What is Landed Cost Tracking Software?
Landed cost tracking software allows distributors to record, manage and allocate landed costs to goods correctly. This is particularly important for distributors that source goods internationally, as this increases the complexity exponentially. And, as every wholesale distributor knows, supply chains have become increasingly global over the last few years. The right landed cost tracking software can provide you with the tools necessary to accurately track landed costs. And the landed cost inventory management software features can allocate these costs back to inventory to create the true costs necessary to come up with competitive pricing that is also profitable. It can help you to cut down on mistakes, oversights and misallocations that could have disastrous financial implications for your business.
What are Landed Costs?
Landed costs are defined as all the costs including the manufacturer’s cost, that are incurred to get goods from the manufacturer’s plant to a distributor’s warehouse. Landed costs are present even for purchases from domestic manufacturers but these are often just goods and freight. In contrast, purchases of goods from a manufacturer in Asia (say) are much more complex. In this case, there could be costs to get the goods from the manufacturer’s plant to the port of origin and loaded onto a vessel, costs for ocean freight, costs for insurance, costs for wharfage and storage at the port of destination, costs for clearing the goods through customs, costs for import duties and tariffs, costs for transportation from the port to a railhead, costs of rail transportation, costs of local transportation to the warehouse, costs of irrevocable letters of credit, and costs of foreign exchange fluctuations. These types of costs are typical in every international trade transaction.
Why are Landed Costs Important?
If you are trying to decide whether to purchase from an international supplier or a domestic supplier, you need to identify and add up all the landed costs in order to make an informed decision. The additional ocean freight, insurance, clearing charges, import duties, and other charges can quickly offset what looked like an attractively low goods cost from an international manufacturer. Particularly in the case of international trade, landed costs add up quickly. For purchases of goods from Asia, the sum of the landed costs could easily be 30% or more of the cost of the goods themselves. These need to be correctly captured and reflected in the overall cost of the goods. Missing or incorrectly accounting for the landed costs could lead to pricing the goods incorrectly and result in unprofitable sales. If your company routinely purchases goods internationally, you need good, landed cost tracking software to help you manage these costs. Otherwise, you could run into significant financial and operational problems.
How To Track Landed Costs?
After you create a Purchase Order (PO) for a vendor, you need to record all the landed costs that affect that shipment with the PO. This may seem straightforward perhaps, but it is not as easy as it sounds. From the placement of a PO to receiving it into your warehouse, it goes through many hands. Internally your sales, purchasing, finance and warehouse departments will all be involved. Externally you have to deal with the manufacturer, the shipper, the insurance carrier, the clearing agent, customs, etc. Many charges though generally known are not always finalized at the same time and in some cases, final billing could come after the PO is received. Ocean freight and insurance will be charged by the container, but a container may include multiple POs, or a PO could be shipped in multiple containers. All these complexities make the job of manually tracking these landed costs quite onerous.
Landed cost tracking software allows you to efficiently record all relevant landed costs with the PO. All these costs and their associated vendors together with details such as the vessel name, voyage number, port departure date, port arrival date, clearing agent, etc., should be saved with the PO. Costs that affect multiple POs may be apportioned between the POs based on some factor. Costs that are not final should be estimated. You should familiarize yourself with how the final costs will be calculated and/or get quotes from the vendors. Then using the same methodology, estimate the costs based on weight, or value, or tariff rate, as appropriate, and save these on the PO as an estimate. All these costs should be continually updated and saved as bills and invoices are received.
Given all the headaches spelled out above, you may ask whether it is worth doing business internationally. Sometimes you have no choice since the manufacturers are now all located in Asia. Sometimes you may be able to access goods much more cheaply purchasing internationally than you could domestically. And sometimes you may need to do this to diversify your risk. Whatever the reason, if you do participate in international trade you will need to master the task of recording landed costs correctly.
How to Allocate Landed Costs Correctly?
If you are correctly recording all the costs associated with an international shipment these landed costs are often grouped in the following buckets:
- Cost of Goods Purchased – these are the costs of purchasing the goods from the manufacturer
- Shipping Costs – these are the costs of packing, containerizing, and freight
- Customs – these are the costs of Import Duties, Tariffs, brokerage and clearing charges and port handling charges
- Risk – these are the costs of insurance, compliance and other risk mitigation
- Overhead – these are generally other operating costs and fees, Letter of Credit charges, other bank charges, exchange rate costs
Once all these costs are identified, apportioned to the PO, and recorded on the PO, they need to be allocated back to each of the products included on the PO. After the PO is received, your landed cost inventory management software should allow you to allocate these costs line by line back to products depending in each case how the charges are incurred. For example, freight is often charged by weight and so could be allocated back to the products based on their respective weights. Similarly, wharfage and port storage and other fees are often charged by cubes and so could be allocated back to the products by cubes or weight. Customs duties and tariffs, insurance, bank charges, LOC charges are computed on value and so should be allocated back to the products based on extended price. Once the allocations are selected, the landed cost inventory management software should allocate each landed cost line automatically to the cost of the product in inventory. This process if correctly followed creates true inventory costs for each product.
Dealing With Subsequent Costs
If landed costs invoices come in after the PO has been received there are two ways to deal with these. The original estimate of a specific landed cost creates a receipt when the PO is received and the landed cost is allocated. When the vendor’s invoice arrives, it can be reduced by the amount of the receipt to give the overage/underage relative to the original estimate. If the original estimate was done properly this overage/underage should typically be small. It can be allocated back to the products through a manual inventory adjustment, or more typically, can be treated as a period expense. If the estimates are done properly, the overage/underage booked to period expenses will be small and will balance out month to month.
If you are going to take advantage of international trade opportunities you need to be able to confidently track your landed costs. Accolent ERP is a Cloud-based solution for wholesale distributors that includes complete PO tracking, landed cost tracking software as well as landed cost inventory management software that together record and allocate costs correctly back to product costs in inventory upon PO Receipt. Contact us to take away some of the headaches of tracking POs and correctly managing landed costs.