Landed cost tracking doesn't catch many headlines in the tech press when it comes to the big data and business intelligence revolution--but maybe it should. In many ways, landed cost tracking is the poster-child for how turning data into information can improve the way business is done.
When it comes to software and business intelligence, fancy reporting tools, graphical analysis, and management dashboards get a lot of attention. And, they should. But before data can be accessed and interpreted, it needs to be effectively labeled and organized. The landed cost story is interesting because it is one of the best illustrations of how improving data labeling and organization allows companies to make better business decisions and lower costs.
Every product-centric business tracks the cost of taking possession of products--whether those costs include just shipping or other expenses like insurance or tariffs. But not every company uses landed cost tracking to map associations between those costs and the specific inventory generating them.
The impact of tracking landed costs goes beyond just transferring costs on the income statement from "operating expenses" to COGS. It also allows for a much deeper analysis of the financial opportunities associated with optimizing the selection of products, suppliers, and transportation providers.
In order to find out more about the landed cost tracking opportunity and how it can be supported via the right software tools, I connected with Alan Stokes, a Business Analyst, from Open Systems. Among other products, Open Systems develops the TRAVERSE ERP product, which provides landed cost functionality for manufacturers, distributors, retailers, and other inventory driven organizations.
Alan: I think like anything, there are some "economy of scale" issues at play here, but there is no question that accurate inventory costing is as important to small companies as it is to large companies. Obviously, accurate inventory is important to all companies involved in the reselling of goods.
We are really talking about two goals here. One is to attain an accurate cost for pricing purposes. They also need to be able to compare like products--not in terms of their vendor price sheet, but in terms of their real cost to the company. Many times companies think the landed cost only involves things like brokerage fees and import duties, when in fact many of the aspects of landed cost occur when you buy goods a few miles away. Costs such as freight charges, insurance, cost of unloading, temporary storage, and simple communication adds to the cost of that product. These costs may be minimal and may not be worth tracking, but thought should be given to what those costs really are and how do those costs come into our decision making in selecting the best resources from which to buy those products.
Landed cost tracking has traditionally covered shipping/transportation, brokerage, taxes, insurance, tariffs--basically the costs to get the products to the warehouse.
Certainly, if the cost of processing or stocking goods is significant. How much time does that product spend in our receiving process? Not only the person loading and unloading the product, but the employee driving the forklift and what about the employee in the office recording the receipt of product into the ERP system? I don't believe every cost should be part of a landed cost. What is important is to simply give the subject some thought. Most companies consider these processing and stocking costs as part of general overhead, but if there are significant differences in these costs between products or if these costs are significant as a percentage of product cost, landed cost tracking may be warranted.
Alan: I would suggest thinking not only about what different types of costs you incur but also how you intend to capture those costs. The most difficult issue I find in speaking with our clients and other prospective clients is the question of when to record landed cost information. Ideally, one would simply record all of the relative landed costs at the time the purchase order is placed or during the receiving of the product. However, this is rarely feasible. What do we do when that freight invoice comes in a week after the product has been received? Maybe the product has already been sold.
Computerized solutions have a number of ways to approach this. Some estimate costs based on a number of possible drivers (such as weight, value, quantity, etc.), or allow for fixed estimates. Some have options for capturing these costs long after the product has been received, and making adjustments to inventory or to the General Ledger in the form of cost of goods sold adjustments or similar transactions. Given the nature of the problem, there is probably no perfect way to capture these costs, so it becomes a question of what is practical for your company in terms of the amount of work required to capture these costs and the amount of these costs in relation to the products being purchased.
Alan: Appropriate or not, landed cost tends to be utilized by larger companies and I don't see a significant change in this. What I do see, however, is that as companies grow in size, they change their business practices. New or additional people come on board who may have experience with landed costing and they push for changes in inventory costing. Most ERP systems can incorporate landed cost without a lot of work, and once existing management sees the value and ease in which it can be implemented, they move forward in utilizing landed cost.
Alan: Like any new business change, these changes can be somewhat difficult to prove out theoretically. The bottom line is improved profitability. In the case of a company reluctant to move to landed cost, we would encourage them to take a group of like inventory products, something easily manageable, and cost those products using landed cost. Am I really saving money by buying the product with the lowest vendor cost? Can I cut landed costs? Does my product pricing need to change? Using both historical and forecasted sales, how would savings in cost or changes in my pricing, affect my bottom line either historically or in the future?
Alan: Training and culture changes go hand in hand. If we have one, we generally have the other. The most important issue is that there has to be "buy in" from all parties, not only management, but sales and purchasing. This generally means involving staff with work flow changes by explaining why the change is taking place and asking for patience and feedback in going forward. Revisiting the subject from time to time to ask how it's going can prove beneficial in a number of ways. What suggestions or comments do employees have? Would additional training be beneficial?
Having implemented a number of software installations, large and small, it all comes back to attitude. If either management or staff is not fully on board, change can be an expensive experiment that tends to just fade away over time. People want to feel like they are part of the solution. When both staff and management have worked hand in hand to select the type of changes to be made and both fully support those changes being made, success is much easier achieved.