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The Center for Supply Chain Research®

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In this scenario, let's assume that a buyer is sourcing a key component for manufacturing and has received quotes from three suppliers located in different countries. The buyer must evaluate the total cost of ownership (TCO), considering each quote's country of origin, applicable duty rates, and Incoterms.

The product is a class 1 medical device (medical device component for assembly) that we are buying for delivery to the US.

Chapter 90: This chapter covers "Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof." If the electronic component is specifically designed for a medical device and is not classified elsewhere, it may fall under this chapter.

• Heading 9018: "Instruments and appliances used in medical, surgical, dental or veterinary sciences, including scintigraphy apparatus, other electro-medical apparatus, and sight-testing instruments." Components that are integral to such instruments might be classified here.

The standard duty rate in the US is 21.9%. Note that duties are not paid on logistics costs.

Each supplier has offered a different price for the component. Still, the buyer knows that to make the best decision; they must consider not only the upfront cost but also additional factors that impact the total cost of ownership.

1. Country of Origin:

   • Each country has different trade relations and agreements with the buyer's country, impacting duty rates and lead times.

   • Supplier C is in a country that has a free trade agreement with the buyer’s country, which means zero tariffs on the component.

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• Supplier B is in a country that has moderate trade relations with the buyer’s country, resulting in a standard duty rate.

• Supplier A has higher duty rates (+10%) due to limited trade agreements with the buyer’s country.

• These duty rates will affect the final cost and should be included in the TCO calculation.

1. Quotes and Incoterms:

   • Each supplier has specified different Incoterms, affecting who is responsible for shipping, insurance, and handling at various journey stages.

• • Supplier A’s quote is $60.97 under terms DDP from the country ‘X’

  • Supplier B’s quote is $50.71 under terms CIP from country ‘Y’ and,

  • Supplier C’s quote is $55.67 under terms FOB from the country ‘Z’

1. Calculate the landed cost for each quote:

   • Supplier C (FOB, Country Z): Buyer adds the cost of ocean freight, insurance, and any domestic transportation costs from the port to their facility, plus customs handling (though no duty due to the free trade agreement).

   • Supplier B (CIP, Country Y): Includes freight and insurance up to the buyer's port. Buyer adds duty and local transportation costs.

   • Supplier A (DDP, Country X): All costs up to delivery at the buyer's facility, including the premium duty rate.

2. Decide based on our TCO:

   • After calculating the total cost for each quote, including duties, transportation, and hidden costs, the buyer can compare the TCO for each option.

Please address the following points:

1. Under this scenario, What’s the product's fully landed cost (refer to the GT Nexus reading for help)? How did you calculate it? [Submit Spreadsheet]

2. Which source is the best option for the firm, and under what circumstances do you prefer to make the purchase? Why?

We might try our hand at this bonus question:

1. Create a table, using your response(s) to question 1, showing the percentages of the detailed costs as a % of the total landed cost. How much of the landed cost is not the “first cost” in each scenario? What would the administrative burden (effort) be for each scenario?

Some costs to consider in our analysis are:

• We don’t know the 1st cost price for any of the quotes. But we can extrapolate it.

• We are ordering ~1,200 units per shipment

• Loading charges for the suppliers [A, B, C] are $0.10 / $0.07 and $0.08 respectively

• Drayage for the suppliers [A, B, C] is $0.15 / $0.18 and $0.17, respectively.

• Terminal charges for the suppliers [A, B, C] are $0.10 / $0.05 and $0.09, respectively.

• Ocean freight is $2,400 per shipment LCL from country ‘X’ and is higher from both country ‘Y’ ($2,604) and country ‘Z’ ($3,036)

• Insurance is 1.5% of the product value

• Port fees in the US are $240

• Broker fees are $790 per shipment.

• Duties (if any) are applied to the 1st cost price

• Drayage from the port to your location is $300, plus a $48 chassis fee See the chart for a breakdown of the various Incoterms.