Estimated Landed Cost

Establishing landed costs for the products that a company handles can be a tricky business. Merchandisers of all businesses that relate to 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 estimated landed cost is critical in understanding what a product actually costs and therefore what is can be sold for.

Estimated Landed cost definition:

Estimated 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 estimated landed cost.

Why Calculation of Estimated Landed Costs is Important?

It is Buyers' tendency; when shopping around for new suppliers, it is tempting to sign a contract with the cheapest source available. However, smart manufacturers never take the purchase price of a material at face value. Additional costs are hidden everywhere – insurance, shipping fees, customs expenses, and other variables quickly add up. Without a way to predict the total landed cost of materials, you are taking an enormous risk that can lose you a lot of money.

Consider the following real-world scenario:
A U.S.-based fashion retailer is selling Decorated T-Shirt to its customers for $8 per piece. Seeking to extend their profit margin, the retailer requests price quotes from suppliers in Bangladesh. Several respond and one is offering the tile at a bargain rate of $2/piece. The retailer quickly places an order for 1,000 pcs.

Upon receipt of the tile at their warehouse, total landed costs have accumulated to a point where the
venture is deemed a failure:

Invoiced purchase price: $2000
Shipping fees and duties: $900
Domestic delivery cost: $200
USDA examination & x-rays: $900
Storage container: $500
Total: $4,500
Total landed cost per piece: $2.5

This example shows the types of unforeseen costs that can quickly add up and increase the total delivered cost of buyer's imports. Without a formula that accounts for these costs before the purchase is made, the buyer may end up with material that he must use those himself or sell at a loss.


Factors that Determine the Estimated Landed Cost:

Although your estimated landed cost can be influenced by a wide range of factors, there are some common fees that you can expect and plan for. These costs typically fall into one of five different categories. Use this breakdown to run a detailed inventory of your operation and see what expenses your landed cost model is missing:

1. Purchase price: This is the base price you are paying for the materials or goods you are sourcing. Keep in mind that not even the purchase price remains completely static – it may change due to exchange rates or under certain conditions outlined in the payment terms you agree to. Various banking fees also apply.
2. Transportation and logistics: Transportation costs include both foreign and domestic inland
   shipping fees, as well as the direct line haul cost. Also pay attention to packaging, insurance,
   broker fees, and any other miscellaneous logistics expenses.
3. Customs: These costs include customs inspections, broker fees, tariff rates, harbor fees, and the merchandise processing fee (MPF). If your imported goods are going to be re-exported or used in the manufacture of exported goods, you may be able to save money through duty drawback.
4. Overhead and administration: Overhead and administration costs are often overlooked or
   unaccounted for when calculating total landed cost. Things like adjusting to a relationship with anew supplier and trips taken to build the relationship can have a calculable financial impact on your total landed cost. Overhead also includes things such as paying staff members to oversee
   transactions and research potential suppliers.
5. Risk and compliance: Complying with various regulations and trade policies also costs your operation money. In addition to these compliance costs, it’s a good idea to account for the risk of supply chain disruption, especially when working with new offshore partners