What is Total Landed Cost?
Total landed cost (TLC), total delivered cost, and landed cost all refer to a very important calculation within a supply chain. It has been defined as “the sum of all costs associated with making and delivering products to the point where they produce revenue.1” Depending on the type of industry where you conduct business, the factors to calculate total landed cost can vary. Popular factors include transportation, unit price, tariff/taxes, and warehousing costs. Other factors can include inventory carrying costs, corporate income tax, risk/quality/service related costs, financial impact of carbon footprint, currency exchange rates, and much more.
Why is Total Landed Cost Important?
The purpose of calculating total landed cost is to capture both obvious and hidden costs within the supply chain. Finding the true cost of a product can improve decision making on how to get products to the end user in the most cost efficient manner. Say you have a product that is manufactured in a few different countries and you only base your purchasing decision on the cheapest net purchasing cost. You could potentially be spending more money if you don’t take into consideration the transportation costs, customs, tariffs, taxes, and many other factors that could be considered hidden costs. If you have a clearer idea of the true cost of your products than decision making will be easier. Without total landed cost you could be making decisions blindly on incomplete data.
Insight into financial performance is another benefit of calculating total landed cost. By knowing your TLC, you would really be able to see your true expenditures per product and determine ways to improve. There will be better insight into cost and the cost tradeoffs associated with your supply chain.
Why is Total Landed Cost Difficult to Calculate?
In 2010, a majority of shippers cited reasons that they don’t calculate TLC due to unavailable data, resources, and time2. As you can see above, there are a lot of factors that contribute to the equation; most of which can be difficult to obtain. A lot of these components aren’t readily available and takes some time and work to discover. Determining all of the factors before solving the calculation can be time consuming. Many companies don’t have the time to calculate within their time constraints that are established before decisions need to be made. A landed cost model needs to be constantly updated and it can be difficult to understand its true value.
Another difficulty with calculating total landed cost is that many do not know how far into the supply chain they should include in the equation. There is no concrete formula so it’s challenging to determine if everything that should be included has been. Some of the formulas that we see are very broad but the more granular you get, the more sophisticated your data will be.
How to Calculate Total Landed Cost?
Just because calculating total landed cost can be difficult doesn’t mean there aren’t different avenues you can take to solve it. Many companies use spreadsheets or internally developed tools to calculate their TLC. Another option is that there can be support available from a third-party organization. This could be supply chain consultants or other supply chain experts. Another option is to purchase commercial tools that can help you compute the formula. This could be through Transportation Management Systems (TMS), Enterprise Resource Planning (ERP) systems, supply chain design programs and many more. As the importance of this equation begins to gain popularity, more tools are incorporating the capabilities to support the calculation.
Where to Begin:
Computing TLC can be intimidating but it is completely achievable. You can begin by taking as much of the data as you have and start the process of developing the equation. Not only will this get you moving in the direction of calculating TLC, but it will also help you identify the things that are missing from the equation. Many want to stand on the sidelines accumulating data to get to the point where they have a higher volume of data and hence a better chance of calculating TLC. By starting the process earlier and beginning the creation of the TLC formula earlier, it will help you figure out what is missing faster. Starting with metrics such as payment terms, transit time, and manufacturing lead time can contribute to completing a formula that works best for your organization. Once you contribute time and resources to determine your TLC your company will begin to reap the benefits.