Landed Cost Essay

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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:

  1. Purchase Price: Base price of the item. This is the starting point for calculating landed cost.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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).
  8. 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.


  1. Erhun and  S. Tayur,  “Enterprise-Wide Optimization of Total Landed Cost at a Grocery Retailer,” Operations  Research (v.51/3,  2003);
  2. Mary Lu  Harding, “TCO and International Sourcing,” NAPM InfoEdge (v.5/3, 2000);
  3. Institute of Supply Management,  “Glossary of Key Supply  Management   Terms,” (cited  March 2009);
  4. Sean P. Willems and Stephen C. Graves, “Optimizing the Supply Chain  Configuration  for New Products,” Management Science (v.51/8, 2005).

This example Landed Cost Essay is published for educational and informational purposes only. If you need a custom essay or research paper on this topic please use our writing services. offers reliable custom essay writing services that can help you to receive high grades and impress your professors with the quality of each essay or research paper you hand in.

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