Key takeaways
- Landed cost is the total cost to get a part into your warehouse, not the supplier's piece price.
- Normalise every quote to the same Incoterm before comparing.
- Duty, freight, clearance, insurance, finance and internal handling all belong in the model.
- A lower piece price can lose to a higher one after freight and duty.
What landed cost means
Landed cost is the cost of a part after every charge needed to move it from the supplier's location to your warehouse. It starts with the goods value and adds freight, insurance, duty, taxes that are not recoverable, clearance, port charges, inland delivery and the cost of money while the goods are in transit.
If you compare two suppliers on piece price alone, you are comparing two different deals. One may quote EXW and leave you to arrange freight. Another may quote DDP and bury the freight in the unit price. The numbers are not on the same basis.
The formula
A practical landed cost formula is: goods value plus freight plus insurance plus duty plus non-recoverable taxes plus clearance plus port and terminal charges plus inland delivery plus financing plus internal handling. Divide the total by the number of good parts received, not the number ordered.
That last point matters. Scrap, damage and short shipments change the effective cost per good part. A supplier with a lower price and a 3% reject rate may be more expensive than a supplier with a higher price and a clean record.
| Line | What it includes | Common mistake |
|---|---|---|
| Goods value | Part price at the agreed Incoterm | Mixing Incoterms |
| Freight | Main carriage, fuel, surcharges | Using a spot rate as a fixed cost |
| Insurance | Cargo cover at the right value | Ignoring it |
| Duty | Customs duty at the classified code | Using the wrong HS code |
| Taxes | VAT or GST that cannot be recovered | Treating recoverable VAT as a cost |
| Clearance | Broker, entry and documentation | Forgetting the broker fee |
| Port and terminal | Handling, demurrage risk, security | Assuming the freight quote includes it |
| Inland delivery | Port to warehouse, unloading | Quoting door delivery without checking access |
| Finance | Cash tied up in transit and stock | Ignoring the cost of money |
| Internal | Goods-in, inspection, storage | Treating it as overhead |
The exact lines depend on the Incoterm. Under DDP the seller carries more of them, but you still need to know what is inside the price.
Normalise to one Incoterm first
Incoterms decide where cost and risk transfer. FOB means the seller delivers on board the vessel and you pay the main carriage. CIF adds insurance and freight to the destination port. DAP adds delivery to the named place, but not duty. DDP includes duty and import clearance.
Before comparing quotes, convert each one to the same basis. The simplest is to build the model at FOB or EXW and add the same freight, duty and clearance assumptions to every option. If a supplier insists on DDP, ask for the underlying freight and duty assumptions so you can see the margin.
A DDP price is not automatically the best price
DDP can be convenient, but the seller controls the freight and the customs entry. If you do not know what is inside the price, you cannot compare it with an FOB quote.
A worked example
Assume a shipment with a goods value of £10,000 at FOB, main freight of £600, insurance at £80, duty at 2% of the customs value, clearance at £120, inland delivery at £90 and financing at £50. The duty base is normally the customs value, which may include freight and insurance depending on the destination rules. Always confirm the customs value with your broker.
For illustration, if duty is 2% of £10,680, that is £213.60. The landed cost is £10,000 + £600 + £80 + £213.60 + £120 + £90 + £50 = £11,153.60. Divide by the good parts received. If 1,000 parts were ordered and 980 good parts arrived, the landed cost per good part is £11.38, not £11.15.
| Line | Amount |
|---|---|
| Goods value, FOB | £10,000.00 |
| Main freight | £600.00 |
| Insurance | £80.00 |
| Duty at 2% | £213.60 |
| Clearance | £120.00 |
| Inland delivery | £90.00 |
| Finance | £50.00 |
| Total | £11,153.60 |
| Good parts received | 980 |
| Cost per good part | £11.38 |
Illustrative only. Rates, duty and the customs value depend on the commodity, route and date. Confirm with a customs broker.
The costs that get left out
The most common omissions are demurrage, inspection at destination, rework, scrap, expedited freight and the cost of a quality failure. A shipment that is held at port for three days can wipe out the saving from a lower piece price. A batch that needs sorting at your warehouse adds labour and delay.
Add a quality line to the model. Use the supplier's historical reject rate, or a conservative estimate for a new supplier. If the part is critical, add the cost of incoming inspection and the risk of a line stop.
- Demurrage and detention
- Destination inspection and testing
- Sorting, rework and scrap
- Expedited freight after a delay
- Inventory carrying cost
- Line-stop risk and safety stock
How to compare suppliers
Put every supplier on the same Incoterm, the same volume, the same payment terms and the same quality assumption. Then compare the landed cost per good part. If one supplier needs more safety stock because the lead time is longer, include the carrying cost.
A simple spreadsheet is enough. The value is not the formula, it is the discipline of using the same assumptions for every quote. The free Qumek landed cost calculator follows the same structure and lets you compare three options side by side.
Review the model when the inputs change
Freight rates, duty, currency and supplier prices move. A landed cost model is a snapshot. Date the assumptions, keep the source for each rate and review the model when a quote is older than the rate basis.
For a long programme, agree a metal index, a currency basis and a freight review cadence with the supplier. That turns a one-off calculation into a commercial model that both sides can defend.
Frequently asked questions
What is the landed cost formula?
Goods value plus freight, insurance, duty, non-recoverable taxes, clearance, port charges, inland delivery, financing and internal handling, divided by the number of good parts received. The exact lines depend on the Incoterm.
Is duty calculated on the goods value or the landed cost?
It depends on the destination and the customs value rules. Many countries use a customs value that includes the goods, freight and insurance to the border. Confirm the basis with a customs broker for the specific route.
Should I compare suppliers at FOB or DDP?
Compare at the same Incoterm. FOB or EXW makes the cost lines visible and lets you apply the same freight and duty assumptions. DDP can be convenient, but ask what is inside the price before comparing.
How do I account for quality in landed cost?
Add the cost of rejects, sorting, rework, incoming inspection and the safety stock needed to cover lead time and quality risk. Divide the total by the good parts received, not the parts ordered.
Sources and further reading
- International Chamber of Commerce, Incoterms 2020
- UK Trade Tariff, https://www.trade-tariff.service.gov.uk
- EU TARIC, https://ec.europa.eu/taxation_customs/dds2/taric
- Qumek landed cost calculator and sourcing models
Qumek Trade Desk
Trade and logistics team
The team that handles Incoterms, customs classification, freight and landed cost for Qumek programmes.
Compare three sourcing options on landed cost
Use the free calculator to normalise freight, duty and quality assumptions before you compare piece prices.
Open the landed cost calculator