Why Total Landed Costs Need to Be Considered
Looking beyond freight rates could have beneficial impact to your business.
More often than not, when looking for to move your product from A to B you want to know what the shipping costs are. However, there are several factors that go into the total cost of moving a product. Freight costs can account for a large proportion of total costs, but they are not the only factor in the equation. Supply chain and shipping decisions should be based on total landed cost, rather than just the freight rate, meaning companies must utilise analytical tools to fully understand their business.
What Is Total Landed Cost?
Total landed cost takes into account all of the costs associated with getting a product onto the shelves or into the hands of the customer. This can include sourcing, manufacturing, transportation, duties and taxes, and inventory costs. Only costs that directly relate to the product and its shipment should be included, so expenses such as office rent, or software are not figured into the total landed cost. Analysing the entire supply chain in this manner will also enable logistics managers to determine where the high costs are and find ways to reduce them.
How to Calculate the Landed Cost
The factors that affect the total landed cost are usually variable, making it difficult to pinpoint an exact number:
Cost of Goods: Variable depending on unit price and quantity
Freight: Depends on volume, destination, time of year, and carrier used
Duties and Taxes: A percentage that is based on customs value
The Unit Landed Cost is determined by the Total Landed Cost/Number of Units. For example, you have a product with a unit price of $10 and a label that costs $0.15 per item. You ship 1,000 units directly to Amazon from a factory, FBA Warehouse including all duties and fees, for $2000. The unit landed cost is calculated as follows:
1000 Units x $10.00 per Unit = $10,000
1000 Units x $0.15 per Unit for Label = $150
Freight Cost for all 1,000 Units = $2000
TOTAL LANDED COST = $12,150
UNIT LANDED COST = $12,150/1000 = $12.15
Landed costs are also important when calculating profitability and determining them earlier in the production process will ensure supply chain costs are as expected. Getting a better understanding of gross margin can enable more accurate prediction of profitability and allow for better sourcing and distribution decisions.
Total landed cost is just as important in international transactions. Global markets and ports continue to be busy, and freight rates are rising. Import duties, freight, and insurance are all direct costs that affect gross margin. As they usually apply to an entire container rather than an individual product, costs can vary between shipments for the same product depending on when it is shipped.
When looking for a supplier for raw materials or parts, buyers should calculate the landed costs before importing the goods. There may be numerous factors that need to be considered, so it is best to order a small batch as a trial instead of an entire large order.
Total landed cost helps with budget management for the entire supply chain and provides an accurate gross margin for each unit of stock. By incorporating total landed cost into the financial calculations, businesses can generate more accurate reports to guide decision making for increased profitability.