Calculating Inventory Carry Costs in Total Landed Cost Models

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Global Trade, Sourcing Strategies

Yesterday, MetalMiner presented a webcast: Modeling Total Costs for Global Sourcing Programs with Purchasing.com and Zycus. We won’t be-labor the information contained in that webinar (though we will make the link available for your listening enjoyment, however joyful a total landed cost model can be) but we did receive dozens of requests from listeners on how to model inventory carrying costs as part of the sourcing equation. To reiterate the point made in the webcast, one of the factors that companies tend to overlook or not include in their landed cost models relates to cost of carrying inventory. In a global trade transaction whereby the buyer purchases on an FOB basis (for example, FOB Shanghai) one cost to include is the inventory carry while the goods are in transit to the plant.

To calculate that inventory carry cost, here is a simple formula to use along with an example:

Inventory carrying cost = piece part price x (a company’s cost of capital/365 days) x number of days of carry (For global sourcing use 45-60 days). Here is an example:

Example: Seating component costs $12.81/piece FOB Shanghai. Ultimate destination: Detroit

$12.81 x 6.50% (company’s borrowing cost) = $0.833/annum or $0.0023/day x 60 days = $0.138 piece

$0.138 x 1660 pieces in a container = $229.08

Watch this space for additional tips and global trade commentary.

–Lisa Reisman

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