Landed cost

From CEOpedia | Management online

Landed cost(also known as a landed price) is the total aggregate of all the costs of a product, from costs of raw materials to the costs of delivery to the final customer.

Those combined costs become very important factor when a company is purchasing goods from foreign sources and also very important to create a significant advantage[1]. Understanding how the landed cost works is a key to be sure that off-shore production is competitive and how the supply chains are relevant.

Analyse of the total landed cost is a method which is used by many companies across the world. It gives a possibility to assess strategic sourcing decisions which allows companies to be more competitive in their market[2]. To reach the best supply chain option, it is essential to build a matrix which focus on[3]:

  • identification of the options of the supply chains
  • identification of the variables which can influence final landed cost
  • identification how pricing may be affected by supply chain
  • organization of the detailed structure which include all variable cost factors

Definition by Cambridge Business English Dictionary

Word landed can be used to describe the total amount of money/the total price of goods including tax, insurance and costs of transport.

Components of total landed cost

It is essential to create some kind of the landed cost model to clearly and more accurately understand the total cost. Every single market is different, but there is some kind of standardised model which can be used as a basic in many fields. This model is distribution process which is divided into 2 main sides[4]:

  • manufacturing country
  • customer country

On the side of manufacturing country the process starts from source of raw materials and next goes through production process. The next step is that the goods goes to the warehouse and finally are transported to the port to be sent.

On the other side, on the customer country the process starts in a final port, where the goods are unload. Next step is warehouse of course and the last one is transport to the customer.

Six cost factors of a total landed cost

In relation to the previous components, 6 factors can be presented[5]:

  • sourcing cost(it depends on the availability of the raw materials in a country of manufacturer)
  • manufacturing cost(it covers costs such as labor and equipment operations but overall it is calculated costs of plant facility cos, damaged costs and finished goods manufacturing costs)
  • warehouse cost(costs associated with warehousing is handling product from enter to exit warehouse)
  • transportation cost(every single transport arranged in the process of distribution)
  • inventory cost(are composed in three parts called Cycle stock, Safety stock, Pipeline stock)
  • taxes

Examples of Landed cost

  • The cost of a product from its point of origin to the point of sale, including transportation, shipping, customs duties, taxes, and insurance.
  • The cost of a product from the manufacturer to the retailer, including shipping, customs duties, taxes, and insurance.
  • The cost of a product from the manufacturer to the customer, including shipping, customs duties, taxes, and insurance.
  • The cost of a product from the distributor to the customer, including shipping, customs duties, taxes, and insurance.
  • The cost of a product from the supplier to the customer, including shipping, customs duties, taxes, and insurance.

Advantages of Landed cost

Landed cost provides an effective way to calculate the total cost of a product, from raw materials to the final customer. There are several advantages to using landed cost:

  • It provides a complete view of all costs associated with the product, including transportation, taxes, duties, customs fees, and other related expenses. This helps companies make better decisions when it comes to pricing their products.
  • It also helps companies accurately forecast future costs and adjust their budget accordingly.
  • It can be used to compare the costs of different suppliers in order to identify potential savings.
  • It allows companies to accurately measure the return on investment (ROI) they are getting from their supply chain. This helps them to identify areas of improvement and make changes to their supply chain processes to reduce costs.
  • Finally, landed cost helps companies ensure they are compliant with regulations, such as transportation and duty regulations, which can significantly affect their total costs.

Limitations of Landed cost

Landed cost is an important element of a business’s cost structure, but there are several limitations to consider. These include:

  • Difficulty in tracking and accounting for all the elements of a product’s cost: Landed cost is a complex calculation that involves tracking and accounting for all the elements of a product’s cost. It can be difficult to accurately track and account for all the costs associated with a product, such as the cost of raw materials, manufacturing costs, shipping costs, taxes, duties, and other fees.
  • Variability in the cost of materials and shipping: Costs of materials and shipping can vary greatly depending on the source, timing, and other factors. This makes it difficult to accurately calculate the landed cost of a product.
  • Difficulties in forecasting cost changes: As global markets are ever-changing, it can be difficult to accurately forecast changes in the cost of materials and shipping. This can lead to discrepancies between actual and estimated landed costs.
  • Potentially higher costs: Landed cost calculations can lead to higher costs in certain situations, such as when there are additional taxes, duties, or other fees associated with a product.

Other approaches related to Landed cost

Landed cost is the total cost of a product, including all the costs of raw materials, delivery to the final customer, and other associated costs. Other approaches related to landed cost include:

  • Cost Plus Pricing: This approach involves setting the price of a product or service by adding a fixed percentage to the total cost of all the materials and labor, as well as any other associated costs.
  • Total Cost of Ownership (TCO): This approach considers the total costs associated with a product or service, including factors such as maintenance and training.
  • Freight on Board (FOB): This approach considers the cost of the goods delivered to a specific point (typically, the seller's location) in addition to the transportation costs of getting the goods to the buyer's location.

In summary, landed cost is the total cost of a product, including all the costs of raw materials, delivery to the final customer, and other associated costs. Other approaches related to landed cost include cost plus pricing, total cost of ownership, and freight on board.

Footnotes

  1. ↑ (Cook, Thomas A. (2007)., p.37)
  2. ↑ (Feller, B., (1995)., p.3)
  3. ↑ (Cook, Thomas A. (2007)., p.38)
  4. ↑ (Jearasatit, A., (2010)., p.20)
  5. ↑ (Jearasatit, A., (2010)., p.21)


Landed cost — recommended articles
Cost element — Cost of goods purchased — Freight out — Conversion cost — Allocated cost — Distribution cost — Absorbed costs — Segment margin — Cost per unit

References

Author: Rafał Gamrat

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