Global Supply Chain and Logistics Focus: Our Weekly Feature Article on Topics Related the the Global Supply Chain and related Logistics Topics  
 
 
  - November 13, 2007 -  

Global Supply Chain: In Search of a Landed Cost Model

 
 

Penn State Research Lays out a Framework, but Few Companies are Capturing All the Elements

 
 

 

SCDigest Editorial Staff

SCDigest Says:
In addition, Thomchick said none of the participating companies was really doing a good job at taking actual fully loaded landed costs and comparing them to what they had calculated.

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With the huge growth in global sourcing, understanding the “total landed cost” of materials, components or finished goods procured from international sources is critical to making the smart choices about sourcing locations and vendors, and to achieve the potential savings from offshore programs.

With that backdrop, Evelyn Thomchick and colleagues at The Center for Supply Chain Research at Penn State worked with six large companies to better understand how they were calculating total landed costs.

The result – development of a six-category landed cost model – and the surprising finding that none of the six companies included every category in landed cost decisions.

Total Landed Cost Framework

While it may be tempting to think developing and using a landed cost model would not be that difficult, to do it well actually takes considerable effort and technology support. Thomchick noted the following barriers

  • The data needed to populate a model is often not readily available
  • Execution pressures and time-constraints often preclude sufficient analysis of the data
  • Companies often do not continuously monitor and update the landed cost inputs
  • Organizational structures inhibit the cross-functional effort needed to build and maintain a landed cost model

The companies in the Penn State research project were all large, with five of the six being at least $10 billion in sales, and the other between $1-10 billion in revenues. The six participants represented companies in the metals, industrial, chemical, high tech and pharmaceutical industries, giving a nice mix of verticals but missing a retail participant, which would have been a nice addition.

 
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The research led to the following six-category model:

  • Purchase Price:
  • Price paid to seller
  • INCOTERMS
  • Payment terms
  • Exchange rates over time
  • Transportation and Logistics
  • Foreign inland
  • Line haul
  • U.S. inland
  • Accessorials
  • Insurance
  • Packaging
  • Customs and Import
  • HTUSA (tariff) rate
  • Merchandise processing
  • Harbor maintenance fee
  • Broker fee
  • Less: Duty Drawback
  • Inventory Costs
  • Cycle stock
  • Safety stock
  • Inventory in-transit

These costs can vary depending on the INCOTERMS in category 1 (when does ownership of the inventory change) and the way a company values its inventory.

  • Overhead and Administration
  • Sourcing staff
  • Due diligence
  • Relationship building/travel
  • Learning curve
  • Risk and Compliance
  • Compliance costs (technology, staff, other)
  • C-TPAT program costs
  • Cost of potential risk of supply disruption
  • Cost of potential risk of damage to reputation Health, Safety, Environment

The cost elements in each category are presented at a high level. Considerable more line items and detail would go into a fully operational model.

No Company Used All Six Cost Categories

Perhaps surprisingly, of the six large company research participants, not one was fully using costs from all six categories, though one was close. (See illustration below).

 

Source: Evelyn Thomchick, The Center for
Supply Chain Research at Penn State

 

In addition, Thomchick said none of the participating companies was really doing a good job at taking actual fully loaded landed costs and comparing them to what they had calculated.

In summary, it appears even among large firms there is still a lot of room for improvement in landed cost model development and usage in global sourcing programs.

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