument in my book Introduction to Supply Chain, which is available in full text online, but the core idea is simple enough to present on its own.
In this essay I want to clarify what I mean by “supply chain as applied economics” and confront it directly with the mainstream view.
Starting from Robbins, not from org charts
Let me start with Lionel Robbins, not with warehouses.
In his classic essay on economic science, Robbins proposed what has become the canonical definition: economics is “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
Strip away the older phrasing and his point is very modern:
- We always want more than we can have.
- The means at our disposal—time, money, capacity, goodwill—can be used in different ways.
- Every choice about how to use those means implicitly rejects other possibilities.
Economics, in this view, is not about a specific domain like markets or governments. It is about a specific aspect of behavior: how we navigate trade‑offs when what we want exceeds what we can do.
Seen from that angle, a supply chain is not primarily a network of factories and trucks. It is a dense web of trade‑offs: Should this pallet go to store A or store B? Should we keep this line idle for maintenance or push one more rush order? Should we buy more stock ahead of a promotion or keep cash free for a new product launch?
Each of these questions is a Robbins-style economic problem. The means are scarce. The uses are alternative. The consequences are mutually exclusive.
If you accept this starting point, supply chain stops being a subcategory of “operations” and becomes a specific branch of applied economics focused on physical flows under uncertainty.
How the mainstream defines supply chain
Now compare this with how supply chain is usually defined in professional circles.
The Council of Supply Chain Management Professionals (CSCMP), one of the main reference bodies in the field, describes supply chain management as encompassing the planning and management of sourcing and procurement, conversion, and all logistics, along with coordination and collaboration with partners. In their words, it integrates supply and demand management within and across companies.
This is a perfectly reasonable description of what supply chain people touch: suppliers, factories, warehouses, transportation, customers, and the information that connects them. It is close to how many textbooks start as well: supply chain is the management of flows of products, information, and funds across the stages from raw material to end customer.
Some authors go further and introduce the idea of “supply chain surplus,” defined roughly as the value of the product to the customer minus the total cost of the supply chain. The stated objective is to maximize this surplus.
None of this is wrong. But notice what is missing.
We are told which activities are in scope. We are told that value and cost matter, and that the supply chain should somehow support competitiveness. Yet the definitions are silent about the central economic question: according to what criterion should we choose between two feasible ways to run the chain?
“More surplus” sounds like a criterion at first glance, but in practice it is rarely computed as a concrete number grounded in cash flows and uncertainty. It behaves more like a slogan: “do things that we think will be good for customers and cheaper to deliver.” The link to profit is assumed, not spelled out.
This is where my view diverges sharply from the mainstream.
Why “not opposed to profit” is not enough
If you ask mainstream practitioners whether they are against profit, they will of course say no. Many will even say that improving profit is one of their goals.
But listen to how ideas are typically justified.
A new inventory method is “good” because it promises higher service levels and lower stock. A new planning process is “good” because it improves collaboration and visibility. A new KPI is “good” because it reflects a best practice. The implicit chain of reasoning is always the same: these things sound like they should help the business, therefore they must.
In terms of Robbins, this is a category error. The very essence of economics is that we cannot rely on intuition about trade‑offs. When means are scarce and alternatives are many, almost every change helps one dimension and hurts another.
A higher service level might be good for sales and terrible for working capital. A leaner inventory might reduce carrying cost and increase lost sales in a way that is invisible until the next demand spike. A more complex planning process might improve consensus while wasting the time of scarce decision‑makers.
If we never force ourselves to express these effects in comparable economic terms, “good for the business” becomes a story, not a testable claim.
Saying “our field is not opposed to profit” is therefore not enough. The question is whether profit—understood in a rigorous, risk‑aware, long‑run sense—is explicitly built into our methods as the organizing objective.
Supply chain as applied economics: what I actually mean
When I say that supply chain is applied economics, I am not just saying “numbers matter” or “we should think about costs and prices.”
I mean something more precise.
First, the raw material of supply chain practice is not data or processes. It is scarcity with alternatives. Inventory, capacity, capital, supplier goodwill, customer attention, and even regulatory permissions are all scarce means with different possible uses. Every decision in the chain is an allocation of these means.
Second, the objective is not a vague improvement in efficiency or competitiveness, but an increase in the firm’s long‑run, risk‑adjusted profit. I am not using “long‑run” here in a hand‑waving sense. A short‑term improvement that damages customer trust, supplier reliability, or regulatory standing is not a supply chain success, even if it makes this quarter’s numbers look better. If we take the economic lens seriously, we must explicitly consider time and risk.
Third, because means are scarce and the future is uncertain, every decision is a bet. When you decide how much of a product to buy, where to put it, and at what price to sell it, you are placing a portfolio of bets on future demand, costs, and constraints. The quality of these bets can only be assessed relative to alternatives: other quantities, other allocations, other price points.
In other words, a supply chain is a system of bets about the future use of scarce resources.
Once this is accepted, many common practices look different. A demand forecast without an explicit link to decisions is not a scientific object but a story about the future. A KPI that cannot be translated into economic impact is a decorative dial. A planning meeting that generates consensus without exposing the trade‑offs in financial terms is a political ritual, not a decision process.
How mainstream practice drifts without an economic anchor
It is not that mainstream supply chain professionals are unaware of trade‑offs. On the contrary, most of the day‑to‑day craft consists in juggling them.
The issue is that, without an explicit economic anchor, trade‑offs are handled locally, case by case, and communicated through proxies.
One team optimizes for service levels within a budget. Another optimizes for freight utilization within lead time constraints. A third optimizes for factory efficiency within labor rules. Each produces arguments and KPIs that are correct within their silo and yet collectively inconsistent.
At the organizational level, we try to fix this with integration frameworks: S&OP, IBP, cross‑functional steering committees, supplier councils, customer collaboration programs. These certainly improve the flow of information and reduce obvious contradictions.
But unless all these conversations are tied back to a shared economic logic—scarce means, alternative uses, explicit valuation of choices—they remain vulnerable to a quiet drift. Whoever controls the narrative or the KPI dashboard for a given year can declare a local victory, regardless of what happens to the company’s overall rate of return.
This is where the gap with the Robbins-style view of economics becomes most visible. From Robbins’s point of view, an economic theory that cannot be falsified in terms of how well it handles scarcity is not really economics at all. It is ideology, or at best a collection of heuristics.
By analogy, a supply chain method that cannot be evaluated in terms of its effect on long‑run, risk‑adjusted profit is not really applied economics. It is operations folklore.
Profit as a discipline
Let me now address a common misunderstanding. When I insist on profit as the governing objective for supply chain, some readers hear this as a value statement: “only shareholder returns matter,” or “intangibles like employee well‑being are irrelevant.”
That is not what I mean. Think of profit as a discipline.
Profit, when properly measured over the long run, forces us to aggregate all the consequences of our decisions, including those that are uncomfortable to quantify. If you mistreat employees, your labor costs may look lower this year, but your training costs, turnover, and error rates will rise. If you neglect environmental constraints, you may save on compliance today and face fines, bans, or customer backlash tomorrow. If you bully suppliers, your purchase prices may fall for a while, then rise sharply when they exit or retaliate.
In a healthy competitive environment, these effects are not abstractions. They show up, sooner or later, as differences in cash flows and risk profiles. Profit, in this sense, is the scoreboard that summarizes the firm’s success or failure at navigating scarcity over time.
For supply chain, adopting profit as the organizing objective means something very concrete: every model, every rule, every process that claims to be “better” should be expressible as a hypothesis about future cash flows and risk, and therefore testable against alternatives.
If you propose a new replenishment policy, the relevant question is not “does it look smarter?” but “does it improve expected discounted profit, given what we know about demand, costs, and constraints?” If you introduce a new KPI, the question is “how does an improvement in this KPI translate into economic gains, and under what conditions could we be wrong?”
This kind of discipline is rare in mainstream supply chain discussions. It is not impossible. It is simply not demanded.
Re-reading mainstream definitions through an economic lens
Let us return to the mainstream definitions for a moment and see how they look once we impose this discipline.
When CSCMP says that supply chain management integrates supply and demand across companies and coordinates sourcing, production, and logistics, they are describing the surface of the system: who talks to whom, and about what.
There is nothing wrong with that. Integration and coordination are necessary. But they are not a purpose in themselves. If we adopt the economic lens, we must ask: integration toward what? Coordination in service of which choices among alternative uses of scarce means?
Similarly, when textbooks speak of maximizing “supply chain surplus,” the idea is promising. Surplus is defined as the customer’s perceived value minus the total cost incurred by the chain. If we could measure and optimize that number, we would indeed be doing something very close to applied economics.
In practice, however, surplus remains almost always a conceptual figure. We do not observe the customer’s willingness to pay directly. We do not capture all supply chain costs at the level of individual decisions. We do not systematically carry uncertainty through to the result.
So surplus serves as a story about what should happen if our many local metrics align correctly. It does not usually serve as an operational decision criterion. That is exactly the gap I want to close.
What changes if we truly treat supply chain as applied economics?
If we take Robbins seriously and decide that supply chain is the applied economics of physical flows under uncertainty, several practical consequences follow.
The first is that models and systems must be built around decisions, not around forecasts or reports. A forecast that cannot be plugged into a decision rule and evaluated economically is just a narrative. A dashboard that cannot be connected to a change in cash flows is just decoration.
The second is that every significant choice—the level of inventory by product and location, the routing of flows, the timing of production, the structure of contracts—should, at least in principle, be justified by a comparison of expected economic outcomes under uncertainty. In some situations, this can be done with fairly explicit financial models. In others, we will rely on approximations and experiments. But the direction of travel is clear: away from “because the KPI goes up” and toward “because the economic bet is better.”
The third is that the boundary of supply chain shifts. If we are genuinely concerned with allocating scarce means to their best uses along physical flows, then decisions about pricing, assortment, and promotions cannot be left entirely to “marketing” and treated as exogenous “demand.” They are part of how we generate and shape the flow of goods, and they consume scarce means: capacity, capital, and risk. Managing them without an economic view of the chain is as dangerous as managing production without knowing costs.
Finally, this perspective forces us to acknowledge that supply chain is not a neutral optimization game. It is a discipline about power and responsibility inside the firm. Whoever designs the allocation rules for scarce resources—whether through software, policies, or processes—has a direct impact on the firm’s economic fate. Doing this based on tradition, imitation, or local KPIs is not just unscientific; it is reckless.
Closing thoughts
My claim is not that mainstream supply chain thinking is useless. On the contrary, it has accumulated many valuable insights about coordination, process design, and technical tools. Nor am I arguing that everyone must become an economist in the academic sense.
My claim is more modest and more radical at the same time.
It is modest because it does not propose any glamorous new buzzword. It simply asks us to take Robbins’s definition of economics seriously and to recognize that what we are already doing, every day, when we decide what to buy, where to stock, and how to move it, is economic reasoning about scarce means and alternative uses.
It is radical because, once we accept this, we can no longer be satisfied with methods that cannot be expressed and tested in economic terms. “Not opposed to profit” is no longer a sufficient justification. “Improves this KPI” is no longer a sufficient argument. “Industry best practice” is no longer a sufficient defense.
If supply chain is applied economics, then our work must be judged in the same currency that judges all economic activity: the company’s ability to turn scarce means into lasting value, measured over time, under uncertainty, in coins.
Everything else is storytelling.
