Establishing landed costs for the products that a company handles can be difficult and convoluted. All businesses that import or export need to understand what the total cost of goods is for what they are buying or selling. In order to accurately calculate the landed cost, all factors beyond the obvious primary price must be considered. Calculating landed cost is critical in understanding what a product actually costs and, therefore, what it can be sold for.
Landed
cost definition:
Landed cost is the total cost of a product once it has arrived at the buyer’s door. This list of components that are needed to determine
landed costs include the original price of the item (converted to
U.S. dollars), all customs brokerage and handling charges, complete
freight and shipping costs, customs duties, tariffs, taxes,
insurance, packaging costs, and surcharges.
The
calculation and model for landed cost must be customized to the
variables in every supply chain. As a generic model, for imports, the
accompanying table can be used, recognizing that specific nuances in
each supply chain might modify how this list would appear.
The
choice of INCOTERM will be a major factor in how costs,
responsibilities and risks are distributed between the seller and
buyer.
It
is critical that both parties when agreeing to the use of an INCOTERM
that they understand the risks and costs.
Importers
into the United States by ocean freight typically buy F.O.B. outbound
gateway. In China this might be written as F.O.B. Shanghai.
This
means the buyer will assume all risks and costs once the goods are
placed onboard the oceangoing vessel in the port of export from
overseas. The key words being “risks and costs.”
Marine
insurance, when thoroughly written offers “all risk,”
“warehouse-to-warehouse” coverage for the buyer at specific terms
and a rate of premium to be agreed.
The
buyer must take a few steps to impact landed costs:
• Use
comprehensive freight forwarders, customs brokers and professional
service providers that have expertise and can lend value in the
global supply chain.
• Pay
attention to the choice of INCOTERM. Many choices give you control
over various aspects of the supply chain where you can impact cost.
• Review
each line item in the landed cost model to determine where costs can
be reduced.
• Mode
of transportation will impact landed costs. Many times air freight is
used, when ocean freight could be a less expensive option.
• Inland
freight expenses can be included in the ocean freight, where there is
an opportunity to leverage the larger ocean freight spend to obtain a
better inland freight cost.
• Utilization
of technology and reducing “paper” in the transaction can reduce
ISF, customs clearance and handling charges when automation replaces
repetitive human handling of import and export documentation.
• When
freight does not have to be consolidated or deconsolidated and can be
shipped in units direct from suppler to point of end use, will also
reduce costs.
• Negotiating
away in a soft freight market with surcharges such as PSS, GRIs and
BAF will also impact landed costs favorably.
• By
leveraging your spend with a minimum number of service providers and
carriers will place a focus on a smaller group of “partners” that
will maximize the opportunity to obtain a better deal.
• Develop
a “partnership” mentality with all your service providers and
carriers. Favor tenured relationships and work as a “team” in
your supply chain. Loyalty and a working mindset will have true
rewards in lieu of short-term benefits.
Another
huge area that is impacting landed costs are the use of trade
programs, such as free trade agreements, foreign trade zones and
bonded warehouses, which can substantially lower and impact the cost
of buying, selling and shipping goods. A subject for the next Bottom
Line.
Just
understand that studying landed cost and the variables, and then
applying sound cost reduction principals, can make your supply chain
operate more competitively.
Cook
is a seasoned global supply chain professional, author of 19 books on
global trade and managing director of Blue Tiger International. He
can be reached at tomcook@bluetigerintl.com. n