If you’re in textile sourcing, you live by one rule: the “First Cost” is never the “Final Cost.”
A supplier in Bangladesh quotes you $2.50/meter for a knit fabric. A supplier in Turkey quotes $2.80. It seems like an easy decision, right?
Not a chance.
That $2.50/meter could balloon to $3.50 by the time it hits your warehouse, while the $2.80/meter from Turkey might only end up costing $3.10. The difference lies in a single, critical metric that every sourcing manager, merchandiser, and brand owner must master: Landed Cost.
Calculating it accurately is the difference between a profitable season and a catastrophic loss. Yet, it’s shocking how many businesses still get this wrong. This guide will give you the complete formula and show you what to look out for.
What is Landed Cost?
Simply put, the Landed Cost is the total cost of getting a product from your supplier’s factory door to your own warehouse door.
It includes the product price plus all shipping, customs, taxes, insurance, and handling fees.
The Landed Cost Formula
Here is the most common formula. Don’t be intimidated; we’ll break down each part.
Landed Cost = (Product Cost) + (Shipping & Freight) + (Customs & Duties) + (Risk & Insurance) + (Overhead)
Let’s dig into each component.
1. Product Cost
This is the “First Cost” or “FOB Price” your supplier quotes you.
- FOB (Free On Board): This is the most common term. It means your supplier pays for the product and for getting it onto the ship at their port (e.g., “FOB Shanghai”). Your responsibility begins the second it’s on that vessel.
2. Shipping & Freight
This is where the costs start to hide.
- Freight: The actual cost of sea or air transport.
- Fuel Surcharges (BAF): Carriers add these as oil prices fluctuate.
- Terminal Handling Charges (THC): Fees charged by the port at both origin and destination.
- Demurrage & Detention: These are the killers. If your container isn’t picked up from the port on time (demurrage) or returned empty on time (detention), you’ll pay a heavy daily penalty.
3. Customs & Duties
This is the non-negotiable part paid to the government.
- Tariffs/Duties: This is the big one. It’s a percentage of your product’s value. You must know the correct HS Code (Harmonized System code) for your textile. A simple polyester fabric (HS Code 5407.61) might have a different duty rate than a blended cotton-poly fabric (HS Code 5211.31). Getting this wrong is a costly legal mistake.
- Customs Brokerage Fees: The fee you pay a professional broker to handle your customs clearance paperwork.
- Taxes (VAT, GST): Depending on your country, you’ll have to pay value-added or goods-and-services taxes.
4. Risk & Insurance
This is the cost of protecting your investment.
- Cargo Insurance: This is essential. What if the container ship catches fire or your container falls overboard? Your insurance covers the value of your goods.
- Quality Control (QC) Fees: The cost of hiring a third-party inspection agent to check your fabric before it leaves the supplier’s factory. This is the best money you will ever spend. It’s far cheaper to fix a quality problem in Bangladesh than in your own warehouse.
5. Overhead
These are the internal costs you must account for.
- Payment Processing Fees: Bank fees for wiring money internationally.
- Currency Conversion: The cost of buying foreign currency (e.g., USD or Euros) to pay your supplier.
- Financing: If you take out a loan to pay for the goods, the interest on that loan is part of the cost.
A Simple Example: The “$2.50 Fabric” vs. The “$2.80 Fabric”
Let’s see why our first example was so misleading.
Order: 10,000 meters of fabric
| Cost Component | Supplier A (Bangladesh) | Supplier B (Turkey) | Notes |
| Product Cost | $2.50/m = $25,000 | $2.80/m = $28,000 | Turkey is $3,000 more expensive. |
| Shipping & Freight | $3,500 (Long sea route) | $1,500 (Shorter sea route) | Shipping from Asia is often costlier. |
| Customs & Duties | $4,500 (e.g., 18% Tariff) | $1,000 (e.g., 4% Tariff) | This is key. Many Western countries have preferential trade agreements with Turkey, resulting in much lower duties. |
| Insurance & QC | $1,000 | $1,000 | Assume this is the same. |
| TOTAL LANDED COST | $34,000 | $31,500 | |
| TRUE COST PER METER | $3.40 / meter | $3.15 / meter |
The Result: The “$2.50” fabric from Bangladesh was actually $0.25/meter more expensive than the “$2.80” fabric from Turkey.
The Bottom Line for Sourcing Managers
Never, ever make a sourcing decision based on the FOB price alone.
The ultimate goal of a sourcing manager is to secure the best Landed Cost, not the lowest First Cost. Building a simple spreadsheet with this formula for every potential supplier is the most important thing you can do to protect your profit margins and make your business successful.
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