The global economic downturn halted, at least for a time, the moves by many companies to manage the movements of goods through supply chains under the principles of total landed costs. With so much uncertainty in world markets, after all, the attention of shippers and logistics providers was almost entirely on transactional costs.
But many companies are shifting their focus from economic survival to cost volatility, global competition, new regulations and supply chain complexity and risk. That’s put a new premium on landed cost calculations that must be flexible to adapt to changing conditions — to reflect the true landed costs of moving goods.
For shipping professionals, there’s always been a difference between landed costs and true landed costs. The difference today is that new technologies that provide enhanced analytics and supply chain visibility allow risk, disruptions, fuel price volatility and other variables to be factored into the landed cost equation, often in real time, for a clearer picture of the true cost of sourcing, transporting and distributing goods
The strategies and methods for understanding and controlling landed costs generally involve three key concepts — supply chain mapping, effective measurement and market knowledge, says Patthira Siriwan, senior project manager, supply chain development for Damco, the combined logistics brand of A.P. Moller-Maersk.
“Shippers need to map the end-to-end supply chain to see the costs, lead time, inventory and volume flow from each vendor to each carrier to each destination,” she said.
Volatility may be the most important new factor that’s fallen under the landed cost calculation over the past decade. The recent political unrest in the Middle East is just the latest example of the potential for rapid and dramatic changes in supply chains that have been critical to logistics in the past decade. The uncertainty may revolve around terror attacks, natural disasters, steep spikes or changes in the availability or costs of sourcing of raw materials.
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Raw material prices have been see-sawing since 2008, and major disruptions have occurred. For example, India, the world’s second-largest grower and exporter of cotton, banned all cotton exports in April. The ban was lifted a little more than a month later, but it was a reminder that landed cost management includes risk management, Siriwan said.
Landed cost calculations are only as good as the data you bring to them, said Tom Sanderson, president and CEO of Transplace, a non-asset-based 3PL that provides logistics technology and transportation management services to manufacturers and retailers.
As a 3PL, Transplace looks to help companies improve service and reduce costs, but Sanderson said shippers can’t do that by focusing on disparate elements such as rates. A 3PL must embrace a total landed cost concept and think about costs as its customers do, which means the cost of getting goods to market rather than discrete parts such as fuel or assessorial charges.
“You need to broaden your perspective and look at all aspects of network design to achieve the customer’s objectives,” Sanderson said.
Transplace defines landed costs broadly as the cost of acquiring goods in the source country and all costs associated with getting them to stores, including transportation, duties, compliance and other fees and costs. Comparisons are made for variables including ports, carriers, modes and inventory levels, based on the characteristics of each unique supply chain. Questions are asked. Should containers be moved intact or transloaded? Should the client use a multiport strategy? What about service considerations?
Companies that determine landed costs solely on price-focused data elements such as rates per mile or pound, or solely on purchase and transportation costs, risk falling prey to what Sanderson calls “simplifying assumptions,” which can result in bad decisions.
“Landed costs are not just a function of miles,” he said. “They have to do with overall capacity and demand-driven imbalances that influence truck or intermodal pricing in specific markets.”
Transplace relies on industrial engineers and proprietary network modeling software to use the massive data on landed costs. Data is king in total landed costing. One key value provided by 3PLs is knowledge of the costs and service characteristics associated with ports, routes and trade lanes that customers may not understand.
And landed costs vary by industry. For retailers, the cost and service times for sourcing critical components and goods from Asia and importing them into domestic distribution networks is the No. 1 supply chain imperative. Last-mile delivery is a critical factor in overall efficiency, and typically has unique delivery characteristics, such as private or dedicated fleets.
That presents a far different landed cost structure than the consumer packaged goods industry, in which much of the processing is done domestically. Distribution structures, cycle times and transportation requirements are fundamentally different from retail importing.
Given the variety of industry requirements and ever-present economic uncertainty, supply chain risk and fuel price volatility, resiliency and flexibility are critical capabilities for managing landed costs. Forecasting and risk assessment are necessary to plan contingencies for supply chain disruptions, such as last year’s flooding in Mexico that closed several border crossings. “If you had multiple service providers lined up instead of only one option, you could still get your product in,” Sanderson said.
Visibility is widely seen as the key to true landed costing. Retailers using up-to-date automated systems for supply chain visibility have reduced total landed costs 5.5 percent, according to an Aberdeen Group survey, “Supply Chain Visibility Excellence: Reduce Pipeline Inventory and Landed Cost.”
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“Before you can reduce pipeline inventory or landed cost, you need visibility to them,” said Bob Heaney, senior research analyst at Aberdeen Group.
A growing number of shippers want their 3PLs to provide total landed cost reporting and analysis to improve agility and decision-making, and to increase visibility and gain insights into the financial performance of products and partners, according to the “2009 Third Party Logistics Study,” compiled by Capgemini and the Georgia Institute of Technology.
The latest generation of global cost control systems offers unified data hubs and real-time cost analysis capabilities, said Greg Kefer, director of corporate marketing at GT Nexus, which runs the world’s only industry-backed, on-demand global trade and logistics control platform. Shippers can log in and locate goods anywhere in the supply chain and across partner networks, and determine costs on an up-to-the-minute basis.
GT Nexus’s cloud-based technology platform includes a repository for contract and rate information, and it uses a Web-based platform to capture events and documents from the time orders are cut to final delivery. Logistics and transportation costs are rolled up in near-real time with other landed costs, giving companies a snapshot of the true cost of goods as they pass through the supply chain.
“Visibility is the backbone of landed cost calculations,” Kefer said. “They’re almost the same thing.”
The cloud-based platforms allow companies to synchronize their physical and financial supply chains, collecting and organizing costs as they occur and assigning them to specific SKUs, product line items or purchase orders. Suppliers, transportation providers and other partners are integrated through the centralized data hub, linking costs directly to elements and events in the supply chain.
The financial link, in addition to reflecting true landed costs, allows suppliers to be paid earlier, based on documentation of physical events in the supply chain. “Banks will look at those documents as valid proof of performance,” Kefer said.
The visibility also helps protect importers against currency fluctuations and reduces cycle times and safety stock.
Platforms must be configurable enough to manage the data elements, reporting and analytical demands of multiple industries, as landed costs vary by industry; type of goods; transportation and distribution requirements; and the timeliness and completeness of data provided by supply chain partners. For example, the small volume, high-value pharmaceutical cold chain relies on high-value, time-definite shipments with chain of custody reporting requirements. The landed cost structure is far different than those of the consumer packaged goods or retail importing industries.
Damco’s visibility tool at Damco.com provides SKU-level visibility on a multicarrier level from the point of manufacture to the final destination, Siriwan said.
The platform is augmented by bolt-on analytic tools for mapping domestic distribution, costs, lead times, volume flows and carbon emissions. Other tools include Oracle Crystal Ball, an application for predictive modeling, forecasting, simulation and optimization that provides insight into supply chain risk factors such as exchange rates, fuel prices and labor costs.
Management Dynamics, a trade management software company based in East Rutherford, N.J., collects trade content from 122 countries to help customers identify costs surrounding duties, excise taxes, preferential trade agreements and related data, said Nathan Pieri, senior vice president of marketing and product management.
“We help companies make apple-to-apple comparisons across product invoice insurance duties, transportation, VAT and other costs associated with moving product between countries,” he said.
Management Dynamics’ Global Trade Content solution includes 5.7 million import duty rates and 1.9 million Harmonized Schedule classification numbers, and its global content team consists of more than 500 trade analysts, trade attorneys and in-country global content providers.
“Landed costs and the ability to deliver within cycle times are impacted by these kinds of data,” Pieri said.
The company’s applications are designed to facilitate planning within companies. Even in the most sophisticated organizations, the three groups that typically deal with landed costs — sourcing, logistics and compliance — may not communicate with each other and take into account the real costs across the delivery chain, Pieri said.
Strategic landed costing is impeded by data hidden within corporate silos, often without a common platform for tracking, measuring and analysis, said Jim Butts, senior vice president of C.H. Robinson Worldwide. “The degree to which we can help companies address total landed costs depends on what our role is and how many buckets will they let us into,” Butts said.
Most companies understand managing landed costs can drive competitive success, but many can’t get a grip on all the moving parts or understand how disparate costs in procurement, production, distribution and other business processes are related. Logistics companies are best able to reduce landed costs when they get involved early to help customers break down silos and design supply chain strategies that factor in landed cost reduction.
“Because those things are hard to see, we are often the change management agent for our clients,” Butts said. “Landed costing is often based on anecdotal evidence within organizations until you provide data.”
Looking ahead to the rest of 2011, U.S. shippers can expect the new hours-of-service, the CSA safety program, carrier availability, slow-steaming and other factors to put pressure on cost containment, Butts said.
But fuel price volatility will be the top concern in landed cost calculations in 2011, said David Bennett, vice president of global logistics sales and Asia trade development at Schneider Logistics International.
Schneider last year rolled out an Inland Logistics Management service that was developed with a major international retailer. The service provides a single snapshot of cost activity from steamship lines, terminals, customs brokers, drayage carriers and distribution centers that can be synchronized with global and domestic supply chain events to provide actionable data, visibility and control for lowering landed costs.
The three “Ds” — demurrage, detention and delays — are black holes in landed cost calculations, especially for retailers. Manufacturers tend to import components on just-in-time inventory cycles and so have a different set of challenges, Bennett said.
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