Expanding a business internationally can bring new opportunities and a wider customer base. However, when dealing with import and export, it is important to consider the total landed cost in addition to the inventory analysis. This cost includes the purchase price, freight, duties, taxes, and any other expenses incurred until the goods reach their final destination.
In this article, we will explore the total landed cost definition, its importance, and how to calculate it for imported goods. We will also discuss two ways to reduce landed costs and provide a conclusion on the topic. By understanding the total landed cost, businesses can make informed decisions when dealing with foreign suppliers and ensure profitability in their international ventures.
Key Takeaways
- The total landed cost includes all expenses incurred until imported goods reach their final destination.
- Calculating the total landed cost is crucial for businesses dealing with foreign suppliers to ensure profitability.
- Reducing landed costs can be achieved through negotiating with suppliers and optimizing transportation methods.
The Total Landed Cost Definition?
The Importance of Landing Costs
The total landed cost is a crucial factor for any brand or retailer. It refers to the total cost incurred by the seller, from the production of the product until it reaches the customer’s hands. This cost includes the price of the product, taxes, insurance, currency exchange, and handling fees. Landed costs are usually associated with international transportation of goods.
The price paid to the supplier is not the final price that the seller pays. There are additional fees to be paid for receiving the product and fulfilling the order, which affect the seller’s profits. These expenses cannot be added to the customer’s bill. If the total landed cost is not taken into account, it can lead to a significant increase in the product’s price, which can drive customers away and affect the brand’s reputation.
Tracking the total landed costs is essential for staying profitable, especially since many related expenses are hidden. It helps the seller to know the exact cost of the product, which can help in setting the right price and markup formula. If the landed costs are not enough to cover the expenses, the seller may not make any profit.
Landed Cost vs FOB
FOB (Free on Board) is a term used in shipping contracts, which includes packaging, fumigation, grading, packaging into containers, and delivery to a shipper. Landed cost, on the other hand, is the total cost of buying and shipping products, including all the expenses incurred by the seller until the product is delivered to the customer.
While FOB is a term used in shipping contracts, landed cost is a broader concept that includes all the costs associated with the product until it reaches the customer. Landed cost is a more accurate measure of the total cost of the product, as it takes into account all the expenses incurred by the seller.
In conclusion, understanding the concept of total landed cost is essential for any brand or retailer. It helps in setting the right price and markup formula, staying profitable, and maintaining a good reputation. Landed cost is a broader concept than FOB and includes all the costs associated with the product until it reaches the customer.
What Does the Total Landed Cost Includes?
The total landed cost refers to the total expenses incurred in fulfilling an order and delivering it to the customer. There are five categories that make up the landed cost:
Product
The product cost is the unit price paid to acquire the goods from the supplier. This cost includes the price of materials and components that make up the product.
Shipping
Shipping costs include packaging, loading and unloading, freight, and transportation. Depending on the reason for importing and exporting products, one may have to pay for inland, ocean, and air transportation.
Customs
Customs fees include the import and export of products. If someone buys from a foreign supplier, they will be charged an import fee. If someone sells products to customers in different countries or regions, they will charge export fees. Customs fees include duties, taxes, value-added taxes, brokerage fees, port fees, and other regulatory fees.
Risk
The risk cost includes any expenses paid to protect the business, products, and customers. This includes the costs of insurance, compliance, and quality assurance. It also includes anything invested in safety stock.
Overhead
The overhead cost involves indirect costs, including purchasing personnel, due diligence, travel, exchange rate/currency conversion, payment processing fees, transportation costs, purchasing agent commissions, corporate income tax, and bank fees.
In summary, the total landed cost includes the product cost, shipping cost, customs fee, risk cost, and overhead cost. By understanding these costs, businesses can make informed decisions about pricing and profitability.
How to Calculate Landed Cost of Imported Goods?
To calculate the landed cost of imported goods, one can use the net landed cost calculation formula. The total landed cost formula includes product cost, shipping cost, customs duty, risk, and overhead. By adding up all these costs, one can determine the total landed cost.
It is important to calculate the landed cost accurately to ensure that the selling price is set correctly. If the landed cost is too high, the customer may not be willing to pay the price, and if the cost is too low, it may result in reduced profits. Therefore, it is recommended to use inventory management software that can automatically calculate the net landing cost formula.
Landed Cost Example
Let’s take a look at an example to understand how to calculate the landed cost of imported goods. Suppose a business located in the United States sells backpacks and purchases 250 backpacks from a supplier in China at a price of $10 per unit, for a total price of $2,500. The tariff is 2%, and the freight for the entire cargo is $500. The business pays $100 for shipping insurance and $5 for each package sent to each customer. Every transaction is processed in U.S. dollars, but the business also pays a payment processing fee of $2 per unit.
To calculate the landed cost, the following costs need to be considered:
Product Cost: $10/unit
Shipping Cost: The shipping fee for 250 units is US$500, or US$2/unit
Customs Duty: 2%, which is US$50, or US$0.20/unit
Risk: $5 each shipping fee + $100 insurance fee/250 = $5.4/unit
Overhead: $2/unit
By adding up all these costs, the total landed cost can be calculated as follows:
Total Landed Cost = $10 + $2 + $0.20 + $5.40 + $2 = $19.60
In this example, the business needs to sell each backpack for $19.60 to break even. To make a profit, the selling price needs to be even higher than this.
Landed cost analysis can help businesses reduce expenses and increase profits. While increasing the selling price is one way to reduce the total landing cost, other opportunities can be identified through landed cost analysis that may have a greater impact on reducing expenses without burdening customers.
Landed Cost Calculation Template
A landed cost calculation template can be used to ensure accurate calculation of the landed cost of imported goods. The template should include all the costs involved in the calculation and can be customized based on the business’s specific requirements. By using a template, businesses can save time and ensure accuracy in the calculation of the landed cost.
Related: 2 Ways to Reduce Landed Costs
Audit Your Supply Chain
Auditing your supply chain partners is a highly effective way to reduce landed costs. It is important to note that the lowest price does not always translate into the greatest profit. Unexpected expenses may increase the total landed cost, so it is crucial to compare prices with different manufacturers, suppliers, 3PLs, shippers, etc.
To determine which partner is most suitable for your growing business, study the actual net landed costs. Negotiating better rates and packages with existing partners is also a viable option. By conducting a thorough audit of your supply chain, you can identify areas for improvement and take action to reduce landed costs.
Use Inventory Management
Using inventory management software is another way to reduce landed costs. By understanding the various metrics in your business, you can stay data-driven and achieve real profits. Inventory management software can be integrated with multiple technologies in the entire supply chain to automate total landing costs.
With inventory management software, you can track inventory levels, monitor demand, and optimize your supply chain. This can help you reduce excess inventory and avoid stockouts, which can lead to unexpected expenses. By using inventory management software, you can streamline your supply chain and reduce landed costs.
Total Landing Conclusion
Calculating landed cost is crucial for profitable international trade. With dynamic freight and various calculations for each shipment, accurate forecasting and data capture are essential. For those seeking a product sourcing service, it is recommended to contact a reliable provider to ensure successful and profitable transactions.