Today’s global corporations need the capability to source products from around the world. It enables them to increase product availability, reduce costs and explore new business opportunities. One of the major challenges of global trade is to accurately estimate the total cost of a product – which is also known as Landed Cost. To put it simply, landed cost is the total cost of a product incurred by the buyer.
Why is Landed Cost important?
Extended supply chain costs often constitute over 40% of a product’s cost. This makes it important to accurately incorporate supply chain costs into the overall financial process. Estimated Landed Cost (ELC) is used to accurately estimate these costs and update them with actual costs to provide more clarity on invoices and pro-rating them to shipments, orders and products. As a result, organizations get better insights into outstanding liabilities and can ensure that trade activities comply with rules and regulatory provisions.
In a globalized business environment with complex supply chain management, it is difficult to accurately estimate landed cost. But for organizations, it is crucial to identify the best sourcing option and avoid the risks of hidden costs within the supply chain. With better visibility of anticipated charges prior to generating a purchase order, organizations can make more informed decisions which will enable them to reduce costs, protect profit margins and stay competitive.
How can ELC be calculated?
Estimated Landed Cost (ELC) can be calculated using a web-based application called Landed Cost Simulator. It is part of Oracle Global Trade Management (GTM) and is used to compare estimated and actual costs when shipping an item. The Landed Cost Simulator follows a pre-determined process to estimate landed cost:
Landed Cost Simulator Process
The sourcing options are determined based on:
- Country of Imports
- Classification Type
- Product Information
- Country of Export
- Transport Mode
- Invoice Value
The components used to determine landed cost are:
- Logistics fee
- Brokerage fee
- Bank fee
The Landed Cost Simulator considers these components to determine the total landed cost for different sourcing options. It allows Global Trade Management (GTM) users to compare the ELC across a range of scenarios by considering variables such as country of origin, mode of transport and incoterms.
What are the benefits of calculating ELC?
ELC provides an unrivalled strategic visibility into the information required to support complex sourcing decisions and supplier negotiations. Companies can use this information to price goods more accurately and fully understand the charges that are associated with procurement and distribution of items.
Increased Product Profitability
ELC has the capability to automatically capture and itemize extended costs including freight, insurance, brokerage fees, duties and taxes. These cost components are allocated and assigned to the products to which they apply. Charges can be viewed before or during the shipment of goods and adjusted when actual invoices are matched to the receipts. ELC users get access to detailed item cost tracking and accurate profitability reports. In addition to this, they can also identify opportunities for additional cost reduction per unit by viewing a detailed list of an item’s cost factors.
Companies frequently incur unexpected costs during various stages of the procurement and fulfilment processes. ELC makes it easier to anticipate charges even before the generation of a purchase or sales order, allowing companies to make informed decisions towards cost reduction, increasing profit margins and managing competition.
ELC allows industries with complex supply chains to comply with global best practices. It enables organizations to link the product supply flows with financial processing and reporting. For companies operating in regions with regulations requiring item specific profitability documentation and income tax calculations ELC can help save several man hours. It can also automatically link invoices to receipts which can provide evidence to authenticate inventory cost declarations in financial reports.
Are you curious about ELC and its possible uses for your business?
Write to us on firstname.lastname@example.org for a free demo.