Competitive pricing is critical to any company’s success, and OEMs are constantly seeking to cut the costs of producing products. Many companies focus heavily on reducing material, labor, and other production costs. An overlooked aspect of global manufacturing and distribution costs is a careful analysis of total landed cost (TLC).
TLC includes all costs incurred to produce a product and transport it from the manufacturing plant to the buyer. Key elements include materials and component pricing, labor, overhead, packaging, freight, import duty, customs clearance fees, taxes, insurance, inventory holding and currency conversion. The purpose of calculating total landed cost is to capture both obvious and hidden costs within the supply chain.
The analysis typically begins with what countries key components are sourced from and where the finished product is going to be sold. Add to this equation the benefits of producing manufactured goods in free trade zones and special economic zones that have their own sets of rules, in countries such as China and Malaysia, and analyzing these factors becomes extremely complex. Without country specific trade expertise, and an accurate picture of the entire supply chain, it is impossible to correctly compare true total landed costs for alternative manufacturing locations.
In large organizations, the responsibility for analyzing costs is often distributed between departments with different goals and incentives. Purchasing is responsible for suppliers and is focused on reducing product costs. Traffic or compliance groups are tasked with reducing transportation costs and customs fees. Materials or inventory planners are responsible for decreasing inventory. The true landed cost can only be understood when a comprehensive TLC analysis is completed. Many companies don’t have the resources or expertise in this area, and turn to electronic manufacturing services (EMS) partners who have departments who do nothing but comprehensive TLC analysis and can identify hidden costs.
Defining product price & the hidden costs of supply chain re-design
Total product manufacturing cost includes the price of individual components used in the manufacture of the product, the cost of incoming freight and duty to deliver the components to the manufacturing plant as well as the price of direct labor to manufacture and test the product. It also includes the cost of overhead and indirect labor such as material planners, buyers, and manufacturing, quality, and test engineers.
The location of the manufacturing plant will impact the price of direct and indirect labor as well as the overhead. Lower cost locations such as Mexico or China will have lower labor rates.