Landed cost: The hidden costs of customs and shipping

By Dylan Blankenship

For new importers, hearing about "the China price" that is a fraction of what domestic suppliers charge always commands attention -- even with prices climbing. But a quote from a China factory is only the beginning of the calculation, and there are many more costs and variables that determine your landed cost -- meaning the total cost of purchasing the product and getting it to your warehouse or final destination.

The numbers do not always produce favorable outcomes. Some of the most vital insight comes by learning from mistakes. Below are some actual figures from a failed 2007 marble tile import venture.

At the time the product was purchased, US retailer Floor & Decor was selling a certain type of marble tile for US$1.73 per sq ft, so that was a target price. A Chinese supplier was pricing an identical marble tile for $0.63/sq ft. An order was placed for 7,500 sq ft.

Upon review of the concluding landed costs, it was determined the project was not cost effective.

Looking at a second order, we identify the standard costs that factor into any order plus a few other possible incidentals, and then detail the key categories that will affect your landed cost.

Standard costs
The following are actual figures from an import order for a 20-ft container of marble tile, FOB Xiamen, to Doraville, Georgia in the United States.

Other costs

• Customs inspection, incl. storage, inspection, moving to inspection site, etc.
• Courier/postage costs
  
• Any deviations from pro-forma invoice total value (for example, invoice changes or additional items to be classified)
  
• Additional time needed to unload container
  
• Demurrage calculates differently depending on the port
  

Managing the key costs
Now for a deeper look at each key cost and some ideas on how to minimize and manage them.

Invoice price: FOB rate means the factory pays trucking, customs clearance, etc (all fees) associated with getting the container from the factory on board the vessel at the port. Once the container is loaded, you are responsible for all costs to the final destination. These are typical FOB terms, but it is still good business to clarify the terms of sale. Clarify what charges are the responsibility of each party -- factory and buyer/importer. Assuming the factory is quoting FOB, your invoice price will only include the cost of the products from the factory and may not include the costs listed below.

Shipping costs: Depending on whether you choose air freight or sea freight will be a determining factor when calculating your shipping costs. Sea freight will likely be much cheaper but will also take longer. International air freight can be quite expensive but is sometimes necessary depending on your time to market commitments.

Manufacturers often have resources available to handle logistics for your shipment. Freight forwarders and customs brokers also have partnerships with ocean carriers and freight lines. If you will be shipping large numbers of containers, stick with one ocean freight company and negotiate a contract. This will lock in low rates and also help you avoid fuel and other surcharges.

If you do a lot of business or know the right people you can get "VIP treatment" at lower cost. Ocean freight providers quote charges in two ways: 1) by the shipment with active rates on the day, or 2) on a contract basis with heavy discounts.

Smaller importers can consider piggybacking with the big boys! Search your contacts and your contacts' contacts for a large importer or logistics company. You can often negotiate to ship containers under a big player's existing contract. You pay less and at the same time help your new partner meet their shipping quota (be sure to remind them of this during the negotiation). Many times your customs broker can put you in touch with the big players.

Customs clearance fee: Entry fees cover customs clearance and processing services relating to your container of goods, based per entry.

Insurance: The main types of insurance are marine cargo insurance, freight forwarding insurance and cargo insurance. These various insurance types protect the importer from unforeseen disasters such as the ship sinking, fire, accidents, pirates, etc. As with standard domestic shipping, various options are available to choose from, typically costing more depending on the amount insured.

Customs bond: A customs bond or surety bond is a guarantee from a bonding company to the government (customs department) that the importer will faithfully abide by all laws and regulations governing the importation of merchandise, will make the goods available to Customs for inspection, and will pay all additional duties and fees incurred as part of that process.

Customs duties/fees: You'll need to calculate and pay relevant duty costs on your items by classifying your product with a harmonized tariff schedule (HTS) code. Depending on the type of product, duties can add significantly to your landed cost.

Courier/postage: In international trade, there is an incredible amount of document transference both domestically and internationally. Original documentation including bill of lading must come from the factory in China to your customs broker for clearance. US domestic shipping will include communicative documents to and from your customs broker (such as power of attorney) and from them to other entities including ports and logistics companies.

Customs inspection: There are a number of exams that Customs and other agencies will require to ensure the safety of US citizens, wildlife and natural resources. In the US, expect an X-ray exam from the Dept. of Homeland Security to check for contraband and other potentially dangerous items. If you are using wood packaging materials, expect an exam from the Department of Agriculture.

Delivery order/coordination fee: These fees are typical customs broker coordination fees.

Delivery: Particularly with sea freight, delivery from the port of entry to your final destination is sometimes an overlooked cost for new importers. While it is usually possible to pick up product yourself from the port of entry, there are also many "last mile" providers that deliver to your final destination.

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One person has commented on this article.

 1. Untitled
M Labasse, Unregistered

Very thorough and detailed article. For an easy and instant landed cost calculation, buyers may use http://www.asiacalculator.com.

 Posted 2009-07-04 04:11:43

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