Understanding the Hidden Costs of Procurement: A Guide to Landed Cost vs COGS
Procurement is a vital part of any business operation. It involves purchasing the supplies and materials necessary to keep your business running smoothly. However, many businesses fail to consider the hidden costs of procurement, which can add up quickly and impact their bottom line. In this blog post, we will explore the concept of landed cost vs COGS (cost of goods sold) and break down the various expenses that you need to factor in when calculating your true procurement costs. So buckle up and get ready for an enlightening read on how to understand these hidden costs!
What is COGS?
COGS stands for “Cost of Goods Sold,” which refers to the direct costs involved in producing and selling a product. This includes the cost of materials, labor, and shipping associated with creating the item. Essentially, it’s the expenses that are necessary to get your products out the door.
COGS is an essential metric for businesses because it directly impacts their profitability. By calculating COGS accurately, companies can determine how much they need to sell their products for in order to make a profit. If they don’t factor in all of these costs when pricing their goods or services, they risk losing money on each sale.
It’s important to note that COGS only takes into account direct expenses and does not include indirect costs like marketing, rent, or administrative overheads. While these may impact overall profitability, they do not affect COGS specifically.
In summary, understanding COGS is crucial for any business owner who wants to ensure that their pricing strategy aligns with their bottom line. Calculating this figure accurately will help you set competitive prices while still maintaining healthy margins.
The Different Types of Procurement
Procurement is the process of acquiring goods and services from external sources. There are various types of procurement methods that organizations can use depending on their specific needs. The most common types include traditional, strategic, and transactional procurement.
Traditional procurement involves purchasing products or services based on a set price list without much negotiation or customization. This type of procurement is typically used for low-value purchases where time and cost-efficiency are key factors.
Strategic procurement, on the other hand, involves long-term planning to ensure that an organization’s supply chain meets its business goals. This method requires careful analysis of supplier capabilities and market trends to identify opportunities for innovation and cost savings.
Transactional procurement is focused on day-to-day purchases of goods or services using automated systems such as e-procurement platforms or catalogs. This type of procurement is ideal for high-volume but low-value transactions with established suppliers.
Ultimately, choosing the right type of procurement hinges upon understanding your organization’s unique needs in terms of budget constraints, risk tolerance levels, desired outcomes, technology infrastructure requirements among other variables.
The Costs of Purchasing Supplies and Materials
One of the most obvious costs that come with procurement is the cost of purchasing supplies and materials. It’s essential to understand these costs as they can have a significant impact on your business’ bottom line.
Firstly, it’s important to note that the cost of supplies and materials isn’t just limited to their initial purchase price. There are additional expenses such as taxes, import duties, storage fees, insurance costs, and more.
Moreover, there may be fluctuations in raw material prices due to factors like supply chain disruptions or inflation. This can affect your overall landed cost.
Another factor affecting the cost of supplies is quality control measures you might need in place. If you’re dealing with perishable goods or items prone to damage during transport or handling – you will need better packaging methods which increase expenses drastically.
In conclusion- understanding all these hidden costs associated with procurement helps businesses develop a comprehensive strategy for managing their spending effectively while still getting all necessary resources needed for successful operations.
The Costs of Labor
One of the major costs in procurement is labor. This refers to the wages, salaries, and benefits paid to employees involved in any aspect of the procurement process.
The cost of labor can vary depending on a number of factors such as location, skill level required for the job, experience level of workers and more. For example, hiring specialized personnel with specific skills may come at a higher price than hiring general staff.
It’s also important to factor in indirect costs related to labor such as training expenses, insurance premiums for employee benefit packages, overhead expenses etc. These additional costs can significantly add up over time and should always be taken into account when calculating total landed cost or COGS.
Aside from these direct and indirect costs associated with recruiting skilled workers and maintaining their employment status within an organization; factors like absenteeism or high turnover rates can further impact overall productivity levels which ultimately affect profitability.
In order to manage labor-related expenditures effectively in procurement processes it is necessary that businesses have policies in place that monitor performance metrics like employee retention rates or average time-to-hire ratios so they can identify trends early on before problems arise.
The Costs of Shipping and Transportation
When it comes to procurement, shipping and transportation costs can add up quickly. Whether you’re sourcing materials from across the country or importing products from overseas, these expenses must be factored into your overall landed cost analysis.
One major expense to consider is freight charges. These fees are charged by carriers for transporting goods and can vary widely depending on factors such as distance traveled, mode of transport (air, sea, land), and shipment size or weight.
Another cost associated with shipping and transportation is insurance. While not always required, many companies opt to insure their shipments in case of damage or loss during transit. Insurance rates will depend on the value of the goods being transported as well as other risk factors such as destination country.
In addition to direct costs like freight and insurance, there are also indirect expenses related to shipping and transportation that should be considered. For example, delays due to customs inspections or other regulatory requirements can lead to lost productivity or missed deadlines – both of which can impact your bottom line.
Understanding the hidden costs associated with shipping and transportation is crucial for accurate landed cost calculations. By factoring in all relevant expenses upfront, you’ll be better equipped to make informed procurement decisions that align with your business goals and budget constraints.
Conclusion
Understanding the hidden costs of procurement is crucial to any business that wants to remain profitable. It’s not just about the cost of purchasing supplies and materials, but also the cost of labor, shipping and transportation. By understanding landed cost vs COGS, you’ll be able to make better decisions when it comes to procuring goods for your organization.
COGS gives a clear picture of what it costs a company to produce or acquire products at scale. On the other hand, landed cost takes into account all the expenses incurred from sourcing goods up until they reach their final destination.
Knowing this distinction can help businesses manage their finances more effectively by allowing them to identify areas where they can reduce costs without sacrificing quality or efficiency.
Businesses need to carefully consider both COGS and landed costs when making procurement decisions. A thorough analysis of these factors will ensure that companies are not only getting good value for money but also taking into account all potential hidden expenses along the way. This approach will ultimately lead to better decision-making and greater profitability in the long run.