Sourcing 101 - What is Landed Cost and Why is it Important
There are both obvious and hidden costs associated with getting any product to your customers. Sometimes the true cost of the products you sell may seem opaque, but knowing your landed cost can bring clarity.
Landed costs cover the cost of getting a manufactured good to your distribution center so you can send it to a customer after they buy from you. It includes the price of goods, shipment costs, insurance fees, customs duties, and any other charges incurred along the way. Not only is knowing how to calculate landed cost important, it is necessary to assess how your business is performing, to maximize your pricing, and to ensure that you know exactly how much you are paying for your inventory.1
Landed cost calculations also provide you the opportunity to analyze your supply chain and determine where you can cut costs – or even if your business model is sustainable. But calculating landed cost can be difficult if you don’t know your full expenses or can’t anticipate how high the additional fees will be. The key is to have the right set of tools to be able to anticipate and estimate a value that is as close to your actual costs as possible.
Landed Cost Formula
The basic equation for calculating landed cost is:2
Shipping + Customs + Risk + Overhead = Landed Cost
There are costs associated with every aspect of the process, including crating, packing, handling, and freight. You should always understand exactly what you are getting in your contract with a freight forwarder, as there are many different options of varying seller responsibility and liability.
Every country has its own authority for monitoring the flow of goods into and out of its borders.
These agencies are also responsible for collecting any duties, tariffs, value-added tax (VAT), brokers fees, harbor fees.
The costs of avoiding risk can add up, but not covering them can be even most costly.
Insurance, compliance, quality, and safety stock inventory are all vital considerations.
Operating costs are the final part of the landed cost equation.
Purchasing staff, due diligence cost, travel, and exchange rates are included in overhead.
Is Landed Cost the Same as COGS (Cost of Goods Sold)?
The cost of goods sold, or COGS, is a part of your landed costs, but not the whole part. So, landed costs include COGS and many related expenses around distribution, fulfillment, and some labor.
COGS calculations often focus on cost per unit, though you can also look at these elements quarterly to better understand how your overall expenses are evolving.
Your COGS only covers the cost of producing or attaining the goods you sell. If you manufacture your goods, then it’ll be dominated by labor and materials. If you’re drop-shipping or running a marketplace, COGS are mainly the price you pay to purchase the products you sell.3
How Can Landed Costs be Reduced?
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. The following are five opportunities to reduce your company’s landed cost:4
1. 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. Using a domestic supplier is not always cheaper, but we see more companies make the shift based on the quality of goods and reduced disruption risks – like what COVID caused. Exporta Wholesale can help you engage with new suppliers.
2. 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 can also help you cut costs by giving you access to higher volumes for discounts.
3. Optimize warehouse staff: optimizing floor 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.
4. 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. Exporta Wholesale can help you find new locations.
5. 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.
International commerce is complex, and an understanding of landed cost is important to ensuring that it is profitable. There’s a lot to calculate for each shipment, and freight costs are dynamic, so you need good projections as well as data capture.
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.5
Understanding your total landing cost will give you insight into financial performance. You’ll be able to see the true expenses for products and find ways to improve it. This gives you better insight into cost and the cost trade-offs associated with making changes across their supply chain. Understanding broad expenses as well as your per unit costs is a smart place to get started. It’ll help you start to see if shipping customs may be prohibitive for you, if you need to reduce the overall cost of a product, or if other per item expenses are getting in the way of your business.
You’ve likely got some specific questions about understanding and calculating landed costs. So, contact us and tell us a little more about your situation and products. Exporta Wholesale can help with your sourcing needs and either provide you with savings opportunities or point you in the right direction for a partner that can.
About Exporta Technologies
Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States.
Exporta’s marketplace offers buyers a full service experience in the origination, sourcing and managing of products. The platform was founded on the idea that curation and service are the most important elements in the buyer’s journey. Exporta’s marketplace is building technology that addresses the pains of sourcing products internationally at attractive prices.