Looking beyond freight rates could have beneficial impacts for your business.
All businesses, when looking for to move product from A to B, want to know what the shipping costs are. But it isn't always easy. 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 and its outgoings.
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. So, this includes any sourcing, manufacturing, transportation, duties and taxes, insurance and inventory/warehousing 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.
'Total landed cost' can also be referred to as just the 'landed cost'. Sometimes even the 'net landed cost' or the 'landed price', but that is more uncommon.
Analysing the entire supply chain in this manner enables supply chain 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. But for the sake of this example, let's break it down into three categories to come up with one:
Cost of Goods Production: 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.
So say 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 the customer from a factory, including all duties and fees, for $2000. The 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
Duties and fees = Included as part of the freight cost.
TOTAL LANDED COST = $12,150
Then the unit landed cost is determined by the total landed cost divided by the number of units. So, you arrive at that figure as follows:
UNIT LANDED COST = $12,150/1000 = $12.15
Landed costs are vital when calculating profitability. Determining them early in the production process will ensure supply chain costs are under control.
Through an accurate landed cost calculation, you getting a better understanding of gross margin. Which enables a more accurate assessment of profitability and the financial health of that product line.
It also allows for better analysis of your costs, so better decisions can be made on sourcing and distribution, which will boost profitability in the long-term.
Total landed cost is just as important in international transactions. Global markets and ports continue to be busy, and freight rates are high. Import duties, freight, insurance and even currency conversions are all direct costs that affect a total landed cost and 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.
There's no doubting the challenge with a total landing cost calculation, or it's importance for the profitability of your product lines. For more guidance on total landing cost, contact our expert Jade Blackburn today.