Several years ago, one of the world’s most famous secret recipes made national headlines when its highly secure location was changed for the first time since 1925.

That recipe -- the formula for the original Coca-Cola– is considered so vital to its parent company’s success that only two living people at a time are said to be privy to its contents. 

Those of us who work in global supply chain management can relate, because our industry also has a failsafe formula. 

Landed Cost: The Basic Formula

The formula in question is landed cost, an activity that enables businesses to more accurately assess the total expense associated with manufacturing products in one location and delivering them to another. Companies that apply it correctly can make more informed decisions about whether potential moves, such as a shift to a new country of origin, will truly deliver the expected savings. By contrast, companies that ignore it could find themselves blindsided by higher-than-anticipated warehousing, shipping and other expenses. 

Like original Coke, landed cost has proven to be enormously successful. But the similarity ends there, because unlike that concoction, its list of ingredients is not closely guarded or particularly secret. In fact, most engineers can tell you that it includes the following:

Labor. As the primary impetus behind many companies’ manufacturing moves, the reason for this line item’s presence should be obvious. There can be vast differences between compensation rates and other HR expenses from country to country, and even from state to state, so it’s always a good idea to be open to lower-cost possibilities. At the same time, it’s also important to be mindful of the axiom, “You get what you pay for,” because sometimes especially cheap labor comes at the price of productivity or product quality. 

Transportation. A change in venue will usually mean a change in shipping distance – and a corresponding increase or decrease in fuel expenses. However odometer considerations are really just the tip of the iceberg. Among other things, your calculation should also carefully examine what a proposed move will do to your company’s modal mix, carrier options, shipping rates and need for specialized services. 

Inventory carrying cost. Longer shipping distances, particularly those that involve international transits, inspire or require higher inventory levels because of increased door-to-door transit times and the possibility of disruptions. So before committing to a particular location, determine how many days or weeks it would add to or subtract from your company’s current supply chain. Then calculate how this would impact your required inventory levels – and the corresponding interest, obsolescence, depreciation and insurance premiums your company would be required to pay. 

Warehousing. Although this is typically a much smaller component than transportation, it’s still important to consider how a move would increase or decrease your company’s required warehousing footprint, personnel and equipment -- and to plot the additional expense or savings associated with either. 
Border crossing. When moves involve a change of country, expenses such as duties, taxes and documentation go with territory. Just how substantial these expenses will be largely depends on a product’s state of completion at the time of entry, whether it will be passing through a free trade zone and which country it originated from.
Systems. Although every supply chain uses these to some degree, it’s generally understood that the more miles, modes and players a supply chain involves, the more it will need to rely on – and pay for – technologies to support them. When evaluating the financial pros and cons of different locations, compare how much connectivity and technical capability you’ll need to manage the inventory flow from each. Then factor in their price differential.

Premium shipping. A move to any location that’s considerably farther away opens the door to more potential disruptions -- and the need to offset them with expedited shipments. Regardless of whether these shipments involve air, air-sea, sea-air or time-definite ocean, two things are certain: They will almost certainly be necessary from time to time, and they will be more expensive than standard shipping. Anticipate and account for this in your final calculations.

Landed Cost: New And Improved

Even if you only use these basic ingredients, you should find yourself far ahead of the game in terms of avoiding relocation-related sticker shock. 
However that doesn’t mean you should make the mistake of assuming they’re the only landed cost components your company might need to consider, because like each family’s preferred recipe for meat loaf, there’s always room for individualization. 

Just as important, don’t assume the formula is written in stone, because in truth, it’s constantly evolving in response to new economic, social and political developments. For example, recent additions to the mix have included:

Fluctuating oil prices. These have made the issue of total distance covered that much more relevant – and fuel-efficient transportation options that much more vital. 
The rise of the omnichannel. As online purchases continue to grow, the need for better last-mile delivery access has escalated, even for companies that never imagined being major players in the e-tail sector. 

Sustainability. Don’t be misled by this winter’s record lows: The concern about global warming and carbon footprints – and need for companies to demonstrate high levels of environmental sensitivity – has never been stronger. 

Increased security. Since the events of Sept. 11, 2001, voluntary and compulsory cargo security initiatives have become a way of life for international shippers – and so have the expenses ( personnel, equipment and systems) involved with staying on top of them.

New consumer markets. The meteoric growth of manufacturing in places like China has not only created countless jobs, it’s created a vast new group of consumers who are ready to buy. Which means landed cost isn’t just about the expense of transporting goods to consumers to the Americas or Europe. It’s also what it costs to reach consumers in Asia. 

How Many People Need To Know?

Like all truly great recipes, the formula for landed cost is one that deserves to be shared – and not just with your engineering and supply chain teams.

Pass it along to your stockholders if you want to manage their expectations about why they might not be seeing significantly bigger dividends even after a move to a lower-cost labor market.

Get your senior management up to speed if you suspect that you’ll need to request a substantially larger logistics budget to accommodate a new location’s longer or more complicated supply chain demands.

And by all means, educate your customers about it, because knowing what truly goes into product cost will give them a better understanding of why factors like fuel price increases sometimes result in them having to pay more for your products.

Landed cost may not be the stuff of which headline stories are usually made. 

But that doesn’t mean it’s not the real thing. 

APL Logistics is one of the world’s largest providers of global supply chain management services. In addition to offering landed cost calculations, optimizations and simulations, it supplies a wide range of warehousing, transportation and other logistics services in more than 60 countries across the world.