Two suppliers quote the same component. One is materially cheaper per unit and eleven thousand kilometres away; the other is more expensive and a day's drive from the plant. The spreadsheet says the first one wins, and for a great many products it genuinely does. The point is that the spreadsheet, as usually built, is not capable of telling you.
Total landed cost is the discipline of getting every consequence of a sourcing decision into the same number. It is not complicated. It is just longer than the version most organisations run.
What goes into the number
| Component | Frequently missed because |
|---|---|
| Unit price | It is the only figure both suppliers volunteered |
| Freight, origin to door | Quoted port to port, so both inland legs are absent |
| Duty and import tax | Depends on classification and origin, so it is deferred |
| Customs and compliance cost | Brokerage, filings and bonds are small per shipment and constant |
| Inventory in transit | It is a capital cost, so it never appears on a purchasing invoice |
| Safety stock | It is held to absorb variability that nobody has priced |
| Minimum order quantity | It changes working capital rather than unit cost |
| Quality and rework | It appears in a different department's budget |
The two that change answers most
Capital in transit
Goods on a ship are money you have spent and cannot use. On a six-week lane, a business holding a meaningful annual cost of capital is paying a real percentage of the value of every consignment simply for the privilege of it being at sea. It is invisible in procurement and entirely visible in treasury.
This is the calculation that occasionally makes air freight the cheaper option outright rather than the faster one, and it is why the transatlantic mode decision is genuinely close for higher-value goods.
The cost of variability
A lane with a four-week transit and a predictable schedule is operationally cheaper than one with a three-week transit that varies by ten days, because the second one has to be absorbed by inventory. Safety stock is the price of that variance, it is held permanently, and it is rarely attributed to the sourcing decision that created it.
Duty is not a rounding error
Duty is a function of tariff classification and country of origin, and rates vary enormously by product. On some goods it is negligible; on others it exceeds the freight. Preference under a trade agreement can remove it entirely, but only where the origin rules are met and the evidence exists to support the claim if it is later audited.
This is worth establishing before the sourcing decision rather than after it. Classification is the importer's legal responsibility, determined with the customs broker of record on the entry, and a decision made on an assumed rate is a decision made on an assumption.
Building the model
- 01Get freight quoted door to door, to the actual delivery address, for the actual order quantity. Port-to-port on a different volume is not an input.
- 02Establish the classification and the applicable duty rate, and whether preference is available and evidenceable.
- 03Apply your own cost of capital to the value of goods in transit, using the real transit and not the best case.
- 04Price the safety stock each option requires, from the variability of the lane rather than its average.
- 05Add the working capital implication of any minimum order quantity difference.
- 06Then compare. The unit price is now one row among eight.
What usually happens
In our experience the model rarely produces a clean reversal. What it produces more often is a split: high-value, fast-moving or short-life lines move closer to the point of consumption, while stable, low-value, long-life lines stay on the long lane where the unit price advantage survives contact with the rest of the arithmetic.
A single sourcing policy applied across a mixed portfolio is almost always wrong somewhere. It is simply wrong in a way that never appears on a purchase order.
Published 11 August 2026.
