For companies in the wholesale distribution sector, keeping a tight control of costs is one of their most important activities. In a business where margins are often tight, knowing exactly what your outgoings are and how these break down is vital, as without this knowledge, you could find any profits you are expecting wiped out by unexpected expenses.
Central to this is calculating landed costs – or the total cost of a product from start to finish. Understanding this enables businesses to more effectively manage their supply chain from end-to-end and be sure their investments deliver a return. But too often, this is an area that proves problematic because firms do not have the right tools in place to provide them with accurate figures.
What factors need to be considered?
Part of the issue is that calculating landed costs can be an extremely complex process, with many factors that need to be taken into consideration. And as supply chains become ever more fragmented and global, this situation only gets harder for businesses to handle.
For instance, it was noted by Aberdeen Group that the logistical costs of operating a global supply chain can be between six and 11 per cent of a firm’s revenue – which it said is typically three to five times higher than those of a purely domestic operation.
But many of these expenses are hidden. As well as the cost of items themselves, you have to consider brokerage fees, shipping costs, customs duties, tariffs, taxes, insurance, currency fluctuations, packaging costs and handling fees. The exact factors involved may differ from supplier to supplier, so it’s not simply a case of finding a one-size-fits-all model for calculating totals.
What does this mean?
Failure to keep track of all these costs can result in nasty surprises for firms that only consider the headline expenses of their items.
For example, a distributor in the UK sells USB cables to customers at a price of £3.50 per cable. It solicits quotes from suppliers in China and opts for the cheapest at £1 each, so places an order for 7,000 cables.
However, likely additional costs will include shipping fees and duties as well as domestic delivery costs, which combined could total an additional £1,500. There are also other factors to take into account – such as storage costs and packaging – meaning if the distributor fails to factor in the additional costs they may find they either have to sell the cables at a loss, or raise prices and risk losing customers.
Please see our related blog post “How NetSuite can be used to improve the calculation of landed costs”. This short article describes how NetSuite Advanced Inventory could allow you to produce much more accurate reports on inventory profitability.
Alternatively, please don’t hesitate to get in touch with one of our experts.
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