Establishing landed costs for the products that a company handles can be a tricky business. All businesses that import or export need to understand what the total cost of goods is for what they are buying or selling. In order to accurately calculate the landed cost, all factors beyond the obvious primary price must be considered. Calculating landed cost is critical in understanding what a product actually costs and therefore what is can be sold for.
Landed cost definition:
Landed Cost is the total cost of a product once it has arrived at the buyer’s door. This list of components that are needed to determine landed costs include the original cost of the item, all brokerage and logistics fees, complete shipping costs, customs duties, tariffs, taxes, insurance, currency conversion, crating costs, and handling fees. Not all of these components are present in every shipment, but all that are must be considered part of the landed cost.
Clearly it is advantageous to reduce the cost of each or any component of landed cost. Each one will allow the seller to lower the final selling price or increase the margin associated with that sale.
When considering the landed cost or ‘true cost’ of any item that is shipped internationally there are components that need to be included. For instance, determining Harmonized System Codes (HS Codes) or Harmonized Tariff Codes (HTS Codes) is essential for over 98% of global trade. Once the HS Code or HTS Code is obtained the mandated duties and tariffs can be established. Accuracy of these harmonized codes is of significant importance as misclassification will result in incorrect tariff codes, incorrect duties, and eventually customs delays and fines. When customs delays and fines are levied, they themselves need to be calculated into the landed cost model.
Global trade management, supply chain management, and International logistics all have many moving parts. In this economic climate trade agreements are being forged and modified at a very high rate. HTS codes vary from place to place, cost of fuel can drastically affect shipping costs, currency valuations ebb and flow constantly and the list of variables goes on and on. Limiting the variables to a manageable few will streamline operations and keep overall cost structures as stable as possible.
Controlling costs, ensuring timely deliveries and customs compliance are serious issues that every international business is concerned with. Landed cost is a significant component of all of these concerns. Establishing a landed cost model is not just important, it is essential.