Landed Cost

What is Landed Cost and how it calculate?

The total cost of a landed shipment including purchase price, freight, insurance, and other costs up to the port of destination. In some instances, it may also include the customs duties, value-added tax, brokerage fees, and other payments levied on the shipment. There’s also currency conversion to consider – different countries will have different exchange rates to USD. Landed cost is also referred to as landed price, total landed cost or net landed cost — so the landed price and net / total landed cost definition is the same.

Understanding landed cost is very important, the price you pay your supplier is not the total price that you end up paying — you’ll have extra fees to pay to receive the product and to fulfill the order. Sometimes net landed costs are calculated per item (this is more accurate), in other cases you might calculate it per batch. This means that sometimes your landed price will vary. Additionally, some of the associated fees may change. It’s normal for your total landed cost to fluctuate.

Why is Landed Cost Important?

The main point of calculating your total landed cost is to find both obvious and hidden costs throughout your supply chain. Finding a product’s true cost can improve your decision-making on how to get products to the end user in the most cost-efficient way. For example, if you have a product that is manufactured across a few different countries and you only base your purchasing decision on the cheapest net purchasing cost, you may find that you’re spending more money than you need to. You have to consider the transportation cost, taxes, tariffs, customs, and a variety of other factors that may be considered hidden costs. With a clear idea of how much your products really cost, your decision-making will be easier. Without knowing your total landed cost, you could be making decisions based on incomplete data.

Expenses included in the landed cost

Product

The product is the most straightforward data point. This includes the unit price you paid to obtain the item from your supplier. The product price accounts for materials and components.

Shipping

Shipping costs include crating, packing, handling, freight and transportation. You might have transportation fees for inland, ocean and air, depending on how you import and export your products.

Customs

Customs includes both the import and export of your products. If you purchase from a foreign supplier, you’ll have import fees. If you sell to customers in different countries, you’ll have export fees. Customs expenses include duties, taxes, tariffs, levies, value-added tax (VAT), brokerage fees, harbor fees and other regulatory fees.

Risk

Risk includes whatever you’re paying to protect your business, products and customers. That means expenses for insurance, compliance and quality assurance. This also includes whatever you have invested in safety stock.

Overhead

Overhead pertains to things like purchasing staff, due diligence, travel, exchange rates/currency conversion, payment processing fees, carrying costs, purchasing agency commissions, corporate income tax and bank charges.

How is Landed Cost Calculated?

Product + Shipping + Customs + Risk + Overhead = Landed Cost

Example

Product: $10 per item

Shipping: total cost of shipment is $500 for 250 items, so $2 per unit

Customs: 2%, which is a total of $50 or $0.20 per item

Risk: $5 for packaging per unit + $100 for insurance for 250 units, which is a total of $5.40 per item

Overhead: $2 per unit

So, your landed cost is: $10 + $2 + $0.20 + $5.40 + $2 = $19.60

How can landed costs be reduced?

There’s no magic bullet for reducing landed costs. You might be able to shave off some expenses here or there, but it will require some work. For many companies, the best starting positions are often investments of time or money. Working on relationships and finding new partners or firing up additional software and reporting tools can help you optimize landed costs as well as other parts of your supply chain. Calculating the landed cost of your goods might make you think it’s time to work on reducing expenses or increasing the price of a product, especially if duties taxes are higher than you realized.

Strategy to reduce Landed Cost

Consider new suppliers: You might be able to find local or in-country suppliers for raw materials or to do your production. Reducing shipping and import costs can save your business and give you shorter lead times, allowing for better inventory utilization and optimization.

Renegotiate with carriers: Carriers provide volume and other discounts. As you grow, you might be able to work with a carrier and achieve a lower rate, or you could find a replacement that makes a better offer. Working with a 3PL or 4PL can also help you cut costs by giving you access to higher volumes for discounts.

Optimizing warehouse staff and space can make it easier for your teams to do intake and process inventory to get it on your shelves. This reduces the final parts of landed costs, which may face some of the highest per-hour rates in terms of labor.

Look for new locations: Shifting storage closer to the port or other entry points you use can trim down costs. If you find a port located near your audience, then a local warehouse may serve to reduce landed costs as well as your fulfillment costs.

Optimize inventory: Landed costs include COGS and any costs for the inventory that is damaged in transit, spoils, or has other issues. Better management of your inventory can help you avoid spoilage and loss, plus protect your budget from over investment. Potentially, you could order less of some products as well.

If you have multiple suppliers in one country, consolidate their goods into one shipment. In addition, if you always have less-than-container load shipments out of one country, try to find another LCL importer of goods from that country. You may be able to partner and consolidate to a more cost-effective full-container load shipment.

Companies that implement software solutions to automate trade compliance are able to speed the cycle times associated with tasks being performed manually, such as document preparation, and eliminate the associated errors. Automated compliance procedures also bring fewer delays at border crossings, resulting in on-time delivery, adequate inventory levels, increased customer satisfaction, and the avoidance of fines.