Domestic vs. Offshore Manufacturing: What Goes into Your Total Landed Cost?

Demand for plastic injection molding manufacturer services continues to grow, with the market for applications such as packaging, automotive manufacturing, and electronics projected to increase the global market to nearly half a trillion dollars by 2025. Countries like China and India have become major sources of plastic injection services due to perceived lower costs stemming from cheap labor and production. Sometimes the perception that offshore manufacturing is cheaper fails to take into account hidden costs such as shipping, tariffs, and taxes that can boost your total costs. Here’s what you need to know about how to estimate your total expenses when comparing for domestic versus offshore manufacturing services.

The Concept of Total Landed Cost

Total landed cost, or TLC, is a crucial logistics concept that’s essential to understand when estimating the actual costs of offshore manufacturing for an accurate comparison with domestic manufacturing expenses. Total landed cost is the entire cost of a product once it “lands” delivered at your door, warehouse, or facility. It includes not only the original price of the product after production, but also all subsequent expenses at the origin point, in transit, at customs, and after the product reaches the domestic border. This encompasses total shipping costs, crating costs, handling fees, inspection costs, brokerage fees, logistics fees, insurance, tariffs, taxes, and currency conversion.

Failing to take into account all these additional expenses can cause you to have a misperception of the actual costs of offshore manufacturing. Without factoring these variables into your budget, you may actually find that offshore manufacturing costs offset any gains you made from perceived lower product costs.

Factors Contributing to Total Landed Cost

What are all the factors that contribute to your total landed cost? The complete list of factors defined by the International Chamber of Commerce includes:

• Truck loading
• Export-customs declaration
• Carriage to port of export
• Truck unloading at port of export
• Loading fees at port of export
• Carriage to port of import
• Unloading charges at port of import
• Truck loading at port of import
• Carriage to point of destination
• Insurance
• Import-customs clearance
• Import taxes

Each of these fees can be paid for by either the buyer or the seller. The ICC uses different Incoterms codes to summarize which of these fees are paid for by the buyer and which are covered by the seller.

Most importers choose code FOB, where the seller generally handles the export end of the equation and the buyer handles the import end. This places responsibility on the supplier for handling internal transport to the nearer port or airport, customs documents for exporting, and local charges, leaving it up to the importer to work with their customs broker or freight forwarder to handle the rest.

Another option is DDP, where the seller handles all costs other than insurance. This makes costs easier to calculate but takes away your ability to find itemized cost-cutting options. For this reason, few manufacturers go with DDP. A similar simplified but expensive option is DAP, or shipping by courier, where the seller handles everything except insurance, import-customs clearance, and import taxes. As a general rule, the more of the total logistics process the seller handles, the higher the total landed cost that ultimately gets passed on to you.

Estimating Total Landed Cost

As this summary indicates, calculating total landed cost is a relatively complex procedure. There is no universal shortcut to calculating your TLC, but here is a template that you can use as a framework to build on:

• Cost of goods: $ amount varies with unit cost and quantity
• Freight: $ amount varies with volume, port, time of year, shipping company, and other variables, typically ranges from $100 to $5,000
• Duty: $ amount varies as percentage of value Customs places on goods
• Tax (Goods and Service or Value Added Tax): $ amount varies as percentage of Customs value of goods, freight, insurance, and Customs duty
• Other costs, such as document fees, Customs clearance, and wharf charges: averages 3 percent of total of other fees

Together, this is typically priced as:

• Shipment value amount (from seller)
• Shipment freight amount (from freight forwarder)
• Shipment customs amount (from Customs via customs broker)

Estimating duties and taxes is typically the most complex part of estimating your total landed cost. Only a customs authority can make a final determination for duty costs. Product HS Codes (Harmony Commodity Description and Coding System Codes), declared value, import customs duties, and import taxes all get factored in.

When you pay, your customs fees can also vary depending on how you had your goods shipped. If you use the postal service, you’ll need to pay the mail carrier or go to the post office. If you use a courier service, your courier will bill you or collect payment on delivery. If you use a freight service, you need to clear your goods through customs, use a broker to clear your goods through customs, or be billed if you arrange to have your goods forwarded to you.

Optimizing Your Total Landed Cost

In order to optimize your total landed cost, you need to know what it is first. Most companies don’t know the Total Landed Cost for each item they produce and sell. The key to tracking your total landed cost is to update your standardized operating procedure to capture your TLC for the SKU number of each item in your inventory, says Chris O’Brien, senior vice president for C.H. Robinson, a third-party logistics provider.

Once you have a baseline to assess your current total landed cost for each SKU item, you can seek to optimize your TLC by considering your logistics network, sourcing locations, freight transportation, and international distribution data. For example, large part plastic injection molding manufacturer Universal Plastic Mold can achieve a total landed cost lower than China-based manufacturing by using a blended manufacturing strategy that combines domestic production for large parts with overseas production for small subcomponents that can be shipped inexpensively. UPM can reduce your inventory and dollars tied up in inventory by producing your orders closer to their intended shipping date. UPM can reduce the cost of warehousing by doing the 3PL process in house, eliminating the need for you to hire another company to manage your orders.

Calculating your total landed cost can be complicated, but the cost savings you can achieve can help to make it worthwhile. If you need help calculating your TLC for products that involve plastic mold manufacturing services, contact Universal Plastic Mold, and our team of experienced experts will help you find the most cost-efficient option for your needs. UPM has experience with blended onshore and offshore manufacturing which can dramatically lower your TLC.