1 1 Landed Cost Models John H. Vande Vate Fall 2009

2 2 Frequently Used to Evaluate A product launch Changing a supplier Changing a distribution network Changing modes Changing ports or gateways …

3 3 Features Typically “piece price” and logistics focused Accumulate costs from supplier to … –Factory –DC –Point of revenue, e.g., customer Used at both the SKU level and family level Apply some standardized metric –$/standard case Allocate shared costs and fixed costs

4 4 Typical Components Logistics-Transportation –Freight Ocean, Air, Truck, Rail Fuel Surcharge –Duties, Taxes, Fees Brokerage VAT Forwarding –Customs Duties & Fees Manufacturing –Raw Material Costs Direct material Consumables –Labor Assembly Quality Audit Configuration Shipping Export documentation –Testing Test equipment Inventories –Usually primitive Packaging –In many cases packaging is a major component especially returnable packaging Handling –Sequencing, cross docking, … Management Overhead

5 5 Additional Factors Incidental Costs –Travel Expenses Air Fare Hotel and travel expenses Contract Manufacturing (soft) expenses rolled into the cost of the product –Expedites End of Quarter/End of year demand Unexpected spikes in demand Sensitivity Analysis –Volatile cost components Certain commodity prices Transportation Fuel surcharge FX Labor rates … –Risk-Supply Chain Disruptions A Port Strike on the West Coast A power disruption at CM Limited lift during peak season …

6 6 Examples Ford: China Sourcing –Typically by part or part family –Compare with “landed cost” of current source

7 7 For a supplier to GM – Asked to increase sourcing from Brazil

8 8 Sensitivity to Volatile Variables Certain commodity prices Transportation Fuel surcharge FX Labor rates

9 9 FX Volatility RMB to USD 21% appreciation

10 Inflation Rate China inflation rate – cost of operations

11 Shipping The BDI indicating changes in shipping costs

12 Locating a single facility US On Highway Retail Diesel price Cents/Gallon

13 Sensitivity Analysis [c 1 x 1 /d 1 (x,y)+c 2 x 2 /d 2 (x,y)+c 3 x 3 /d 3 (x,y)] [c 1 /d 1 (x,y)+c 2 /d 2 (x,y)+c 3 /d 3 (x,y)] But that depends on x!

14 Next Supply Chain Design Overview Introduction to Part 2: Managing Variability