Definition: Landed cost is the sum of all costs involved to get the product to the recipient’s door. It includes shipping, custom duties and taxes among other expenses.
What Does Landed Cost Mean?
The concept of landed cost is particularly important to evaluate suppliers. Companies have to analyze all the different expenses involved in a purchase transaction, adding them to arrive at the landed cost of the operation. Then, the company can divide the total cost by the number of items being purchased to determine the real price per unit.
This is a metric most frequently employed in supply chain departments where different potential suppliers compete with each other, with the landed cost being one of the elements involved in the evaluation. The term is also particularly important when it comes to international trading since there are many hidden expenses that must be incorporated into the calculation to arrive at the landed cost of an import operation.
For companies that have to import its raw materials, keeping the landed cost as low as possible is an essential task, since a minor increase in the cost of shipping, handling or ordering the materials can have a substantial impact in the company’s profit margins.
Example
Full Light Co. is a company that sells lamps mostly for commercial clients like stores, warehouses, supermarkets and others. The company has a centralized manufacturing facility located in Cambodia but the headquarters are located in the U.S., which is the company’s primary market. Shipping the items from Cambodia to the United States is a regular operation for the company but recently there have been a few changes in Cambodian customs’ procedures which has caused delays for the shipments to arrive.
These holdups are starting to worry the company’s top management since each additional day that the cargo takes to arrive increases the landed cost by a 0.25% which is a big figure considering the high volume of sales the company has. In order to reduce the delays, the company hired a customs’ consultant based in Cambodia to help them expedite the process. After a few days working, the holdups were eliminated and the company resumed its regular trading schedules.
