Accurately calculating the total cost of a product is fundamental to financial health and competitive pricing in global supply chain management. While the purchase price of goods is a primary expense, the additional, often variable, costs incurred during transportation can significantly impact profitability. These are known as landed costs, and a comprehensive understanding of them is essential for any business involved in procurement and importation.
In an interview with ERP Today, Aylwin Agraviador, Principal Consultant for the SuitePaths practice at CloudPaths, examines the financial risks of improperly calculating landed costs and details the challenges of manual management.
Defining Total Landed Cost
Total landed cost is the complete cost of a product once it has arrived at the buyer’s warehouse. It extends beyond the material cost to include all fees associated with its journey. According to Agraviador, landed costs are “the combination of tariffs, freight costs, and expenses accumulated to get a procured product to your warehouse for distribution or manufacturing.”
He lists four primary components of landed costs:
- Shipping & Freight: Costs for transporting goods via sea, air, or land.
- Customs & Tariffs: Duties, taxes, and fees levied by governments on imported products.
- Insurance: Premiums paid to protect goods against loss or damage during transit.
- Handling & Port Fees: Charges for loading, unloading, and other port-side services.
The Financial Impact of Inaccurate Costing
Tracking these costs is critical for effective financial planning. “Accurate landed costs are important to help companies realize better profit margins because they can recognize true costs accumulated throughout the procurement process,” Agraviador states. Businesses that only consider material costs when calculating their cost of goods sold operate with an incomplete and often misleading financial picture.
This inaccuracy leads to significant business risks. “Most companies that look at profit margins based off material versus sales costs may end up with inaccurate margins,” Agraviador explains. “Doing so will provide inaccurate prices which can either undercut the profit margins or substantially deter customers from purchasing because it could be too high of a buffer.”
Moreover, overestimating costs to create a safe margin can render pricing uncompetitive, while underestimation directly erodes profitability on each sale. Landed costs can represent a significant portion of a product’s total cost. Agraviador noted that they can account for 15-20% of the total cost or even “significantly more depending on where you’re sourcing from and what tariffs are in play.”
Common Challenges in Manual Landed Cost Management
Many organizations rely on manual methods, such as spreadsheets, to track landed costs. This approach presents several operational challenges, the chief of which is accurate cost allocation.
“Most companies have trouble allocating these landed costs to the correct item distribution,” says Agraviador. “As a result, they cannot accurately depict what each item is valued at.”
For example, within a single shipment containing items of varying weight, volume, and value, a spreadsheet-based allocation method often fails to distribute freight and duties correctly across all items. This results in skewed inventory valuation and flawed product profitability data.
Businesses must move beyond manual processes to overcome these challenges and achieve accurate costing. In the second part of this interview, Agraviador examines how modern ERP systems like Netsuite and expert implementation partners like CloudPaths provide the tools for effective landed cost management.
What This Means for ERP Insiders
The 20% margin is a ticking clock. The market trend of rising freight costs, geopolitical instability, and fluctuating tariffs means landed costs are more volatile than ever. Agraviador’s estimate that they can exceed 20% of material costs highlights a critical risk. For ERP professionals, legacy systems or manual workarounds are no longer viable for protecting profitability. The pressure is on companies to find systems that deliver true cost visibility.
Allocation accuracy is a core ERP requirement. Agraviador emphasizes that the primary failure of manual systems is the inability to allocate costs correctly by weight, volume, value, etc. This is a direct challenge to ERP systems. A modern ERP must have the native functionality to handle complex, line-level cost allocation to provide an accurate inventory valuation, which is the foundation of reliable financial and operational reporting.
Visibility must extend to the warehouse level: The trend towards distributed inventory and multi-location warehousing demands more granular data. As Agraviador points out, a key capability is seeing costs on a per-warehouse basis. An ERP system must be able to answer not just “What did this item cost?” but “What did this item cost to land at this specific warehouse?” This enables smarter logistics and fulfillment strategies.
