Landed costs are the total costs of getting a product from your supplier to your business. In addition to the actual cost of the product, it includes all expenses associated with transporting and landing products through the supply chain to their final destination. It also includes certain mandatory compliance costs.
Understanding and accounting for landed costs are crucial, especially with the rise of SMEs’ involvement in global trade.
Some of the expenses that make up landed costs include:
This is the cost associated with transporting a product from its origin to your business. Generally, it makes up a significant percentage of the landed cost.
Insurance and Compliance Costs
These are the costs of insuring products shipped from the supplier to your business. It protects the business if the goods are stolen, damaged, or lost during transport. Compliance costs are all the expenses that a company must incur to adhere to government regulations.
Customs and Import Costs
Costs associated with importing goods from overseas can vary by country as each country has different custom-related fees, taxes, regulations, and potential licencing requirements. The cost therefore depends on the product type and nature of usage.
Handling and Processing Costs
During transportation, shipments are subject to handling charges incurred from packing, storage and payment processing.
These charges cover the use of port facilities upon the arrival of goods from overseas. The charges vary according to the turnaround time of the goods from arrival to the time of claiming the goods and termination of the use of port services (e.g. storage). After a specific time period has elapsed there might also be penalty charges (called demurrage).
As most countries have floating currency exchange rates (FX), the cross-border rate at which companies trade is constantly changing. Therefore, if a company frequently purchases goods from overseas, it should monitor FX rates closely. Because FX rates have the potential to significantly affect product pricing and profit margins. This is especially true in the event of turmoil in the local economy which leads to high FX rate volatility.
Why it’s important to recognise your landed costs!
Facilitates Accurate Product Pricing
Accounting for landed costs enables a business to identify ideal price points that encompass all expenses across the supply chain. When setting selling prices, landed costs should be “passed on” to the consumer instead of being treated as a company expense. Full accounting for landed costs means a more accurate knowledge of the cost of goods sold (COGS). Accounting for these expenses protects the business from reduced profit margins.
Optimises Purchasing Decisions
A business should look at the landed cost of each purchase as a metric for comparing competitive offerings. By only looking at the product cost per unit can make overseas alternatives, especially those from developing countries, seem more attractive. However, once expenses incurred throughout the supply chain are accounted for, purchasing domestically may be a better option. Purchasing from overseas can also be unfavourable to a business who cannot afford to purchase in bulk and incur higher expenses per unit of item. It is important to consider these costs in purchasing decisions, so they do not erode a business’ budget and its profit.
Helps Minimise Costs
By being aware of the expenses that make up the landed cost, a business can analyse and look for different ways to reduce them over time.
Below are a few examples of how a business could minimise some of the expenses that make up the landed cost.
By analysing the freight rates and packages offered by shipping carriers, a business could potentially reduce this component of the actual landed cost. This can be done by choosing a shipping carrier with lower freight charges, or package-based freight services that include other landed cost components such as insurance, port charges, storage fees, etc.
Import Duties / Tax
Import duties and /or tax charged by the customs department vary by country. High-risk countries and those not listed under any free trade agreements generally have a higher import fee. Companies should bear this in mind when purchasing goods from overseas.
When companies are involved in international trade, their profits are closely related to currency fluctuations. Depreciation of the local currency can cause the landed cost in a foreign currency to increase significantly. However, this can be overcome (partially) by participating in currency hedging, a topic that can become complex, however your bank may be able to offer solutions to this risk. Alternatively, a company could choose to trade only with companies that use the same currency as your own or with currencies that have a more stable FX rate history.
If you would like to know more about Landed Costs, please feel free to email us. We would love to hear from you.