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Understanding 'Landed Costs' in Supply Chain Management and International Trade

By Elena Malykhina

International trade often involves many hidden costs that importers may not be aware of, so it can be important for international businesses to calculate the total delivered cost – or simply, the "landed cost" – of goods within their supply chains. While landed cost calculations allow companies to accurately calculate profit on every product,1 they're a complex process depending on factors that can be unique to each business. Therefore, landed costs offer both challenges and opportunities for companies in import-export trade.

Calculating Landed Costs in International Trade

 

Pitney Bowes defines a landed cost as "the total price of a product once it has arrived at a buyer's door."2 A traditional approach international traders use to calculate landed cost is to create a pro forma invoice, which is a quotation that contains the product description, price, currency of sale, and terms of sale – including the period for which the offer is valid.3 Besides the product's cost to the importer, the total landed cost typically includes final shipping costs and fees such as inspection charges, brokerage fees, tariffs, taxes, insurance, and currency conversion costs.4

 

As a rule of thumb, the most common fees to include in landed cost fall into five categories: Purchase price; transportation and logistics; customs; overhead and administration; risk of supply chain disruption, and compliance.5 Sometimes, there can be additional complexities associated with determining landed cost. For example, if an import-export trader needs to leave the terms of sale open on how the goods will be delivered to the final destination, the buyer wouldn't be able to determine the precise cost of the transaction. In such instances, the buyer may abandon the sale without such insight into his or her total price.6

 

On the flipside, by correctly accounting for landed costs, companies can see all the expenditures involved in purchasing goods and have a better understanding of where savings can be made in the supply chain.7

 

Importance of Landed Costs in Supply Chain Management

 

Unfortunately, there can be a lot of guesswork figuring out landed costs for international traders with substantial supply chains.

 

"Most companies realize that calculating a true landed cost for global sourcing directly correlates with the profitability of purchased goods. However, only a few [have] real-time visibility into all the costs involved for cross-border movements," said Hung Lee, senior product manager at supply chain management software supplier Amber Road, in a podcast on best practices for determining landed costs.8 Capturing all the costs in a timely manner is essential, he added.

 

A 2016 Aberdeen Group report found that fewer than 50 percent of all companies have online access to accrued supply chain costs, which "adds risk to upstream decisions" and results in the lack of cost visibility.9 This is an area where import-export companies can make improvements, the report said. International suppliers typically deal with longer lead times than domestic firms due to additional compliance and documentation requirements that must accompany cross-border shipments. Many conditions – including costs – can change for these companies during the selling process, which is why visibility into their landed costs is key, according to the report.

 

As part of the report, Aberdeen Group explored how "best-in-class" companies address international trade needs. It found that leading companies are 54 percent more likely to track landed costs as a shipment progresses. As a result, those companies have a better handle on their true costs.

 

Tools for Handling Landed Costs

 

There are tools that supply chain managers and executives can use to analyze their landed costs. One option is to develop a landed cost prediction model that provides accurate estimates of final expenses for an international trader's unique business situation. Landed cost predictions can be made using spreadsheets, commercially developed software, or online landed cost calculators, according to World Industrial Reporter.10

 

Global trade management systems also can be effective in tracking landed costs. Some leading companies are using such systems, which combine both logistics and compliance costs together to get more accurate landed cost pictures.11

 

Whichever method a company chooses, they key is to capture the costs in a timely manner and have a proper classification process in place, said Amber Road's Lee.

 

The

Takeaway:

Total landed cost is a fundamental component of supply chain management. With access to timely information and calculation tools, companies can get a better handle on the real costs of importing goods and help to ensure that their international trade is profitable.

Elena Malykhina - The Author

The Author

Elena Malykhina

Elena Malykhina is professional writer who has covered science, technology and business for more than 10 years. Her work has appeared in InformationWeek, Scientific American, Newsday, The Wall Street Journal and Adweek, as well as through the Associated Press.

Sources

1. “Cross-Border Trading: How Landed Costs Can Boost Your Global Trade,” XSellco; https://www.xsellco.com/resources/cross-border-trading-landed-costs
2. “What is a Landed Cost and Why it’s Essential in Global Trade,” Pitney Bowes; http://blogs.pb.com/ecommerce/2013/05/15/what-is-a-landed-cost-and-why-its-essential-in-global-trade
3. “Quotations and Pro Forma Invoices,” Export.gov; https://www.export.gov/article?id=Quotations-and-Pro-Forma-Invoices
4. “How to Calculate Landed Cost When Importing from China?” Cargo From China; https://cargofromchina.com/landed-cost
5. “Managing Your Supply Chain: Accurately Calculating Total Landed Costs,” World Industrial Reporter; https://www.worldindustrialreporter.com/wp-content/uploads/2012/09/Calculating-Landed-Costs1.pdf
6. “What is a Landed Cost and Why it’s Essential in Global Trade,” Pitney Bowes; http://blogs.pb.com/ecommerce/2013/05/15/what-is-a-landed-cost-and-why-its-essential-in-global-trade
7. “Cross-Border Trading: How Landed Costs Can Boost Your Global Trade,” XSellco; https://www.xsellco.com/resources/cross-border-trading-landed-costs
8. “Best Practices for Arriving at the True Landed Cost,” Amber Road; https://www.amberroad.com/podcast/best-practices-for-arriving-at-the-true-landed-cost
9. Visibility: The Key To Managing Your Inbound Retail Supply Chain, Aberdeen Group; https://www.bdpinternational.com/wp/wp-content/uploads/Visibility-in-Retail-Supply-Chain-1.pdf
10. “Managing Your Supply Chain: Accurately Calculating Total Landed Costs,” World Industrial Reporter; https://www.worldindustrialreporter.com/wp-content/uploads/2012/09/Calculating-Landed-Costs1.pdf
11. “Best Practices for Arriving at the True Landed Cost,” Amber Road; https://www.amberroad.com/podcast/best-practices-for-arriving-at-the-true-landed-cost

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