Total Landed Cost Joyce Johnson is a senior product manager for International Fruit Distributors (IFD), a major U.S. based food-processing company, based in Long Beach, California. IFD sells a wide variety of fruit concentrates, flavors, and extracts found in many popular food products. One of Joyce's responsibilities is to negotiate annual purchase contracts for fresh fruit extracts. One of her larger contracts is for mango concentrate, which comes from fruit grown and harvested on a seasonal basis in various countries around the world. Through demand forecasting techniques, International Fruit Distributors estimates that demand for mango concentrate is relatively constant throughout the year. Recently, Joyce was examining the costs associated with one of her suppliers, Papa Growers, a Philippine mango grower and processor. International Fruit Distributors has used this supplier's high-quality product for a number of years. Papa Growers provides a unique variety of mango, world renowned for its flavor. Access to this grower gives IFD a competitive advantage over other distributors in the food processing industry. Papa Growers has plantations in remote sectors of the Philippines and transports the harvested fruit in company trucks to a processing plant where it is cleaned, pureed, concentrated, and packaged for transoceanic shipment. The Philippine processing plant packages the mango concentrate (currently priced at $0.62/pound) in large sealed foil bags, each containing 60 pounds of product. The processor then places the foil bags in specially designed cardboard boxes for protection and shipping. There is one bag per box. The cardboard boxes are stacked on wooden pallets, 50 boxes to a pallet. The product moves to a portside facility by truck, which can only carry five pallets per load, at a cost of $125 per trip. At the post-side facility, the pallets are loaded into climate-controlled refrigerated overseas containers. These metal shipping containers are called TEUs, since they are roughly twenty-feet long by ten feet wide. Each TEU holds 20 pallets and is loaded onto an ocean freighter for shipment to the U.S. west coast. Papa Growers ships one full TEU container-load per month, based on International Fruit Distributors MRP-based requirements. Loading the TEU costs $950 per TEU. The shipping charge for ocean freight transport is $4,500 per container. Once the freighter reaches the Port of Long Beach, local stevedores unload the TEUs and move them at a charge of $400 per TEU to a dockside warehouse for storage and customs inspection. While in this warehouse, U.S. Customs conducts inspections and assesses import duties, amounting to 4.5 percent of the original unit purchase price excluding freight charges. After passing customs, IFD moves each TEU to a public refrigerated warehouse until needed for processing (average storage time is one month). The cost to move the TEU from dockside customs to the public warehouse is included in the monthly storage charge of $18 per pallet. The public warehouse also charges a one-time fee of $6 per pallet to cover their general and administrative costs. Accountants at International Fruit Distributors estimate the inventory carrying charge (holding cost) at 1.2 percent per month, and calculate this charge using the original unit price of the product. When mango concentrate is required at the IFD food processing plant, a local freight company moves the TEU container for $550 per TEU. Receiving and quality control procedures at the plant add costs totaling $8.75 per pallet. Due to the perishable nature of the product, the distance traveled, and the numerous "touch-points" involved in moving the mango concentrate through the supply chain, company operations experts estimate dollar losses of 2 percent of the total concentrate based on the original purchase price. Production engineers calculate the factory yield of the mango concentrate when blending into various company products is 97 percent -- IFD wastes 3 percent in terms of original purchase price of the product by volume during processing in its plant. Occasionally, spoilage of mango concentrate will not be detected until after product is shipped to the retailer (external failure cost), requiring the removal of tainted product from grocery store shelves. When this occurs, IFD absorbs an additional out-of-pocket cost totaling $20,000 for each incident. The company's records indicate that such incidents occur about once every six months. In addition to the other costs noted, International Fruit Distributors has internal accounting policies that require that the mango concentrate total costs include a 19 percent assessment based on the original unit cost to cover general and administrative overhead costs within the company. Case modified from Monczka, Trent, and Handfield, Purchasing and Supply Chain Management, 3rd edition, South-Western Publishing, 2005. Hints For a starting point, compute the following: a) Pounds per pallet b) Pounds per TEU c) Pounds per truck You will need these figures as you identify the incremental costs! All the costs listed on the worksheet are in the order that you will find it during the case. Notice that the answers are expressed in cost per pound, (or cost per unit) as we discussed in class. Also, notice that the answers on the assignment are expressed to four decimal places - as often each step along the way may only add fractions of a cent to the landed cost - but fractions of cents add up to real money! Question 1 0.6 pts Original unit price Question 2 0.6 pts Truck to port fee Question 3 0.6 pts Load TEU fee Question 4 0.6 pts Shipping charge Question 5 0.6 pts Movement to dock storage cost Question 6 0.6 pts Import fee Question 7 0.6 pts Movement to public warehouse cost Question 8 0.6 pts One time warehouse fee Question 9 0.6 pts Carrying / holding cost Question 10 0.6 pts Movement to plant cost Question 11 0.6 pts Receiving & Quality Control cost Question 12 0.6 pts Perishable loss cost Question 13 0.6 pts Yield loss cost Question 14 1 pts Spoilage at retail site cost Question 15 0.6 pts Company G&A overhead cost Total Landed Cost Joyce Johnson is a senior product manager for International Fruit Distributors (IFD), a major U.S. based food-processing company, based in Long Beach, California. IFD sells a wide variety of fruit concentrates, flavors, and extracts found in many popular food products. One of Joyce's responsibilities is to negotiate annual purchase contracts for fresh fruit extracts. One of her larger contracts is for mango concentrate, which comes from fruit grown and harvested on a seasonal basis in various countries around the world. Through demand forecasting techniques, International Fruit Distributors estimates that demand for mango concentrate is relatively constant throughout the year. Recently, Joyce was examining the costs associated with one of her suppliers, Papa Growers, a Philippine mango grower and processor. International Fruit Distributors has used this supplier's high-quality product for a number of years. Papa Growers provides a unique variety of mango, world renowned for its flavor. Access to this grower gives IFD a competitive advantage over other distributors in the food processing industry. Papa Growers has plantations in remote sectors of the Philippines and transports the harvested fruit in company trucks to a processing plant where it is cleaned, pureed, concentrated, and packaged for transoceanic shipment. The Philippine processing plant packages the mango concentrate (currently priced at $0.62/pound) in large sealed foil bags, each containing 60 pounds of product. The processor then places the foil bags in specially designed cardboard boxes for protection and shipping. There is one bag per box. The cardboard boxes are stacked on wooden pallets, 50 boxes to a pallet. The product moves to a portside facility by truck, which can only carry five pallets per load, at a cost of $125 per trip. At the post-side facility, the pallets are loaded into climate-controlled refrigerated overseas containers. These metal shipping containers are called TEUs, since they are roughly twenty-feet long by ten feet wide. Each TEU holds 20 pallets and is loaded onto an ocean freighter for shipment to the U.S. west coast. Papa Growers ships one full TEU container-load per month, based on International Fruit Distributors MRP-based requirements. Loading the TEU costs $950 per TEU. The shipping charge for ocean freight transport is $4,500 per container. Once the freighter reaches the Port of Long Beach, local stevedores unload the TEUs and move them at a charge of $400 per TEU to a dockside warehouse for storage and customs inspection. While in this warehouse, U.S. Customs conducts inspections and assesses import duties, amounting to 4.5 percent of the original unit purchase price excluding freight charges. After passing customs, IFD moves each TEU to a public refrigerated warehouse until needed for processing (average storage time is one month). The cost to move the TEU from dockside customs to the public warehouse is included in the monthly storage charge of $18 per pallet. The public warehouse also charges a one-time fee of $6 per pallet to cover their general and administrative costs. Accountants at International Fruit Distributors estimate the inventory carrying charge (holding cost) at 1.2 percent per month, and calculate this charge using the original unit price of the product. When mango concentrate is required at the IFD food processing plant, a local freight company moves the TEU container for $550 per TEU. Receiving and quality control procedures at the plant add costs totaling $8.75 per pallet. Due to the perishable nature of the product, the distance traveled, and the numerous "touch-points" involved in moving the mango concentrate through the supply chain, company operations experts estimate dollar losses of 2 percent of the total concentrate based on the original purchase price. Production engineers calculate the factory yield of the mango concentrate when blending into various company products is 97 percent -- IFD wastes 3 percent in terms of original purchase price of the product by volume during processing in its plant. Occasionally, spoilage of mango concentrate will not be detected until after product is shipped to the retailer (external failure cost), requiring the removal of tainted product from grocery store shelves. When this occurs, IFD absorbs an additional out-of-pocket cost totaling $20,000 for each incident. The company's records indicate that such incidents occur about once every six months. In addition to the other costs noted, International Fruit Distributors has internal accounting policies that require that the mango concentrate total costs include a 19 percent assessment based on the original unit cost to cover general and administrative overhead costs within the company. Case modified from Monczka, Trent, and Handfield, Purchasing and Supply Chain Management, 3rd edition, South-Western Publishing, 2005. Hints For a starting point, compute the following: a) Pounds per pallet b) Pounds per TEU c) Pounds per truck You will need these figures as you identify the incremental costs! All the costs listed on the worksheet are in the order that you will find it during the case. Notice that the answers are expressed in cost per pound, (or cost per unit) as we discussed in class. Also, notice that the answers on the assignment are expressed to four decimal places - as often each step along the way may only add fractions of a cent to the landed cost - but fractions of cents add up to real money! Question 1 0.6 pts Original unit price Question 2 0.6 pts Truck to port fee Question 3 0.6 pts Load TEU fee Question 4 0.6 pts Shipping charge Question 5 0.6 pts Movement to dock storage cost Question 6 0.6 pts Import fee Question 7 0.6 pts Movement to public warehouse cost Question 8 0.6 pts One time warehouse fee Question 9 0.6 pts Carrying / holding cost Question 10 0.6 pts Movement to plant cost Question 11 0.6 pts Receiving & Quality Control cost Question 12 0.6 pts Perishable loss cost Question 13 0.6 pts Yield loss cost Question 14 1 pts Spoilage at retail site cost Question 15 0.6 pts Company G&A overhead cost