Tracking landed cost for purchased goods

Most consumer goods companies have moved their manufacturing operations outside of North America and Europe. Brand owners rely heavily on their Asian partners to manufacture their products due to lower labor costs. In most cases, companies design their product in their headquarters and then collaborate with their Asian partners to determine the purchase cost. Once the price is locked in, companies cut purchase orders to their vendors. The manufactured goods then must be transferred to the brand owners’ distribution locations around the world. During this transfer, the products incur additional costs. The cumulation of these transportation-related costs in addition to the purchase cost determines the landed cost of the product. Tracking landed cost components is important to keep the actual profit in line with the business plan. Unfortunately, most companies lose control of these cost components which then erodes their margins.

There are several landed cost components. The most common ones are duty, brokerage, and freight costs. These are incurred in addition to the purchase price of the product. Thus, the landed cost is generally composed of the purchase price, duty, brokerage, and freight costs. Let’s study each of these components. 

The purchase price is pretty much-set upfront. It is stated clearly in the purchase order. It is paid to the vendor. It does not vary during the season. It can be controlled by the brand owner. 

The duty, on the other hand, is paid to the government. Based on the product categories, duties are set upfront by governments. Unless the rules and regulations change, the duty cost does not vary either. It can be estimated upfront with good accuracy. 

The brokerage fee can be many things such as insurance, compliance, quality assurance, processing fees - basically any fee that is not duty or freight. They can be also be estimated upfront. They tend to be stable unless a significant event disrupts the supply chain. 

The most tricky part of the landed cost is the freight component. It can vary significantly. Companies plan for low-cost modes of transportation, such as ocean freight, to bring their products to North America or Europe. When companies face delivery delays or higher demand, they expedite the delivery by using the faster thus costlier modes of transportation, such as air freight. Any error in planning or execution generally shows up as a large variance in the freight cost. Companies can lose hundreds of thousands even millions due to such variances.

In order to avoid profit erosion, companies must track each landed cost component to identify these variances. Most importantly, they must associate the variance to a specific product. This is not an easy task. The landed cost components must be estimated first. Each component must be accrued during the purchase. When the actuals come in, the cost must be distributed to the products correctly to analyze the variance. Purchase price and duty are at the product level, thus can be managed. The challenge is with the brokerage and freight cost. They are associated with inbound shipments. They also come much later in time. These costs must be spread across the products within that shipment in terms of value, volume, quality, or weight. This can get really tedious without a good system.

If you are seeing significant variance in your freight cost and cannot associate it with a product, it may be time for you to relook at your landed cost tracking process. Most are surprised to see that the products that they thought to be most profitable were actually losing money due to heavy expediting. 

If you are interested in learning more, please connect with me on LinkedIn, follow me on Twitter, or watch me on YouTube.

My name is Cem and this has been another gem.