In today’s business world, many enterprises use global suppliers and outsourcing as a business strategy in order to sustain market competitiveness and maintain profit margin in their markets.
Using global suppliers means that companies have a chance to obtain a vital tool, not only for balancing low-cost sourcing but also for satisfying their own quality requirements with many supplier options. However, when the goal is to produce revenue, there are several obvious and hidden costs to keep in mind. Those costs are associated with making and delivering products. In supply chain literature, the sum of all of these obvious and hidden costs is called landed cost.
I want to thank Amber Road publicly for the short video they made that explains what landed cost is in a simple way.
Why Is Landed Cost Essential For Your Business?
If you are dealing with import businesses or global sourcing, you should pay attention to the landed cost. The nature of your work is getting things done in an efficient way. In other words, you are aiming to clear goods from customs at minimum cost and sell them at maximum gain.
Additionally, calculating the real cost of a product helps you improve your decision-making process on how to get the product to the end users or customers in an efficient way.
Knowing the true value of the landed cost means you would be able to understand your real expenditures per product, and thereby determine more competitive and realistic prices for your customers and end users in your market. This is why the landed cost is essential for your business and has a vital impact on your supply chain and decision-making process.
Landed cost is also a crucial factor for exporters. However surprising it is, it is true that exporters should also care about and understand the basics of the landed cost. For further information about this topic, you can check my previous article in Ashton College blog, Exporter’s Secret Weapon: Landed Cost.
Factors That Affect Landed Cost
Although the factors to calculate the landed cost can vary depending on the industry, some of them are common for all industries. For that reason, companies should always keep an eye open for the changes in each of those factors and should obverse them closely.
The only way of finding the total cost of a product, or landed cost, is through understanding the obvious and hidden costs in the common factors listed below.
1. Delivery Terms or Incoterms
The terms that you discuss and agree on with your supplier have a huge impact on your landed cost calculation. Each party has to bear some costs based on the selected term, and each term has a different impact on your calculation of landed cost. For example, under EX Works (EXW) Term, all expenses for taking the goods from abroad to the delivery point (where they produce revenue) belong to the importer. However, under the Cost, Insurance and Freight (CIF) Term, expenses start from the destination port. Each term has a different impact on your calculation of landed cost.
Consequently, you should assess each term carefully on price quotation. The best course of action is getting a quotation from the most commonly used terms, such as EXW, CIF and Free on Board (FOB). Thereby, you should able to compare the cost for each term and have a chance to check with your service providers.
Delivering goods is a complicated process. Sending goods across boundaries is challenging even for large enterprises, and it can be a really complex task for many small and medium enterprises. For that reason, you should be careful when making any decisions about transportation.
Your expenses for transportation also depend on certain parameters in transportation.
- Delivery Term: Every term has different cost variables for your transport. For instance, under the EXW Term, you cover all transportation expenses from your buyer’s factory to your warehouse in your home country, while under the CIF Term you only pay for inland transportation in your home country.
- The means of transportation: Goods can be carried by vessel, plane, truck or train, and all these modes of transportation have different cost variables. For instance, air cargo is faster than the other means of transportation, but it may double your transit cost. Additionally, you pay the terminal handling cost for container shipments, but you don’t pay any terminal charges for truck deliveries. These are some of the things to keep in mind; otherwise, you will have to spend more money than you expected.
- Partial and Full Shipment: The type of shipment also affects the value of landed cost. If you load less than a container, you will get a higher freight rate; arranging a full container load can get you a more reasonable and competitive freight rate.
- Freight: Freight plays the most important role compared to the other factors in the landed cost calculation. Understanding freight and its applicability is crucial: if a shipper transports the goods without proper knowledge, he could end up making a huge loss. As a trader, you should always follow the trends and know the factors that affect freight. Those factors include intended destination, service charges, current season, bunker capacity and currency, among others.
3. Customs Duties, Taxes & Quotas
It is extremely important for companies to understand the legal requirements of importing goods prior to signing a new purchase agreement. After all, the importer is liable for paying all the customs duties and taxes. Any changes to these duties and taxes affect your landed cost, and as a result, your selling price in your home market. For that reason, you should always check with your customs broker on any changes or any new legislation.
Generally, customs duties have consistent rates that are not easily changed, but some countries may apply additional taxes and duties in order to protect local manufacturers and gain additional earnings. In this situation, you are not able to be competitive because the unit cost of your imported product will be higher than the product that local producers offer. You should always keep your eyes open for such hidden and unexpected costs.
Import quotas should also be considered during the landed cost calculation. Certain products can have a limit on the product quantity allowed to be imported at a lower customs rate. In this case, any additional shipments would be a subject to higher duties.
4. Currency Fluctuations
While many large enterprises have finance experts who follow the changes in currencies, many small and medium enterprises do not pay enough attention to the rates and the effects those rates may have on the business. Companies dealing with international trade are at the mercy of global currency fluctuations. Same as with importing, changes in currency rates can wipe out your profit or decrease your revenue.
If you are importing or outsourcing your products, you should watch out when local currency is weaker than the currency of your purchase: in this situation, your landed cost will automatically increase, therefore decreasing your profit margin. From here, you have two options:
1) You may reflect the increase in your sales price; or
2) You may absorb the increase and allow it to decrease your profit margin.
How to Calculate Landed Cost And Where to Begin
Calculating landed cost can seem intimidating, but it is very easy and achievable. You should start by collecting as much of data as you can and start the process of formulating the equation.
You don’t need to pay thousands of dollars for complicated programs – you just need to understand the basics of landed cost. It is just basic math from there: know your purchase price and add all other expenses for bringing the goods from abroad to your local warehouse.
Written by Kemal Sucu
A pragmatic, smart, and strategic International business strategist and new market researcher, Kemal has good insights into international trade and is full of great marketing ideas. Kemal possesses the real life experience, academic capability and the necessary personal skills to help SMEs build up import-export strategies, enter new markets and expand their business activities in more foreign markets.