Resources · Sourcing
Landed cost: what actually goes into the price of imported goods
Landed cost is everything it takes to get the goods onto your warehouse floor, not just what the supplier invoiced. On a typical import it is noticeably higher than the quoted price, and the gap is not the same for every supplier.
The definition, and why it matters
The unit price is what the supplier wants. The landed cost is what you pay. Every comparison between suppliers, and every margin calculation downstream, should be built on the second one, because it is the only figure that includes costs that differ by route, by Incoterm and by country.
A worked example
An order of 1,000 units at a quoted 50 per unit, bought on a free-on-board basis, so the supplier delivers to the ship and the rest is yours. The figures below are illustrative; yours will differ, but the shape of the sum will not.
| Component | Amount | How it is worked out |
|---|---|---|
| Goods | 50,000.00 | 1,000 × 50 |
| Ocean freight | 4,000.00 | Forwarder’s quote |
| Insurance | 250.00 | 0.5% of the goods value |
| Customs value | 54,250.00 | Goods + freight + insurance (see below) |
| Import duty | 2,712.50 | 5% of the customs value |
| Port handling and clearance | 900.00 | Agent’s invoice |
| Inland transport | 600.00 | Port to warehouse |
| Landed cost | 58,462.50 | 58.46 per unit |
The quoted price was 50. The landed price is 58.46, which is 16.9% more. None of that is a mistake or an extra on anybody’s part; it is simply the rest of the journey.
The parts that surprise people
Duty is charged on more than the goods
In many countries the customs value includes freight and insurance (the CIF value), so the duty is charged on 54,250 here, not 50,000. A few countries use a value that stops at the ship. Which one applies is a question for your customs broker or the tariff of the country you import into; do not assume. Also confirm whether VAT or similar is recoverable, in which case it is a cash timing cost rather than part of landed cost.
The Incoterm moves costs around
Two quotes at the same unit price are not equal if one says ex-works and the other says delivered. The first leaves you to pay for inland transport at origin, export clearance, freight and insurance; the second has already priced much of that in. Before you compare, put both on the same basis. There is more on the terms themselves in the article on comparing quotes that are not comparable.
Currency is a cost, not a conversion
If the invoice is in euros and your costs are in another currency, the landed cost is only as good as the rate you used. Use the rate you will actually pay on the settlement date, or add a margin for the movement between order and payment. Two suppliers quoting in different currencies can swap places on a small move in the rate.
Time has a price too
Goods in transit are money you have paid or committed and cannot use. A longer route that is slightly cheaper per container may cost you more in inventory held for the extra weeks and in the safety stock needed to cover its variability. This is rarely in a landed cost calculation. It belongs in the decision.
If the cheapest quote on the page is cheapest because a cost has been left for you to find, you have not found a saving. You have found an unbudgeted invoice.
What people get wrong
- Adding freight as a single percentage across all suppliers, when it depends on the route, the container fill and the season.
- Leaving out the small lines (documents, terminal handling, inspection, local delivery) because each looks too minor to matter. In the example above, the port and inland lines alone were 1,500 of the 8,462.50.
- Using last year’s duty rate or the wrong tariff code. A code that is one digit off can mean a different rate.
- Forgetting charges that only appear if something goes wrong, such as storage or container demurrage. They are not predictable, but they are not zero. See demurrage and detention.
In the software
Procurement Control Tower puts quotations on a landed basis: each offer takes its own currency and exchange rate, duty percentage, and freight and clearance, and the comparison ranks them by what they cost standing in the factory. You can see this on the Run the numbers page, where the cheapest quotation and the cheapest landed one are not the same supplier.