The Bottom Line: Landed cost in global trade

Excerpt from: American Shipper | By: Tom Cook | March 22, 2016

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.

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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 [ www.scarbrough-intl.com/incoterms ] 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.