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CHAPTER 6
TOTAL COST OF OWNERSHIP (TCO)
6.5 CALCULATING TOTAL LANDED COST AT CHEFS SUPPLY
The following example illustrates the key elements that comprise the total landed
cost of an internationally sourced good and how these costs can be compiled
and calculated to identify a total landed cost.
Chris Smith is a supply manager with Chefs Supply, a company with operations
throughout South Africa. Chefs Supply is a family-owned business that
processes and distributes specialist food products throughout Africa. As can
be imagined, the company uses a variety of ingredients to manufacture its
products; these include meat, fish, grain, and vegetables. A key ingredient used
in the manufacture of a range of the specialist food products, including jam and
chutney, is a type of processed dried fruit.
Because of the rising costs of sourcing ingredients in South Africa a decision
was made by supply executives to review the costs associated with outsourcing
the dried fruit, including the use of foreign suppliers. Chefs Supply performed a
supplier research and identified several potential suppliers. This example focuses
on a Madagascar supplier that supply managers believe has the potential to help
the company meet its longer-term cost requirements. Chris Smith was tasked
with estimating the total supply chain costs associated with using this supplier.
6.5.1 IDENTIFYING TOTAL LANDED COST ELEMENTS
The Madagascar supplier obtains fruit from local farmers to produce the dried
fruit product, which is made by cooking, pressing and drying the fruit. Once the
fruit is dried it is packed into vacuum-sealed bags that contain 50 kg of product.
Each of these is packed into a corrugated box (one bag to a box) and sealed.
The dried fruit is currently priced by the supplier at $0.29 per kilogram delivered
at the ocean-going vessel.
For overseas shipments the supplier stacks 40 boxes to a pallet, which is loaded
into a shipping container that holds 20 pallets. The containers are sent to a port
for loading onto an ocean vessel. At this point the transportation costs become
Chefs Supply’s responsibility. The purchase agreement, however, calls for title
transfer once the container reaches the South African port. The ocean carrier
will charge Chefs Supply $2 500 to ship each container to a South African port.
Once the containers reach SouthAfrica they will be moved to a local warehouse
at a cost of $350 per container. Applicable customs charges and import duties
are 15% of the original purchase price. Demand planners believe the company
will require the equivalent of one container per month. Fortunately, the demand
for the product is fairly stable throughout the year.
Chefs Supply plans to store each container in a public warehouse for a month
until the dried fruit is required for processing. The storage helps cover any
demand or supply chain uncertainty the company may face. Monthly storage
costs are expected to be $6.50 per pallet with an additional warehouse handling
fee of $6.25 per pallet whenever a pallet leaves the warehouse. Inventory