According to the Institute of Supply Management, landed cost is “the total accumulation of costs for an imported item, including purchase price plus freight, handling, duties, customs clearance and storage to a designated point of delivery.” A firm that focuses on the item’s initial purchase price alone may significantly underestimate the real cost of acquiring and bringing that item to its final delivery point. Accordingly, when making purchasing decisions, landed cost should be the basis of comparison between potential suppliers of a given item. Firms that do not consider total landed costs may pay potentially more for imported goods than for domestic goods, despite a less expensive purchase price abroad.
When calculating landed cost, a variety of cost issues should be considered. While their specific application will vary by organization and situation, these costs generally include the following:
- Purchase Price: Base price of the item. This is the starting point for calculating landed cost.
- Transportation: Additional costs to ship the item to the final point of delivery. This may involve inland transportation within the country of origin, ocean shipping or air freight, and inland transportation in the destination country. Freight forwarding and other handling charges also may apply. With the increased variability present in long, global supply chains, there may be an increased need for expedited shipments using air freight. An estimate of these costs should be included, as it is possible for one unexpected, expedited shipment to negate months of savings from international sourcing.
- Insurance: Marine insurance or other insurance to cover loss or damage for the shipment. These costs may be higher for imported items due to the additional risk exposure inherent in international shipments.
- Export and Import: The country of origin may impose export fees and taxes on the items. Similarly, the destination country may require customs duties that vary depending on the type of item and country of origin. Fees for customs brokers to facilitate customs clearance also may be involved.
- Financial Transactions: Banking fees typically are higher for international transactions. Also, if payment is to be made in a foreign currency, currency exchange costs may be incurred. Furthermore, the buyer may be exposed to currency exchange risks from fluctuations in exchange rates.
- Inventory and Warehousing: Because of the longer lead times and increased variability typically present in global supply chains, warehousing and inventory costs will increase for items from a foreign supplier. Each day of increase in transit time means a corresponding increase in inventory-in-transit, and larger inventory safety stocks will be needed to cover the higher risk of delays. The result is a significant increase in inventory carrying costs and a potential need for more warehousing space.
- Administrative Costs: Various indirect costs may be higher for an imported item. There may be an increase in employee travel and communication expenses for evaluating and monitoring the foreign supplier. Foreign language documents may need translation. Additional information technology or software may be necessary for managing a more complex supply chain. Also, because international shipments are subject to increasingly strict security measures, the costs to comply with these measures also should be considered (e.g., the United States’s advance manifest rule, and the Customs-Trade Partnership Against Terrorism [C-TPAT] program).
- Impact on Competitiveness: Though difficult to quantify and include in landed cost calculations, there may be further impacts from working with a foreign supplier that the firm should recognize. The longer lead times from a foreign supplier may result in reduced responsiveness and flexibility in the supply chain. As a consequence, customers demanding fast, responsive service may choose to go elsewhere if their needs are not met by the firm.
Familiarity with International Commercial Terms (Incoterms) is useful for understanding and determining total landed cost. Incoterms are internationally recognized terms of sale that specify what is included in the supplier’s quoted price. From this, the buyer is able to determine clearly which additional expenses, such as transportation or customs duties, must be incurred by the buyer in order to bring the item to a designated delivery point. In addition, many software applications are available to help a firm determine the landed cost for an item. Landed cost calculator is a common name for such software applications.
- Erhun and S. Tayur, “Enterprise-Wide Optimization of Total Landed Cost at a Grocery Retailer,” Operations Research (v.51/3, 2003);
- Mary Lu Harding, “TCO and International Sourcing,” NAPM InfoEdge (v.5/3, 2000);
- Institute of Supply Management, “Glossary of Key Supply Management Terms,” ism.ws (cited March 2009);
- Sean P. Willems and Stephen C. Graves, “Optimizing the Supply Chain Configuration for New Products,” Management Science (v.51/8, 2005).
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