As part of global trade, companies need to consider all possible risks and costs to maintain a competitive advantage. Total Landed Cost (TLC) implies the cost of manufacturing a product and its delivery to its final destination to the consumer. This concept has a significant impact on all transportation operations within the global environment. Global supply chains can transform depending on the factors included in the TLC. Each of the aspects included in the concept must be taken into account and evaluated to form the most effective logistics processes.
Total Landed Cost Concept
Total Landed Cost (TLC) within global supply chains can complicate the profit picture and comprise a significant part of the cost of selling products and goods. TLC can be defined “as the sum of all costs associated with obtaining a product, including transportation, inventory, administration, customs, risk & damage, handling and packaging” (Pumpe & Vallée, 2017, p. 853). This indicator also includes hidden costs, which refer to the costs associated with uncertainty, which often result in additional inventory.
Pumpe and Vallée (2017) note that TLC may include different features and characterize different buying situations, as well as supplier selection decisions. Within the framework of global logistics networks, this factor is extremely significant and determines the characteristics of supply chains.
In today’s global environment, it is difficult for modern companies to minimize the volume of TLC. This concept can be formulated differently as “the total cost of a product delivered at a given location, the production cost plus the transportation cost to the customer” (as cited in Gonzales-Ramirez et al., 2020, p. 96). Thus, TLCs include both the initial cost of the product and all costs associated with transporting the product to its final destination. The modern environment is characterized by a high level of competition, as well as the globalization of trade, which requires the development of strategies to minimize the cost of logistics processes and increase their efficiency.
TLC is gaining importance with the increasing complexity of the global trade environment. Pumpe and Vallée (2015) underline that TLC is a critical factor to consider when formulating a logical strategy, but only 50% of companies take it into account (p. 48). A detailed outline of all TLC components is the basis for efficient supplier decision-making. However, since there is no unambiguous description of the composition of the components of this concept and they vary depending on the context, it is more and more difficult for companies to take them into account during transportation (Pumpe & Vallée, 2015). Additionally, no models have been developed that provide a comprehensive approach to optimizing TLC within global supply chains.
Impact of TLC on Global Supply Chain
Currently, global trade is associated with economic downturns as well as transformations in key transportation variables. Thus, in logistics decision-making, companies need to take a holistic approach to assess all the factors that potentially increase the cost of transportation and reduce it. efficiency. Many factors affect the efficiency of supply chains, especially in a global environment. Thus, companies need to consider various qualitative and quantitative risks when formulating a logistics strategy. Within the framework of TLC, changes in races in such aspects as manufacturing costs, transportation, inventory, trade costs, and risk of disruptions can dramatically increase the overall cost of the product available to the consumer, which is a threat to competitive advantage.
In addition to the most evident aspects, TLC is also influenced by various related expenditures. These include costs associated with quality, insurance, duties, taxes, expedites, deconsolidation, and rework or returns. Companies need to identify these aspects along with transportation factors to optimize their network. Particular attention should be paid to high-cost factors and unexpected changes which can significantly affect TLC. Within the framework of global supply chains, indirect costs are especially important, as they imply international trade. It is critical for companies in transportation to choose locations and sourcing with the greatest attention, basing their decision-making on their evaluation.
As part of international transactions, organizations need to calculate and optimize TLC. World ports and warehouses are often congested, leading to higher freight costs. TLC aspects including freight, insurance, and taxes directly affect a company’s gross margin. In particular, this is especially noticeable when the volume of transportation increases, multiplying the TLC for each unit of goods. TLC volume may vary for the same product depending on location, time, and conditions of transportation. Accurately calculating the costs of logistics processes allows companies to manage costs and determine the expected profit from a unit of goods. Overall, more accurate TLC planning allows companies to create logistics strategies that make operations most profitable.
Another important factor when considering TLC concerning global supply chains is risk minimization. Especially during the pandemic, many potential weaknesses in international trade networks have been spotted. In particular, many supply chains were disrupted, resulting in not only a loss of profits but also a shortage of goods. Thus, it is now also important for companies to take care of creating a financial buffer in the form of additional inventory and extra capacity. Thus, in today’s global environment trade requires companies to plan even more carefully the design of supply chains and logistics processes. Minimizing TLC influences an essential role in maintaining competitive advantage.
Companies often try to change manufacturing locations or diversify production to reduce TLC. However, such a reorganization also requires a revaluation of all aspects of transportation, especially freight and duties. This step may potentially appear beneficial, but in practice, when considering all costs, it may not be effective enough. Therefore, for companies, even when reorganizing their supply chains, it is important to evaluate this factor as paramount. With global logistics management, it is also important to take into account the possible volatility of emerging markets and consider the costs in this regard. The company must also keep in mind possible changes within the industry of a particular country, which would require an exit or additional costs. All these aspects are essential when evaluating TLC and shaping a logistics strategy in a global context.
TLC is one of the main characteristics to be considered when designing logistics processes. This concept includes many factors that may be evident and hidden, but invariably affect the cost of transportation. For effective management of global supply chains, it is important to consider all possible aspects and risks to minimize costs and potential failures. TLC is complex and requires a holistic view from logistics managers at all stages of the transportation of goods. This concept is especially important in the modern global context, which is characterized by a high level of uncertainty.
Gonzalez-Ramirez, R. G., Villalobos, J. R., & Meneses, C. (2020). The strategic design of port services based on a total landed cost approach. International Journal of Logistics Management, 32(1), 96-120. Web.
Pumpe, A., & Vallée, F. (2015). The Total Landed Cost concept. Begging for answers. In T. Blecker, W. Kersten, & Ringle, C. M. (Eds.), Operational excellence in logistics and supply chains: Optimization methods, data-driven approaches and security insights (pp. 31-54). Epubli GmbH.
Pumpe, A., & Vallée, F. (2017). A typology for selecting an appropriate Total Landed Cost method in international supplier selection decisions. Transportation Research Procedia, 25, 853-869. Web.