Is it possible to accurately calculate Total Landed Costs?

There was a terrific article in this month’s Supply Chain Management Review by John Ferreira and Len Prokopets from Archstone Consulting (“Does offshoring still make sense?”).  The article highlights some key findings from a survey Archstone and SCMR conducted with thirty-nine senior executives from U.S. and European manufacturing companies.  Among the interesting points highlighted in the article:

  • North American manufacturers sourcing from China perceived that their savings would be in the 25 to 40 percent range. The true savings may never have been more than 15 percent, and were probably as little as 5 percent for some products.
  • Off-shore labor and commodity costs are growing by more than 10 percent a year, key foreign currencies are gaining value against the dollar, and ocean freight costs have increased by 135 percent over the last three years. Thus, offshore manufacturing is becoming even less attractive.
  • Consequently, North American manufacturing stands to grow 5 percent over local market demand, with Mexico and low-wage states like Alabama and Arkansas being the big winners.

For me, the most interesting portion of the article was a chart that showed all the cost buckets that companies need to consider when calculating an “all-in” total landed cost.  Most of the manufacturers surveyed have landed cost models that take into account component and material prices, transportation costs, and exchange rate differentials.  But only 41 percent have cost models that also take into account inventory costs, the cost of quality, and country specific costs like VAT and customs fees.  Further, less than a third of the companies surveyed take into account six other cost factors, such as customer service costs and packaging costs, that also contribute to total landed costs.

Companies need granular costing models in order to determine true landed costs.  As I looked at the various cost buckets, however, I wondered if it was even possible to accurately calculate a company’s true landed costs.  Let’s just look at two of these areas:  inventory costs and global trade costs.

As average lead times and lead time variability increase, the amount of inventory companies must hold to maintain a specific service level needs to increase.  A 25 day average lead time is not necessarily better than a 30 day lead time from the perspective of how much inventory is needed.  If the first supplier attains the 25 day average by having half of their deliveries occur on the 15th day and the other half on the 35th day, while the second supplier’s shipments are always delivered between 28 and 32 days, the math that determines how much inventory should be carried may well favor the “longer” lead time supplier.

To maintain desired service levels and accurately track inventory carrying costs, companies need good Supply Chain Event Management and Global Visibility solutions and they need to update the input variables of their inventory planning engines, specifically lead times and lead time variability, on an ongoing basis.  In other words, in order to accurately determine the inventory component of a total landed cost calculation, companies have to integrate their visibility and inventory planning systems, as well as automate (or even semi-automate) the process of updating lead times and lead time variability.  Do you know of any companies doing this?  I don’t.

Last year, I completed a market study of Global Trade Management (GTM) solutions.  GTM is a complicated solution space because these suites must support the “3 Cs” of global trade: compliance, content, and connectivity.  The different platform choices – i.e., in-house implementation versus software-as-a-service (SaaS)-have different strengths and weaknesses when it comes to supporting the “3 Cs”.

SaaS solutions, as my colleague Adrian highlighted last week (“More questions about Software-as-a-Service“), are superior when it comes to global trade visibility and event management because they have a prebuilt network of connections to customs, carriers, logistics service providers (LSPs), suppliers, and other trading partners.  As a result, they tend to have better data quality management surrounding communications with external parties, and on-boarding new trading partners that are already part of the network tends to be much quicker.

GTM solutions must also require up-to-date trade content.  While some suppliers claim that they have trade content for nations representing 95 to 98 percent of global trade, they don’t claim to have all of the relevant content from the nations they cover.  In other words, they may cover import and export compliance content, but not content related to free trade agreements like NAFTA (which is a particular weakness of several leading solutions). 

Further, local expertise and presence is important.  Trade regulations can change quickly.  Without sources on the ground working with local authorities, GTM solutions can lag regulatory changes.  In general, GTM solutions with a global scope lack depth in trade content.  Also, it is not clear that the process for updating their content occurs easily or in a timely manner.  Several solutions have depth in terms of regional or country-specific content, but lack the global scope.  

In short, as I look at the cost buckets needed to calculate total landed costs, I have real doubts, based on current software solutions, that we can accurately calculate these costs.  The question is: How close can we get to a true landed cost?  And how would we know if we’re close?

Comments

  1. Both Steve Banker’s and the referred article on off-shoring, emphasize the need for managing the complications associated with total landed cost calculations that are required to make informed off shoring decisions.

    To Banker’s comment on content providers, it is important to note that supporting the content does not imply the vendor also supports software to actually comply with the administrative requirements set forth by the local government. Additionally, two elements are important:
    1. Planners should not use (only) current duty rates but also future rates.
    2. The cost associated with complying with the preferential trade program that has been estimated to be between 2% and 15% need to be considered.

    The point on content is equally important – what use is content if it is outdated? The decision maker should simply look at three things to assess whether the content provider is the right one:
    1 Does the vendor offer a strict Service Level Agreement?
    2 What is the vendor’s content sourcing strategy? As Banker mentions: Are there local contacts? Does the vendor have experience and insight in remote regions, and can the vendor communicate in the local language and retrieve answers from remote locations?
    3 The buyer should randomly check the content provided for up-to-date rates.

    In conclusion, the importance of duties and taxes in total landed cost calculation can not be underestimated, but in order for this part of the analysis to be accurate, the manufacturer must ensure the right content provider is selected.

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