Coming in for a Landing: How Business Software Helps Manage Landed Cost

Landed cost is the end cost of an internationally shipped item, including freight, duties, taxes, insurance, purchase price, and other costs. Since all of these factors affect the value of the item, it’s important for businesses to be able to estimate and tally the full landed cost of any item it sells and ships.

We talked to Open Systems’ manufacturing and distribution expert Alan Stokes about landed cost, what kinds of companies it affects, and how business software solutions can help businesses manage goods shipped to and from overseas.

What kinds of companies use landed cost calculations?

Alan Stokes: It tends to be used by companies who deal with a lot of imported products, mainly because the cost of getting the product might be a significant part of the overall expense of the product. If you based your retail price on only the product cost, without the additional costs of acquisition, you’d lose money on every sale.

What kinds of costs can Landed Cost help you track and pass into inventory?

Costs like freight, custom duties, taxes, insurance, freight forwarding, brokerage, and inspections costs can greatly affect the real cost of inventory and directly affect your profitability.

How could not tracking import costs affect profitability?

Let’s say I sell flowers here in Minnesota. I can buy Colombian roses for about 50 cents apiece, maybe a little less, so if I sold them for $1.00 I’d be making great money, right? Not really. This is because the cost of getting them here might be an additional $1.00 in freight, inspection, duties, etc. So what I want to do is roll the cost of all these “other” factors into the cost of the rose so I know my “real” cost. So now I’m charging $3.00 a piece, not $1.00!

How can business software help companies manage their landed cost needs?

A good landed cost solution allows you to calculate those costs based on weight, quantity, product cost, fixed charges or any combination of the these. All costs are automatically calculated, and a good solution also offers the user the ability to easily change and override these costs for those special situations that come up or simply to tweak these additional costs on an ongoing basis.

Some examples of those charges that I’ve seen include brokerage, pallet costs, freight costs, laboratory costs, custom duties, taxes, insurance, inspection, freight forwarding, etc. Again, these tend to apply to companies who do a lot of importation.

What are some challenges associated with calculating landed cost?

The problem with landed cost is trying to figure out how much it amounts to. Let’s say that the shipping company says that the cost per item will be $1.00. Great, this makes it super easy, we simply add $1.00 to the product cost and voila, we have the landed cost. Of course, it’s rarely this easy. The biggest problem is that we don’t really know the additional costs until long after the product has been received and possibly even distributed or sold. It’s too late to change the cost then.

The second big problem is that we may not know how to allocate the cost. We get a freight bill for $400.00 for a shipment of 40 flower clay pots, 120 flowers, and 500 sheets of green wrapping paper. We know the cost if each item but how do we allocate the $400.00 over these items? Let’s just say it’s going to involve guesswork no matter what.

How does business software minimize the guesswork?

If the solution is robust, the user should have four choices to allocate or assigned costs to inventory to arrive at a landed cost, each with pros and cons.

1. We could allocate the cost as a percentage of the cost of each item. This would work great if we were buying precious stones and one of our significant cost importing these stones was insurance. It might not be good if our significant cost was simply freight because the cheap stones would have non-proportionately low costs.
2. We could assign a flat charge for the shipment. Great if we know the freight charges up front and we are buying things of relatively equal value and weight and our cost driver was freight. Again, not so great if items vary greatly in weight and size but not cost.
3. We could assign the cost by weight. Again, great if our cost driver is freight and all items are about the same size. Probably not so great if our cost driver is insurance and inspection costs.
4. We could assign cost by quantity. This works great when items are close in value and weight. Doesn’t work well at all when weight varies.

So as you can see, there is no one perfect method. Note that you can also combine these methods and use any combination of the four at the same time.

These costs are calculated when the product arrives and when it’s put in inventory, the costs are allocated amongst the items on the order. Like I mentioned, it’s likely that none of these costs are exactly right but they are in the ballpark, thus allowing us to cost our item without really knowing the exact additional charges.