As I noted in a recent blog posting, it’s not easy to accurately calculate total landed costs (TLC). But it’s the best way to understand your business at the subatomic level, find process gaps, and optimize your supply chain in every way. Here are the 4 things you must have to calculate total transportation costs—one piece of TLC—and what you can do with the results.

1. Executive buy-in. Where do costs lie, and what internal profit and loss areas exist that keep you from understanding TLC? TLC can’t be a minor project conducted within a single group (e.g., sales, operations, transportation, procurement, etc.). If you’re going to calculate TLC, there’s got to be a major enterprise commitment to change management—a commitment that can only come from the very top and include a number of people from throughout the organization.

2. Your best minds, dedicated to determining TLC. Do you have an end-to-end TLC discipline? Since most people don’t, this often takes a big, full time project for some of your best people. It’s not easy. They’ll discover gaps in data, processes, and technology. Empower them to collect data from all silos, pulling all the costs from multiple budgets and business lines, and identifying a better way to measure TLC.

3. SKU-level data. If you’re focused exclusively on getting the lowest freight costs per mile or per pound, you’re sort of missing the point. Of course, you should try to keep costs low. But with TLC, there’s more at stake. Because you’re not shipping truckloads. You’re not shipping LTL. You’re shipping product. That’s what you really want to measure. So, get SKU-level data—down to volume and dimensions—for every product you ship. With that information, you can build better pallets. You can analyze the data that you measure to make better freight and cost allocations. You can gain better analytics on what each specific SKU is costing you, anywhere in the world that you ship it. Of course, the TLCs for each product are a moving target; they will have to be recalculated as SKUs, locations, suppliers, and other variables change.

4. TMS Technology. There really is no way around it: gathering and analyzing the level of information you will need requires a transportation management system (TMS) or managed service that utilizes TMS technology. The TMS must capture company-wide supply chain data in a single system. You must be able to pull specific costs out of the system to support TLC calculations. Technology helps facilitate that. With the right technology, you can gather meaningful information, measure against a baseline, and initiate changes and improvements for quicker and longer supply chain management performance improvement.

It’s a major commitment to track all the related costs, but when it comes to TLC, it’s not just about what you measure, but what you expect to get out of those measurements that counts.

Total landed costs help you understand your business. They also help you identify areas where your supply chain can give you an advantage over your competitors. It’s all about optimizing:

• Your network. Once you know all of your costs—truck, ocean, inbound, handling, customs clearance, operations, returns, and so on—you can use your analysis to set up the optimal network. This refers to where locations are and how close they are to the customer. With a holistic view, you can optimize the entire supply chain.
• Sourcing locations. Best-in-class companies collaborate with vendors, sharing data and discussing where they can invest that would be the best place for them to source or manufacture the product for you. Making these mutual decisions make it a win-win for the company and its vendors.
• Freight transportation. Forget the cyclical benefits—trying to time the market or running bids. These don’t set you apart from your competitors. The real opportunity for improvement appears when you make your freight more attractive to carriers than anyone else’s freight. How easy do you make it for the carrier to accept tenders and interact? Can you help bundle volumes in the lanes where they need it most? Is your freight dock friendly to the driver? How quickly can the driver get in and out of your facilities? Do you give the carrier enough lead time so they have time for strategic planning? With transportation spend—just one of the components of total landed cost—what can you do as a shipper that will lead to long-term savings? TLC also reveals the conversion opportunities you have at your disposal. Convert small parcel to LTL, LTL to truckload, truckload to intermodal, etc. All of these are great ways to improve your transportation costs—a contributor to total landed cost. Until you can look at the whole system holistically, you will sub-optimize orders.
• Global trade. Do you aggressively understand and work with international trade agreements? Do you look for opportunities in terms of sale and international finance and trade? All of these, managed well, can lead to opportunities; managed poorly, they can exert a drain on your free cash flow. Make sure you’re capturing both the domestic and international distribution in the overall cost to deliver. Besides being an area of big opportunity, it’s increasingly becoming an area of risk from a regulatory standpoint. The risks are misclassifications, poor notifications, delays in shipment, and fines. Not having a good regulatory compliance plan can impact total landed cost and decrease free cash flow. Having a TLC discipline in your organization will lead almost to a culture of estimated landed cost in your planning cycles. So when you analyze whether to change supplier locations from China to Vietnam, you’ll have great baseline comparisons. You can run simulation on the effective duty and tax rates of exporting and importing into countries.

Most of all, you can continually improve your operations. You can look at your network monthly and quarterly to review activities and find opportunities to improve total landed cost.

How does your organization approach total landed cost analysis?

Chris O’Brien joined C.H. Robinson Worldwide, Inc. in 1993 and became senior vice president in May 2012. Previous positions with the company include vice president, manager of the Raleigh, North Carolina branch as well as the general manager and later president of the company’s European division.