In many companies the various costs associated with finding, buying, receiving, and preparing for sale are scattered around the general ledger. Buyers see the purchase price which may or may not include in-bound freight and duties. Sourcing sees product cost and shipping but may not see repackaging and break bulk handling. Distribution sees the freight and material handling bills but not the purchase costs. All these costs need to come together in one place, typically on the Supply Chain Manager’s desk.
Shippers need to react to constant change. Just look over the past 18 months – fuel “crisis”, global recession, green mandates, import/export regulations. Many factors can impact the efficiency and productivity of a supply chain. Identifying and categorizing these and other risk factors is the first step to take in getting on top of today’s competitive environment.
Steve Banker has written in his February 2, 2009 article Is it possible to accurately calculate total landed costs?,
- North American manufacturers sourcing from China perceived that their savings would be in the 25 to 40 percent range. The true savings may never have been more than 15 percent, and were probably as little as 5 percent for some products.
- Off-shore labor and commodity costs are growing by more than 10 percent a year, key foreign currencies are gaining value against the dollar, and ocean freight costs have increased by 135 percent over the last three years. Thus, offshore manufacturing is becoming even less attractive.
- Consequently, North American manufacturing stands to grow 5 percent over local market demand, with Mexico and low-wage states like Alabama and Arkansas being the big winners.
Total Landed Cost of a product includes all of the costs incurred along the supply chain in order to make the product available for consumption. This includes the costs of manufacturing and sourcing, quality, transportation, inventory, taxes, duties, insurance and other trade costs, disruption risk mitigation, repackaging, returned goods and others. The impact of changes in one or more of these categories can have a significant impact on profitability and service, and on the whole design and structure of the supply chain.
By taking a holistic view and then categorizing and assigning costs related to the various supply chain activities a company can begin to determine the current optimal sourcing locations, optimized network architecture and facility footprint. When cost categories shift what-if and risk analysis can help quantify the impact of change and the value of alternatives. Total Landed Cost analysis allows management to model and simulate before making structural or policy changes. The goal is usually to optimize working capital and cash flow and balance customer service.
To determine the true Total Landed Cost means collecting and vetting a significant amount of data from across the enterprise, so teamwork is vital so that dependencies and interactions are visible beyond just the supply chain function. Forewarned is forearmed as the saying goes. Companies that build and maintain their total landed costs models will be in a better position to respond to market change quickly and improve shareholder value.