Understanding the components of Landed Cost

Uncertainty in the marketplace, why knowing your landed cost is so important

By now, everyone has heard about the potential increase in tariffs that the current US administration is considering, not only on goods from China but from all countries. Duties imposed by US Customs are just one piece of the puzzle when it comes to determining your landed cost. Shipping rates and currency exchange fluctuations also play significant roles and can directly impact your bottom line. This is why it’s so important to have real-time visibility into landed costs.

Over the years, in the various businesses I’ve run, I imported goods from Asia, Europe, and Canada, and one thing was always clear: calculating these costs was never simple. Every change, whether in tariff rates, shipping methods, or currency exchange, could have a huge impact on the final price and profitability of the company. It was important to have a handle on it and plan shipments better to get the lowest landed cost I could get to improve margins and the bottom line.

So what is landed cost? Landed cost encompasses all the costs it takes to get your goods to your front door. If you are buying from a US distributor then that cost usually is just your shipping cost and makes things easy to calculate. But, If you are importing from a foreign country then you have more costs to consider.

Duty

Tariffs imposed on goods usually are the biggest cost on any good coming into the country. It is a percentage of the cost you pay for the product, and it can range from 0% to 50% or more. This cost could be going up significantly this year, so it will be at the top of many businesses’ minds!

Shipping

There are four main methods for transporting goods: Air Freight, Ocean Freight, Rail, and Truck. When it comes to international imports, Air and Ocean freight are the primary options. Ocean freight is typically the more cost-effective choice, though it takes longer to arrive. On the other hand, Air Freight is faster but considerably more expensive, and may not be practical for all types of goods.

If you don’t happen to live right next to a port then your shipments will have to either be trucked or railed to you. Trucking can offer a lot of flexibility and speed if you are fairly close to a port, ie you live on the west coast within a few hours of one of the four main ports. Rail can be cheaper but it will also take a bit more time, I have seen a rail shipment from Tacoma to Portland take nearly a week longer than trucking it, only to save a couple of hundred dollars, so be mindful that the more expensive shipping option might be the better one in the long run for your business. Shipping rates are negotiable, and with proper planning, you can secure favorable rates in advance.

Additionally, you can choose a less expensive shipping method that takes longer if you’re looking to save costs. Be mindful of demurrage fees, which occur when containers sit at the port past their free time. These fees can accumulate quickly if not managed efficiently.

Currency rates

One of the good things about the US is that the dollar is a world reserve currency and most foreign companies will accept payment in USD. But if you can track it well and have good controls in place sometimes paying in the country currency you are buying goods from can save you significantly. But know that there are risks to this as well so make sure you understand how to buy foreign currency and know the exchange rates on a daily or weekly basis.

Brokerage Fees

These fees include all the costs that your shipping partner charges, these rates are negotiable but sometimes a really good forwarder and customs broker is worth it over a cut-rate shipper. Now that we have a clear picture of what landed costs are and what contributes to them, let’s dive into why knowing these costs are so important.

Pricing

Having clear and accurate pricing is #1 on the list of reasons why! During COVID-19 importing from Asia was getting very expensive, costs for shipping a 40-foot container went from about $2000 to $25,000 which is a huge increase in costs. On top of that, it was taking twice as long to get to you, demurrage costs were high and drayage was crazy too. That all adds up to a squeeze on your bottom line. Knowing those costs in real-time can help you raise prices quicker or at least know where the hemorrhaging is coming from. Being able to set an accurate price to cover your costs and know your profit margin can help you manage your company clearly.

Profitability

If you aren’t factoring in your full landed cost, you may not realize that you could be losing money on certain products, or not making what you think. Your margins in which you operate should be based on your landed cost, some products like clothing have extremely high duties and if you don’t factor that in you could be losing money.

Supply Chain Efficiency

Identifying inefficiencies in your supply chain is easier to flag when you know your landed costs. You may find that certain suppliers or shipping methods are more expensive than others, like air shipping over the ocean, so planning shipments better can help you reduce your landed cost and increase profitability. Finding ways to optimize your supply chain is made easier when you know your landed cost!

Inventory Management

You can assess your inventory and see if it’s worth stocking more or less of particular goods when you know what your landed costs are. You may find that a certain product is expensive to bring in because they are big boxes that aren’t heavy or have a high duty rate, knowing this you can pair these items with smaller items that have a lower duty rate which you can amortize your costs across more items. Or you may find that it’s more effective to order fewer products more frequently to free up cash that won’t be held in inventory.

A lot of companies I worked for or have dealt with over the years had most of their profit tied up in large amounts of inventory, this was certainly the case coming out of the COVID years and the companies that had a better handle on this are much healthier than those that didn’t.

There are a lot of other reasons to keep a close watch on Landed costs but these are the most impactful and easiest to manage with a good ERP solution!

It all sounds very time-consuming to get all these data points or you may feel you can just keep managing the way you were with spreadsheets and long hours looking at these spreadsheets. But, it doesn’t have to be this way and it’s never too late to implement a system that can help you keep these costs under control or at least manage them in a data-driven way so you are making the smartest business decisions. If your ERP can’t handle some of these basic cost structures it may be time to look at something a little more robust.

Versa Cloud ERP along with all the basic inventory, orders, and financial reports provides the customers the freedom to customize their reports as per their requirements. Take the First Step Towards Transformation with this ERP Reporting Essentials Guide!