Making sure your total landed costs (TLC) are calculated precisely is a crucial task for any supply chain organization. Yet, many businesses often rely on averages, estimates, and even guesswork, which can result in inaccurate calculations, and even failed ventures.
As anyone in the business knows, a company’s TLC is the sum of all costs associated with delivering products to the point where they can begin producing revenue. The TLC can account for up to 40 percent of product costs, and includes handling and transportation fees, insurance, duties, taxes, and hidden costs that are often overlooked.
In a July 2015 survey, Supply Chain Digest asked over 200 supply chain professionals if they were confident in the accuracy of their total landed cost calculations. Only 24 percent said they believed their numbers were highly accurate. This is a surprising figure, considering the impact inaccurate TLC calculations can have on a business, and on strategic decision making.
Smart supply chain companies never take the purchase price of a product or material at face value.
When shopping around for new suppliers, it is prudent to resist the temptation to sign a contract that lists a cheap product, or material before the TLC has been calculated. To sign without this vital information is a huge, and unnecessary risk suppliers shouldn’t take.
An accurate TLC enables companies to understand both the obvious costs, and the hidden costs associated with a product’s movement. This information provides the true cost of sourcing, and logistics decisions.
Calculating Your Total Landed Costs
Calculating the total landed cost of materials, and finished goods that are arriving from offshore locations is not a simple task.
Many carriers don’t realize the extent to which they should delve into their supply chains when calculating these costs. There is no hard, and fast rule, which makes it all the more challenging to review your calculations, and say with certainty that all the necessary tenets have been included.
To safeguard your investments, build a model that checks your predictions against actual invoices, and real data to provide a level of accuracy that can boost your confidence when sourcing, and making logistical decisions.
Paying Attention to Hidden Costs and Fees
As mentioned earlier, hidden costs can affect the accuracy of your TLC. They can include inventory carrying, customs charges, corporate income tax, service related costs, exchange rates, administration, and even the financial impact of the carbon footprint.
Administration, and overheads are often overlooked in TLC models, along with the true cost of changing, or adopting a new supplier.
The cost of paying staff to develop relationships, carry out transactions, and research potential suppliers, is not always factored in.
Complying with various regulations, and international trade policies can also add costs to your operation. Furthermore, the purchase price, while static, can still be influenced by exchange rates, and additional charges for payment terms.
Making the Most of Today’s Technology
Looking for solutions? You should consider technological assistance. There are several ways to go about it, from developing a model, to plug-and-play preformatted spreadsheets, to specially-designed custom software.
Custom software can help simplify the process, enabling you to accurately calculate costs while managing other aspects of the supply chain.
There are also free calculators, and tools available online to help with TLC calculation, though they are limited in scope.
It is always a good idea to add a safety buffer to your model, as a means to prevent unforeseen expenditures.
It is also wise to run a detailed analysis of your business, to better understand what expenses your landed cost model may be missing.
An accurate TLC is a must if you want to correctly assess your enterprise, and see exactly where your costs are going. It is well worth giving your TLC model a little tender loving care to avoid paying the cost of miscalculation. If you want to learn more about how you can improve your inventory management, give us a call at QStock today.