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. 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. To reach the best supply chain option, it is essential to build a matrix which focus on:
- 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
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:
- 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:
- 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)
- (Cook, Thomas A. (2007)., p.37)
- (Feller, B., (1995)., p.3)
- (Cook, Thomas A. (2007)., p.38)
- (Jearasatit, A., (2010)., p.20)
- (Jearasatit, A., (2010)., p.21)
- Cook, Thomas A. (2007)., Global Sourcing Logistics: How to Manage Risk and Gain Competitive Advantage in a Worldwide Marketplace, Chapter three: Landed Costs
- Feller, B., (1995)., Development of a Total Landed Cost and Risk Analysis Model for Global Strategic Sourcin, "BS Industrial Engineering"
- Jearasatit A., (2010)., Using a Total Landed Cost Model to Foster Global Logistics Strategy in the Electronics Industry
- Lee H., Lee, Ch-Y., (2007)Building Supply Chain Excellence in Emerging Economies, "Springer"
- Landed Cost,(2014)., "Microsoft Corporation"
Author: Rafał Gamrat