I see a lot of new importers at trade shows. They come to China to find a supplier or a product idea, and they are ready to learn as they go. The first thing they struggle with is working out how to calculate landed cost of the products they want to import.
How to calculate landed cost in a formula
Purchasing price + International shipment + Import duties + Domestic delivery + Risk reduction + Miscellaneous overheads = Landed cost
Landed cost breakdown
If it costs $1 per piece under FOB terms in China, can they deliver it for $2.5 per piece to retailers in their country? Can they sell it $3 online? Will they turn a profit?
Here are the main costs that make up total landed cost in more detail:
1. The green dollars
What I call “green dollars” is the hard costs that you can calculate. More about the soft (grey) costs later.
1.1 What you cannot avoid paying
- Purchasing price from the supplier (including packaging, mould opening…)
- International shipment (under FOB terms), usually managed by a freight forwarder of your choice — be careful, shipping rates vary from month to month;
- Import duties applicable to your product (ask your country’s customs office, or your forwarder, for this information);
- Domestic delivery to a warehouse (and possibly another delivery from your warehouse to different customers).
1.2 What is recommended to pay
You can do without these costs, but they will reduce your risks and might literally save your business!
- Assistance to qualify a supplier, with background checks / factory audits / subjective opinion of a sourcing consultant;
- Quality inspections (to check if your products are acceptable) during and/or after production;
- Tests in a third-party laboratory (in case your product might cause safety issues);
- Letter of credit through your bank (to avoid the risk of losing a 30% deposit if the supplier plays games);
- Product liability insurance (for products that might harm users);
- Transport insurance (in addition to international shipping costs).
- OEM agreement, drafted by a specialized lawyer.
1.3 What you might be forced to pay
Production issues happen regularly in China. They will cost you time and money. That’s why you must target a healthy margin, or you will often end up in the red. Here are a few common examples:
- Several shipments instead of only one, and/or air freight fees (if production is late and your supplier does not accept the responsibility);
- Increases in material costs passed on suddenly by the supplier;
- Depreciation of your country’s currency (for example, if you are in Europe and you pay in USD) between the order and the payment.
2. The grey dollars
Production delays and quality issues can cost a lot to your business, even though you have not included these expenses in the total landed cost of your products:
In the short term, you might have to put out fires at great expense (see part 1.3 above). You might also have to deal with chargebacks and product returns from your customers.
In the long term, it also shows that you don’t deliver as promised. As competition gets tougher and tougher, do you want to appear unreliable in the eyes of your market?
Image credit: pshegubj
