Understand Total Landed Cost
As we mentioned in an earlier post, the benefits of exporting for your business can be substantial in terms of growth and profit. However, simply meeting overseas demand with supply is not sufficient to ensure that your export process works. Profitability is the obvious measure of success, and this is directly impacted by the concept of landed cost.
In simple terms, landed cost is the cost of your product delivered to or from a foreign country. Cost of product and delivery are the most common and obvious measures that an exporter must consider. However, there are significant additional costs that can drive up the landed price of your goods overseas. Knowing these costs is crucial in order for exporters to ensure order profitability. Some of the more common but frequently overlooked costs, that can impact landed cost directly, include the following:
• Freight – there are many components to freight cost in itself. Cargo has to be picked up domestically, sailed or flown overseas, cleared through various freight terminals at the destination, and trucked to final destination. Each of these steps carries a cost, and even after determining the cost of transport expenses such as airport terminal handling charges (charged by the airline and almost never quoted to the exporter), destination terminal handling (charged to the consignee at destination by steamship lines and very rarely quoted to the exporter) can apply and directly impact landed cost. Also, as shipment documents pass from the hands of various customs and documentation agents, service fees can apply that don’t get quoted to anyone in particular at time of shipment. For example; an importer buying product from China can receive a CIF price from their overseas supplier and presume they have an understanding of landed cost. However, destination charges imposed by the steamship line can run into several hundreds of dollars per container and are to be paid by the importer in most cases. Additionally, logistics providers will charge for services such as document turnover fees, messenger fees, import filing and, customs entry filing fees. This can add as much as $1000 to landed cost and that’s before paying duties that may be charged by the government. In order to obtain a thorough understanding of landed costs exporters should carefully consult with a freight forwarder or logistics services provider prior to starting international business.
• Duties & fees – Customs duties apply all over the world. In some countries they are applied to exports as well as imports. Knowing duty rates is crucial as these charges are non-negotiable and must be paid to local authorities prior to release of goods or within a very short period of time thereafter. Proper classification of goods, correct invoice values and even, invoice formats are required in order for proper duty rates to be applied. For example; the U.S. import duty rates on the general category of “textiles” or “garments” can vary based on country of origin, type of fabric, material used. This can have a significant impact on an importers choice of product and sourcing location. Importers & exporters alike must consult with a customs broker and/or logistics services provider well in the earliest stages of their international business planning in order to get a thorough understanding of duty structures and import formalities that may apply to their business.
•Insurance – Insurance cost is significant. Coverage is necessary in order to prevent a buyer or seller from partial or total loss of goods due to unforeseen damages or theft. Insurance rates can vary based on commodity, mode of transport and country of destination, as well as value of merchandise insured. Parties purchasing insurance should keep in mind that it should not only cover the value of the merchandise, but also the cost of shipping the goods so that these charges do not have to be re-incurred. A general rule of thumb is to insure merchandise for 110% of invoice value so that shipping costs for replacement goods can also be recovered along with the value of the product. Working with an insurance broker is a great way to learn about your options for insuring goods, especially if your company is looking to engage in ongoing international business. Many freight forwarders also sell insurance on a per shipment basis and can provide competitive pricing options for coverage.
These are some of the more significant cost drivers of landed cost. Proper consultation with a logistics services provider can offer a more in depth view of such costs as each country can have significant variations and additional charges that an uninitiated exporter is likely to be unaware of.