As more companies source and distribute internationally, the issue of understanding the true total landed costs (TLC) is increasingly important. Whereas most companies have gone offshore for sourcing because of low labor rates, many are finding that the true operating costs — both direct and indirect — for the cost of goods sold may increase at surprising levels.
The challenge is to understand the total supply-chain costs, then devise better methods to manage and contain them.
These 10 tips will help you identify the total cost components, which is the first step in understanding what it is costing you in total to land a product at its intended destination.
If your product is delivered to a final retail or other consumer destination, then the total delivered cost (TDC) also should be computed.
1. First, calculate the obvious — transportation costs.
The costs of transport are direct and can be computed segment by segment or in total. An all-in rate per shipment should include land, sea and air costs, which may be charged through contracted rates or via a forwarder. The rates may be per container, per shipment or by some other size and weight factor. Be sure to factor in any fuel surcharges, peak surcharges or other add-ons.
2. Determine the product groups to be calculated.
Different product groups will incur different costs, depending on several factors, including Customs classifications; volumes; degree of quality controls; size and weight; and whether the product is perishable. This step is necessary for attaining usable cost information for product pricing and profitability, as well as customer profitability.
3. Determine the costs of customs tariffs, duties and taxes.
Your end-to-end transportation rates may or may not include these charges, but they must be understood. Customs tariffs and duties, as well as taxes, vary by country, by commodity and often by the port of entry or debarkation. There are more than 20 types of international taxes, and the routing of goods will determine many of them. Supply-chain security costs — C-TPAT, for example — also need to be factored in.
4. Determine the impact that carrying an inventory has on your working capital.
Long supply chains increase your working capital requirements. The cost of trade receivables, plus inventories, minus accounts payable, measures inventory asset efficiency. The “days of sales outstanding,” and “days of inventory” will amount to a much higher expense in global supply chains. Cash moves according to events that happen in the physical supply chain, including cycle and lead times.
5. Time is money; determine the cash-to-cash cycle times from forecasts to purchase orders, to goods movement, to billing and collecting.
This cycle time, by product group, brings with it a cost of capital employed, as well as a currency exchange rate that will likely vary day-to-day. Global cash management is tricky, and terms of payment are triggered by events and information about the flow of goods, including transit times, delays, congestion and other supply-chain factors.
6. Calculate the cost of quality.
Sourcing globally raises inevitable concerns about the quality — and safety — of the goods purchased. Different product groups have different quality-control requirements, but all incur a cost — at the site of production and upon delivery. Recent concerns about safety problems with certain goods procured from China have heightened this awareness, and thus the cost of doing business there. Counterfeiting is another concern; its cost of avoidance needs to be factored in.
7. Add the cost of returns, reverse logistics and/or added product work.
Products often must be returned for repairs or because they have been returned by customers, which adds a cost. In addition, companies sometimes postpone certain value-added processes until the products are landed — such as packaging or reconfiguration. These costs need to be factored in by product group for understanding total landed cost and/or total delivered cost.
8. Compute the costs of technology related to supply chains and allocate it to product groups.
International supply chains require twice as much information technology as domestic flows do. The investments in technology need to be calculated and amortized across the product groups.
9. Calculate the costs of internal controls.
The costs associated with internal controls will increase with global supply chains. Sarbanes-Oxley regulations are one key factor, but there are others related to international transactions.
10. Measure the selling, general and administrative (SG&A) expenses associated with global supply chains.
Expenses related to executive time, planning and meetings on problems; managers’ travel; global communications; process checking; outside experts; and possible litigation, among others need to be recognized as well. These are often overlooked, or considered “necessary overhead”. In fact, they contribute to the total landed cost and total delivered cost, and should be factored into the cost of goods sold.