Technology platforms provide accurate picture, but require shipper diligence to succeed.
By Eric Johnson
Acurious tidbit of information is to be found within American Shipper’s Import Operations and Compliance Benchmark Study both this year and last.
Somewhere between one quarter and one third of respondents over the two years say that total landed cost is a functionality they possess on the import side. On a list of 16 functions, landed costs was only the 15th most common functionality to have in 2013.
What’s more, the percentage of respondents who said that total landed cost was a function they currently possess actually dropped from 2012 to 2013.
Yet landed cost is consistently cited by shippers, third party providers and technology vendors as a critical element of success for the modern importer. What gives?
The reality is that arriving at true landed cost is not as simple as punching numbers in a calculator. It takes the right metrics and, in many cases, the right service partner or platform. It also requires some work by the shipper.
There are myriad elements that comprise a true total landed cost calculation, and eliminating or overlooking even one element can render the calculation incomplete.
In a blog item in early February, Chris O’Brien, senior vice president at C.H. Robinson, wrote shippers interested in capturing true landed cost have to think harder about the costs they don’t see.
“Say that a transportation department has decided that it will pay a maximum of $100 for detention, and that transportation pays the carrier’s invoice. And in this company, the shipping department controls the loading process. Perhaps shipping loads inefficiently, so the driver is regularly detained. And in the end, the carrier’s cost for that detention is usually $150,” he explained. “Since the carrier can’t recoup enough of their costs to make a profit, they could build the extra $50 into their line haul rate.”
Landed cost is not a new phenomenon. Companies have been striving to know what it actually costs to import for decades.
“Total land cost is something that’s been around forever — since the beginning of trade,” said Anthony Hardenburgh, vice president at global trade management solutions provider Amber Road.
He said the advent of e-commerce more than a decade ago heralded a drive to achieve landed cost calculations as companies saw new opportunities to import and export. But despite the enthusiasm, those turn-of-the-century landed cost mechanisms often failed to capture all the costs, so that the cost to ship a laptop from the United States to Brazil might have been double the cost of the laptop.
The inaccuracy of those calculations — or more correctly, a lack of applications able to help importers ensure all the cost were measured — a decade ago is likely what led to waning interest in the concept. And that’s still likely why far less than half of importers today consider it a high priority.
But as global trade management systems and transportation management systems have become more robust, it’s possible that importers could once again focus on this key metric.
The reality is that landed cost sort of resides on the overlap between global trade management and transportation management. There are cost elements outside of those systems that can go into a landed cost calculation, but shippers need to decide on a foundational system on which to base their calculations and then draw in other cost elements as necessary.
In lieu of using or adopting a system, shippers can turn to their 3PLs, who may have developed their own mechanism for capturing landed cost or white labeled a technology developer’s solution.
So shippers seeking landed cost have a decision to make, and it’s not unlike many other technology questions they face these days: build the capability in-house, choose a technology vendor to give them the capability to do it themselves, use a technology vendor and have them manage the function, or turn to a managed services provider to handle it in a completely outsourced way.
“What it really means is, what are the costs of one item leaving one country and coming into another?” Hardenburgh said.
The basic informational components, he said, are: destination and origin countries, classification, per unit cost, the Incoterm, transportation costs (inland and international), and insurance costs. C.H. Robinson advises that SKU (stock-keeping unit) level detail is a must for a proper calculation.
“There are a lot of fees within transportation costs,” Hardenburgh said. “Some countries have differences in provincial taxes and fees. You can’t just say I’m going to Brazil, you have to say which province.”
To get the most out of a landed cost endeavor, shippers need to determine which costs are critical to their business.
“The tricky thing about landed cost calculations, and this may be part of why there seems to be a relatively low percentage of shippers doing it, is that it really needs to be tailored very specifically to each individual company and it has to start with an understanding of your company’s goals in completing the exercise,” said Virginia Thompson, senior director of import/export operations and trade compliance for Euromarket Designs, the parent company of Crate & Barrel. (Thompson is also a member of American Shipper’s editorial board.)
“One company, for example, may consider it merely a financial accounting process, as a double-check against general ledger coding of invoices. A retailer may be using it to measure buyers’ performance in the area of gross margin calculations. Another company might need the calculation in order to charge different departments or business units. Or it might be used as a way to gain visibility into supply chain decisions and how successful they were,” she said.
Thompson said there are myriad ways to configure the calculation, but again, all are based on the costs that impact a shipper’s specific supply chain.
“Knowing what your goals are will drive the decisions around which elements to include,” she said. “Most will want to roll in at least most transportation costs, duties/taxes and commissions or fees paid to third-party service providers (brokers, buying agents, banks, forwarders, etc). Generally other assist-type costs like packaging will also be included. Some of the costs that may or may not make sense to bake in are internal resources time, transportation to subsequent distribution locations past the original landing location, and costs that are not routine, like an off-loading fee because the specific container was overweight or detention due to a Customs exam.”
No Magic Bullet. Will McNeill, a principal analyst at Gartner, said shippers should not think of a landed cost calculator as a separate product to purchase.
“I think the tools can give companies a lot of information, but it’s not everything,” he said. “Generally, it’s not this distinct piece of software. It’s generally functionality embedded within something else. A GTM platform can pull in logistics and compliance information, but then it would have to reach to other systems to pull transport costs for, say, domestic trucking or sourcing costs.”
McNeill said a complicating factor when it comes to understanding the meaning of landed cost is that there really isn’t one definition.
“Everybody defines it differently,” he said. “Is it the total cost to serve, or to deliver? It can include a hundred different metrics. Companies are left up to their own devices to figure out what it means to them. Shippers do have a good handle of what the major pieces are, but do they know what the values are. They might not know all the fees associated with all the components. So they know what could be included, they just don’t know necessarily what the values are.”
So what is a good starting point? McNeill said GTM providers are a good start, though shippers could also look to their sourcing and procurement vendors, realizing they would still have to feed in all the logistics costs.
“3PLs are in a good position to help shippers with this,” he said. “A lot of 3PLs are working on control tower concepts, starting to reach beyond what they do, and acting as 4PLs.”
Hard Work. It’s not hard to find a total landed cost calculator. Just perform a Google search and any number of Websites will claim to offer the tool. The problem is that calculating landed cost is not as simple as calculating an estimated mortgage payment.
To get an accurate picture of landed cost typically requires a shipper to draw from multiple data points in a handful of systems. Even that process can just result in an estimated landed cost, not an actual landed cost, depending on how real-time the information sources are.
“Finding or designing a system in which to do the calculations is not easy,” Thompson said. “I suspect this is at least in part a result of the need to make one’s calculations very individualized to each company. We have utilized a couple of different tools over the years, but we have yet to come up with a solution that is truly automated.
“Part of the reason is that the data needed is generally held in numerous systems and/or received on paper invoices,” she said. “So, most of our calculations require a trained associate to enter data pulled from several sources into the calculating software. Because some costs have not even been billed at the time of receipt, which is when we lock in our landed cost for an item, associates need to have a deep and broad understanding of what all costs a given shipment will incur in the future. For that reason, we don’t even train associates to cost our import files until they have been in the department for at least six months.”
O’Brien stressed shippers have to be realistic going into this endeavor. It can take significant time and effort upfront to stitch together all the components of a landed cost calculation.
“With our customers, it starts with a discipline of the customer to capture this and share it with us,” O’Brien said. “It’s not an easy commitment. You have to keep it up to date, every time a SKU changes. You have to make it part of the process — all flowing to us.”
C.H. Robinson has made landed cost a key piece of its Navisphere platform, which the company released earlier in 2013.
“My message has been that the technology to capture this has been a missing piece,” O’Brien said. “It certainly was a big trend several years ago, but we didn’t see anybody able to capture everything you needed to achieve that.”
“There were companies able to supply it from a customs-level or just the transportation or just the inventory,” said Matt Prindiville, C.H. Robinson’s director of global freight forwarding IT. “Now the technology is starting to catch up and capture all the facets. We’re smart about it now. We can make richer, on-the-fly decisions. We think of a question and answer it very quickly. That’s what’s changed from my point of view.”
Correct Calculation Timing. The elusiveness of landed cost accuracy has been a historic problem.
“Early attempts to build landed cost systems suffered from several fundamental design flaws and weaknesses,” the cloud-based supply chain software developer GT Nexus said in a white paper on global sourcing. “Data needed to feed the systems was scattered and isolated.”
The paper cites these disparate sources of information to make up the calculation:
- Shipment data came from the ocean or air carrier, via a Website lookup or partially complete integrated shipment status message.
- Other logistics cost data had to be obtained from forwarders, 3PLs and customs brokers.
- Product purchase costs came from an ordering system or a supplier’s invoice Import fee and government cost data came from error-prone third-party content providers and/or brokers.
- Other fees were left out or inaccurately assigned because they did not exist in an accessible system, they were not tracked, they had to be manually figured out, or they were merely assumptions or “rough cuts” that prorated a consolidated cost.
But it goes beyond the mere difficulty in collecting data from all these sources. The data has to be timely and accurate. Traditional methods of collecting data from non-integrated sources led to conclusions that left little time for action.
“Any knowledge gained about excessive costs was learned well after the product was delivered, priced and sold — far too late to take any corrective actions,” GT Nexus said. “Unfortunately, these ‘surprise’ costs and extra fees came right off the bottom line, reducing the margin on the product, or even pushing it into a loss.”
GT Nexus advocates what it calls global cost control, in which users leverage its network to link the real-time information of supply chain partners to create an accurate picture of landed cost. That’s opposed to guessing what the landed costs are prior to the shipment, at the risk of being wrong, or calculating them after the fact, in which case the information is obsolete.
“Most of our customers who use landed cost (and supply chain intelligence) look for the impact of expedited freight on their unit cost,” GT Nexus spokesman Greg Kefer told American Shipper. “That’s the big issue most are driving towards. I think landed cost has little to do with platform and more to do with focus. Most companies look to drive transportation-spend down and believe that has a direct correlation to lower landed cost.”
Uptick In Demand? So what to make of actual demand for landed cost tools? Does it qualify as “like to have” or “need to have”?
“It depends on who we’re talking to in an organization,” O’Brien said. “Transportation and logistics are focused on container utilization. If we speak to the CFO or merchandiser, that conversation jumps quickly into total landed costs. It depends on who they are and what their responsibilities are. But the demand has been there. I think the market has been underserved both domestically and internationally. The demand has been especially high on estimated landed cost — deciding on where to source, so they have that information against a forecast.”
McNeill said he notices interest in landed cost tends to “peak, and then wane.”
“It’s still a manual process,” he said. “You still need to do some integration to get it. It’s a symptom of the enterprise-to-enterprise connectivity issues that shippers have in general. Supply chain visibility is in a similar position. If they can do a good job of that, the costs of doing total landed cost will come along for the ride.”
Integration Metric. Getting a true landed cost picture enables all sorts of knock-on benefits. Specifically, it can support an importer’s procurement process and influence sourcing decisions.
But to achieve that level of planning sophistication, a landed cost calculator should sit next to a transportation management optimization engine.
Hardenburgh said the difference is having a pure landed cost focus versus a trade planning focus.
“It lets you look at the whole picture,” he said. “Where should I locate a plant? If I’m going to have a hub to reach a certain market, where should I be bringing this in from? It expands beyond the duty/tax/fee implications. It also looks out and says, what are the restrictions you should also be considering? Say, the controls and costs associated with bringing monitors from China to Mexico are too high, so you’ll bring them in from another location.
“Transactional landed cost is out there and necessary, but trade planning is getting to where that CFO is looking at the more macro view of this,” Hardenburgh added. “Companies are still making sourcing decisions in an old-fashioned method. The reality is that transactions are still done on paper. But folks are realizing at the C-level, looking at the company holistically, where is that next plant going to go, where do we bring this product from. They’re looking at hundreds of inputs.”
Part of the transition to a trade planning focus is that the cost savings aren’t immediately apparent, making it difficult for the import department to move it up the investment priority ladder.
“One thing that’s difficult to quantify is that they look to automation to save money for what they’re doing today,” Hardenburgh said. “You’re not going to let compliance managers in various countries go because of automation. The real (return on investment) is getting to these decisions more quickly, with more accurate information. Or it may make you consider an option that you wouldn’t have ordinarily.”
He said the pitch is now not aimed solely at logistics departments, but at the C-level.
“At Amber Road, any time anyone’s pushing solutions, it revolves around landed costs. Ultimately talking about how I can most effectively cost wise get my product to someone. Landed cost has gone beyond transactional. It’s going into forward-thinking procurement decisions.”
Thompson said an integrated management approach aids in developing a true picture of cost.
“One thing that helps is if the compliance, logistics and financial aspects of international shipments are all managed by the same team/department,” she said. “We are structured that way at Crate&Barrel, and I feel that it helps to drive accuracy in our calculations of landed costs. With a more siloed structure, one will need to ensure that systems and processes support excellent cross-departmental communication.”
Near-shoring. It’s hard to separate a discussion of landed cost from that of near-shoring. When shippers arrive at accurate landed costs calculations, and use them to inform sourcing and procurement decisions, it will inevitably impact whether they decide to move production closer to their end-consumer market.
According to the latest AlixPartners Manufacturing-Sourcing Outlook, released in April, landed costs remain the primary decision factor for companies that have, or are considering, near-shoring.
“Cost is, as ever, a main driver: 58 percent of the executives surveyed said they have reduced or expect to reduce total landed costs by 5 to 20 percent as a result of near-shoring,” the report said. “Those cost savings are expected to come from a wide variety of sources, with the most attractive potential advantages being lower freight costs and improved speed-to-market/lower inventory or in transit costs.”
The report specifically said the landed cost equation between United States and China could reach an inflection point by 2015.
“In China, major considerations include strengthening exchange rates against the U.S. dollar and internal wage inflation; the latter has been on a steady and steepening incline since 2005,” the report said. “If we assume that historical wage inflation trends will continue and that the Chinese currency strengthens by 5 percent a year — while other currencies stabilize — and that ocean freight rates increase by 5 percent annually, we can predict that China’s landed cost will approach U.S. cost by 2015.”
Results, of course, may vary not just depending on the supply chain, but also on how landed cost is calculated. If what goes into landed cost is in the eye of the beholder, that’s because each beholder views the equation differently.
- More than two-thirds of importers don’t have landed cost functionality — it doesn’t seem to be a high priority.
- It takes diligence to piece together the disparate components of the landed cost calculation – shippers often need to draw information from several systems.
- There’s generally no standalone tool that captures all the data points, though 3PLs and managed services providers can help.
- Accurate landed cost calculations can influence procurement and sourcing decisions — it’s not just about knowing bottom line transportation and compliance costs.
- Landed cost and near-shoring are inextricably linked – the landed cost gap between Asia and the Americas is narrowing.