Eskom Procurement Book 2015

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. 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

6.5.1 IDENTIFYING TOTAL LANDED COST ELEMENTS

140 CHAPTER 6