Best Practices in Global Trade with Thomas A. Cook: Managing Landed Costs in the Global Supply Chain
Personnel managing their global supply chains according to recognized best practices will manage their total costs of good purchased or sold through modeling the “landed costs.”
Landed cost is the total cost of a product once it has arrived at the buyer’s door. What follows are the components that are needed to determine landed costs, including the original price of the item (converted to U.S. dollars, all custom brokerage and handling charges, complete freight and shipping costs, custom duties, tariffs, taxes, insurance, packaging costs and surcharges.
- Purchase price of goods (acquisition cost) – variable depending on unit price and quantity (converted to USD)
- Buying agents fees – variable depending on level of service
- Consolidation – securing LCL shipments into larger shipments and coordinating freight from several suppliers
- Local trucking and international freight – variable, depending upon choice of mode, carrier, freight rate negotiation and surcharges
- Duty – variable percentage of the value Customs put on your goods … typically origin and HTS# factored
- Tax (goods and services tax or value added tax) – $ variable percentage of (The Customs value of cost of goods + freight + insurance + Customs duty)
- Insurance charges, typically referred to as cargo insurance
- Customs clearance, ISF, CBP 7501, courier and handling charges, etc.
- Storage and deconsolidation
- Inland freight– from inbound gateway to final destination
- Demurrage – if applicable when potential delays occur. (Note: this became a more impactful expense and concern through the pandemic.)
Every supply chain will have some unique factors and variables that impact landed costs that must be taken into consideration. However, the above generic model will serve as a base template for landed cost calculations.
I firmly believe that senior management and a “best-practice mindset” warrants paying attention to this critical detail in global trade and supply chain management.
In an international trade, both parties enter into a purchase agreement that will include either named or by default an “INCO Term,” as defined by the International Chamber of Commerce in Paris, subscribed to by most trading nations of the world that belong to the United Nations.
As an example: Importers into the United States by ocean freight typically buy FOB outbound gateway. In China this might be written as FOB Shanghai.
This means that the buyer will assume all risks and costs once the goods are placed onboard the ocean-going vessel in the port of export from overseas. The key words being “risks and costs.”
A potential additional cost in the import or export transaction will be the cost of marine cargo insurance and typically would be considered a necessary component of reducing the risks involved in international transportation.
Marine insurance, when thoroughly written, offers “All Risk,” “Warehouse to Warehouse” coverage for the buyer at specific terms and a rate of premium to be agreed.
Exporters also need to be concerned with landed costs:
- They need to make sure that the final costs to their customers are competitively structured, which would mean the accumulation of costs to get from the origin to destination, and everything included.
- The choice of INCO Term may require them to bear all the logistics and customs charges such as in a DDP (delivered duty paid) transaction.
- Areas such as quality customer service, profitability, margin impact.
- The exporters freight costs may be less expensive than what the importer would pay.
- To accommodate foreign customer needs.
- In e-commerce transactions, the INCO Term DDP is a very likely option in an export sale, which the shipper (exporter) would cover in the COGS. Thus, obtaining competitive freight costs (international and last mile) will help reduce the overall landed cost.
The following recommendations should be considered:
- Learn how INCO Terms impact cost and risk in every transaction and learn to leverage the best INCO Term between you and your supplier and/or buyer.
- Review all areas of cost in the landed cost model to determine where savings might exist. It might be negotiating better freight rates, or service provider fees.
For example, it might be from sourcing from a country that we have a free trade agreement with, thereby eliminating the duty and tariff.
Companies that import from China are greatly impacted by the 301 tariffs, which added as much as 25% additional cost due to the duty surcharge, which was implemented during the Trump Administration and continued with President Biden’s policies.
By considering another country as a manufacturing source could greatly impact the calculation of duty and tax.
Near-shoring and friend-shoring have grown over the past six years and will likely continue to expand as the risks tied into costs on goods originating in China have created significant exposure to sustainable supply chain management.
Another area would be the HTS number utilized, impacting duties and tax rates. Keep in mind that it is the country of origin and the product HTS number outlined in a matrix within customs regulations that determine the duty rates.
Mode of transportation will impact landed costs. Many times, air freight is utilized, when ocean freight could be a less expensive option. This means better demand planning and coordination between purchasing/sales/sourcing and the logistics department handling the transportation choices.
Included in this area is control over the suppliers with setting more realistic expectations, tighter control over order status and communications, contractual obligations, and penalties for non-performance.
- Inland freight expenses can be included in the ocean freight, where there is an opportunity to leverage the larger ocean freight spend to obtain a better inland freight cost.
- Utilization of technology and reducing “paper” in the transaction can reduce ISF, Customs clearance and handling charges when automation replaces repetitive human handling of import and export documentation.
- When freight does not have to be consolidated or deconsolidated and can be shipped in units direct from suppler to point of end use, will also reduce costs.
The pandemic took witness to unprecedented increase in freight pricing all over the world. Through 2022, we saw a normalization of freight pricing take hold.
In 2023, the pricing is moving toward pre-pandemic levels and there are signs that demand is diminishing, which might impact pricing to even more competitive levels.
For companies with larger volumes, negotiating certain incidental costs in a soft freight market is available. Surcharges such as PSS, GRI’s and BAF will also impact landed costs favorably.
- Another option is to minimize the number of service providers and carriers where you can better leverage your freight spend.
- Freight forwarders, customhouse brokers, 3PLs and other forms of service providers when chosen wisely can be a very critical partner in your global supply chain to both assist in reducing risk and spend through their resources, knowledge, and skill sets.
- The pandemic forced supply chain managers to pay attention to detail to a much greater extent. This scrutiny brought magnification of all the components of an international transaction.
- Make sure the risk of loss and damage during transit is managed with a marine cargo insurance policy, written through a qualified insurance broker and underwriting company. And guarantee the terms are customized to the unique risks associated with your supply chain model.
- In purchasing, when we strive to negotiate a competitive price, we should be wary of “cheap pricing,” as the “cheapest” may have trade-offs on timeliness, safety, and security.
To improve the landed cost model, you must first identify the areas of cost and which ones can be impacted favorably. This will work best in a collaborative process internally with all your stakeholders and externally with all your service providers and consultants.
The assessment process should lead to strategies followed by tactics that develop into action steps creating favorable results in reducing “landed costs” in your global supply chain.
Thomas A. Cook is a seasoned global supply chain professional, author of more than 20 books on global trade and managing director of Blue Tiger International. He can be reached at email@example.com or (516) 359-6232.