The big calculation

While the term Total Landed Cost has its origins in finance and accounting, its application within the supply chain and logistics sphere was never before time as the onslaught of globalisation became ever more formidable.

Manufacturing & Logistics IT spoke to some of the key supply chain software solutions providers about the true meaning and significance of the term and the positive influence such a calculation can have on the bottom line.

Over the past few years there has been a trend for many manufacturers and retailers to source from low-cost countries and this has led to many organisations moving their manufacturing base or their sources of supply to places such as China, India or Eastern Europe. However, as Razat Gaurav, vice president & general manager global logistics at i2, points out, rising fuel costs, lead-time variability and quality factors mean decisions concerning where to source from should be made in a more holistic way taking into consideration all the various cost elements. This has led to the adoption of the industry term Total Landed Cost; or as some people prefer, Total Delivered Cost, he explained. This approach is centred around making sourcing decisions and is based on taking into account not only the price of the raw materials, parts and the cost of production, but also transportation costs, which are now becoming a larger percentage of the overall cost. 

Evan Puzey, chief marketing officer at Kewill, primarily defines Total Landed Cost as calculating exactly what expense the business has had in getting a product to a specific point in the supply chain. I think that, today, Total Landed Cost is starting to see the transition from being a term purely applied to accounting tasks to that of the whole supply chain picture; from transport management in terms of fleet size and warehousing in terms of the value of stock held. Leo Valentin, business development manager EMEA at 3M Supply Chain Solutions, also points to Total Landed Costs origins as a financial term and its arguable similarity to the term Total Cost of Ownership (TCO). When we talk about TCO we are basically referring to the attempt to include every piece of cost that can considered over a reasonable period of time, he said, adding that this can naturally be applied to the world of manufacturing and logistics.

Holistic decision making

In terms of transportation costs, Gaurav stresses that companies need to consider indices and taxes, which can vary dramatically from country to country, as well as the inventory tradeoffs based on lead times. He adds that they should also take into account factors concerning the quality of the product that theyre sourcing as well as some qualitative risk factors that may be pertinent, such as the region, the economy or the specific companies that are being dealt with. Taking into account all these factors can really help companies make a more holistic decision in terms of where to source from, he said. When youve done the analysis from a Total Landed Cost perspective as opposed to just looking at the price quotes from various suppliers or manufactures some very counter-intuitive decisions then need to be made. You may have a price of a part from China that may be a lot lower compared with a quote from a supplier in India. But even though the price of the part may be higher in India, given all the various other cost factors the duties, taxes, transportation costs, the lead times and various qualitative factors you may realise that youre better off going with a supplier that quotes a slightly more expensive price for the part itself. So I think sourcing & procurement organisations and senior executives within companies that need to decide where to manufacture and where to source from, are becoming more savvy from a supply chain perspective.

Puzey maintains that the concept of Total Landed Cost started to don a grander mantle when globalisation became a bigger concern. He points out that, for many companies, their supply chains have become more complex since shifting all or some or their manufacturing operations overseas; and as a consequence the Total Landed Cost equation has also become more complex. In the past it might have been a case of delivering goods half an hour up the road, but now many companies have had to start looking at the effect of things such as free trade agreements, export & import duties, he said. Therefore, the whole calculation of Total Landed Cost has naturally become much more difficult to do.

Software for the task

So what of complementary software packages on offer; have they moved forward in parallel with the extra requirements dictated by Total Landed Cost best practice? Gaurav made the point that, in certain instances, due to the complex nature of some companies sourcing requirements, vendors should not only think about providing an out-of-the-box-type software solution to aid Total Landed Cost practice, but should when necessary be willing to work with the company in question to find a solution that is the very best fit for its procurement requirements, etc. As an example, Gaurav cited a project i2 has been involved with, concerning a large global automotive OEM. Our work with the Total Landed Cost approach started with various solutions and engines weve had for several years now; including inventory optimisation and transportation planning & optimization, he said. However, when the automotive OEM wanted to take a Total Landed Cost approach to help it make sourcing decisions for its parts, we worked jointly with the company, leveraging the various engines we had, but more importantly leveraging our platform to re-wrap a work flow that allowed the companys sourcing directors to make better decisions on a worldwide basis.

Puzey makes the point that, in terms of the basic Total Landed Cost calculation, this is a fairly straightforward process; you just add everything up and come up with a number at the end, he said. However, he observes that many companies who started Total Landed Cost-type initiatives in the recent past found they couldnt get much of the appropriate data needed to make an accurate calculation. For example, a lot of these companies suppliers didnt have the electronic tools to share order and invoice information, etc., or could only provide the information by phone or fax, he said. But I think this is now starting to change as a higher percentage of the trading partners in the supply chain have access to an electronic means of providing this type of information, thereby making it more likely to calculate an accurate Total Landed Cost. Valentin also believes that, in terms of technology and trends that are aiding Total Landed Cost best practice, the market is seeing evidence of more connectivity; not just in terms of the software but also with regard to the suppliers and customers. So, the supply chain is being looked at it in a more holistic way, such that when a company is either sending out material or receiving it, it has the most up to date information because its connected to its partners, electronically.

Valentin also outlined how waste- and cost-inefficiencies that can become clear when undertaking a Total Landed Cost/Total Cost of Ownership calculation: One area within strict manufacturing includes poor production planning or demand forecasting, he said. Then, there are specific warehousing processes where companies want to become as efficient as possible within the four walls. So, companies want to ensure their inventory stock is at a cost-efficient level, they want to have their isles set up in the most space and time efficient way, and they want to make sure that their picking processes are as efficient as possible. He adds that, in this regard, there are modules available that will basically do an evaluation of the places that the company picks from more often, and then ensure that those are the places that have the fastest moving items. 

In terms of manufacturing, Valentin points out that there are a number of software tools and methodologies that companies could utilise to reduce waste. These companies could certainly look at using Lean Six Sigma processes that basically look at one piece of the supply chain and then try and ensure that the company is only engaging in the activities that add value, he explained. Lean Six Sigma is a great way to map-out the pieces that add value and then propose improvements to the areas that dont add value. With Lean Six Sigma, companies can take a very structured approach to their processes.  

Green and the supply chain

With regard to Total Landed Cost best practice, there is also a green advantage to be had, as Gaurav explains: In our experience, transportation and logistics functions account for around 70 per cent of a companys carbon footprint it varies from industry to industry, but this is an average calculation, he said. And some early-stage legislation around carbon emission trading and quotas that are being allocated in various parts of the world will become increasingly important to take into account. The good news is that, in addition to the cost-saving benefits of a Total Landed Cost-based approach within the manufacturing, logistics and retail sectors, a more efficient supply chain is also a more environmentally friendly supply chain.

Puzey agrees: Because of the rising importance of green issues, more companies are now looking at Total Landed Cost to determine a balance between what are the green miles versus the accounting cost, he said. So, were seeing more and more customers keen to get this sort of information and use it to enable them to make greener and more cost-efficient decisions. Valentine also believes there is a link with green best practice in terms of companies trying to be as efficient as possible in areas such as optimising transportation; whether this involves rail, ship, air or road. This has implications on companies supply chain and on the software needed to support that, he said. Also, in terms of green best practice inside a companys four walls, such as the warehouse, Valentin believes that having access to better information via better software systems can enable companies to make better decisions, which could have implications that facilitate a win win cost-saving and greener supply chain scenario.

Razat Gaurav: in addition to the cost-saving benefits of a Total Landed Cost-based approach within the manufacturing, logistics and retail sectors, a more efficient supply chain is also a more environmentally friendly supply chain.

Evan Puzey: I think that, today, Total Landed Cost is starting to see the transition from being a term purely applied to accounting tasks to that of the whole supply chain picture; from transport management in terms of fleet size and warehousing in terms of the value of stock held. 

Leo Valentin: we are basically referring to the attempt to include every piece of cost that can considered over a reasonable period of time.