What is the Importance of the New Microsoft Dynamics 365 Landed Cost Module?

The new Dynamics 365 Landed Cost Module aims to improve freight importing through financial and logistical control across the inbound shipping process.

Steve Stallings

Steve Stallings

Organizations often have global supply chains with international suppliers, exposing them to high tariffs, long lead times, and expensive inbound transportation costs.  In this environment, doing business in a cost effective and predictable way requires software designed to support users and their objectives. Specifically, finance and supply chain software included in the Dynamics 365 Landed Cost Module. Landed costs can add 20% to 40% or more to the base cost of goods and long lead times can add stress to the supply chain planning process. The complicated nature of global supply chains necessitate software to control logistics and finances during the importing process.

 

The Microsoft Dynamics Landed Cost Module in the Dynamics 365 Finance & Supply Chain solution has features that support the user in keeping track of their landed costs along a voyage. For a full list of features in this new module, visit: Microsoft’s Landed Cost Module page. This article will explain the importance of the new Microsoft Landed Cost Module, and how it supports global supply chains.

landed cost inbound tracking
Dynamics 365 Landed Cost provides users the ability to define journey templates and use them for voyages to track shipping containers based on estimated lead times that are automatically updated whenever an actual date is captured.
voyage costs breakdown
Dynamics 365 Landed Cost provides visibility of estimated voyage costs, and subsequently replaces those estimates with actual landed costs as vendor invoices are posted against the voyage, containers, POs or items. In this example, freight was estimated at $2,000 and the actual invoice was for $1,900.

These Journey Template and Auto Cost features in the Dynamics 365 Landed Cost module allow users to define these values upfront, and then simply invoke them to quickly create accurate voyages. As actual landed costs are collected from supplier invoices, and service supplier contracts are updated, these estimates can be refined over time.

The Impact of Incoterms Explained and Their Use in Landed Cost

Microsoft ERP and WMS users engaged in international trade must deal with a list of new terminology and costs that directly affect global procurement. This starts with Incoterms that define the point of ownership change and which party pays for what transportation costs. Incoterms are defined by the International Chamber of Commerce (ICC) as “International Commercial Terms” of delivery.  For a comprehensive list of Incoterms, there are numerous resources available. The most common ones are described here, in the order that indicates a progressive change of ownership from beginning of the transportation process to the end.

  • Ex-works (EXW) indicates that as soon as the goods supplier places the product on his outbound shipping dock, his responsibility for those goods is ended, and payment is expected. That means the buyer is responsible for payment, transportation, and costs involved with moving those products to their warehouse. These costs can include:
    • Hiring a local agent or broker to oversee the international steps of the process
    • Paying for and scheduling local transport from the supplier’s dock to the port of exit
    • Selecting a carrier and buying space on a cargo ship
    • Loading the products onto/into the cargo ship
    • Paying for ocean freight and insurance
    • Paying for other port and carrier assessments, such as:
      • Port fees
      • Bunker adjustment fees
      • Fuel surcharges
      • Other factors depending on the port of exit and political/economic conditions
    • Unloading the products at the port of entry in your country
    • Paying for customs inspection and duties
    • Fumigations or other special handling if required by customs
    • Local delivery to your destination warehouse after clearance
      • That local transportation may be by truck, rail, or a combination of both depending upon the commodities and distance from the port to your warehouse

All subsequent Incoterms are a subset of those tasks and costs.  For example:

  • Free Alongside (FAS) indicates that the international supplier has paid for the local transportation to the port of exit, but not the loading, so the buyer owns the goods on the ground at the port. Therefore, the list of activities and costs listed above for EXW will most likely start at loading, assuming that the selected carrier and vessel were known in advance.
  • Free onboard (FOB) is one of the most commonly used, misunderstood, and misused Incoterms. FOB without a location is only a partial Incoterm. “FOB-Vessel Name” is the complete form.  As such, FOB-COSCO Sea King indicates that the supplier has delivered the goods to the port and supervised the loading of the container onto the Sea King, owned by China Overseas Shipping Co. That now becomes the change of ownership point, and the responsibility for all subsequent steps and costs belong to the buyer.
  • Cost and Freight (CFR) goes a step further and indicates that the supplier has delivered the goods onto a cargo ship and paid for the ocean freight leg. The change of ownership point is now changed to the end of the ocean voyage.
  • Cost Insurance & Freight (CIF) takes the CFR scenario another step further and indicates that the supplier has also paid for the shipping insurance. In this case, as in CFR, the point of ownership change does not occur until the goods arrive at the port of entry at the end of the ocean voyage.
terms of delivery inside dynamics 365 landed cost
Terms of delivery is the terminology used in Dynamics 365 to describe Incoterms. Each of these Incoterms used with Landed Cost requires a different journey template with the appropriate steps to cover those legs, activities, and costs that the buyer will incur. Accounts payable will need to define separate terms of delivery for domestic and international suppliers.

Ownership and Risk-Bearing in the Supply Chain

There are other Incoterms used in international trade that cover several other less common scenarios, but those defined above are the most used. They range from zero responsibility by your supplier beyond their shipping dock at EXW, to a substantial part of the journey being covered by the supplier in CIF. As we move from EXW to CIF, the supplier is bearing more cost and more risk, as well as delaying the point of ownership change, and therefore the invoice due date. As with any business process, we can expect that our costs will go up to cover those risks and delays, and possibly the creation of transportation profit for the supplier. Therefore, to the extent the buyer can take responsibility earlier in this process and assume that risk, they will have more control and lower costs.

 

Another common scenario that buyers face while engaged in international trade is dealing with payment terms that dictate that the goods invoice is due at the point of ownership change based on the Incoterm. This means that buyers must pay for goods before they are received and counted.  Furthermore, based on where that change of ownership occurs, the buyer will also be receiving invoices for all the other services not covered. These invoices could be from the goods supplier or several other vendors. The invoices are received over time with costs based on the entire shipment, each container, the vendor POs, or the goods themselves.

 

There is another common Incoterm that represents the complete absence of the buyer’s involvement in this process. As such, it is the costliest and provides the least control from buyer’s standpoint.

  • Delivery Duty Paid (DDP) indicates that the goods supplier is responsible for all costs and risks to the point that the goods arrive on the buyer’s receiving dock. In this scenario, the buyer is not involved in any of the delivery decisions or processes, and all landed costs are included in the base cost of the goods. It tends to be expensive, but conversely, simple. For this scenario, no landed cost tools are required, but your business will incur higher costs and have no visibility.
  • Delivery Duty Unpaid (DDU) is a less common, but similar Incoterm in which the supplier is covering everything to the buyer’s receiving dock except for the customs inspection and duty.
freight and cranes in a shipping port

The tradeoffs between various Incoterms that define portions of the importation process that buyers choose to control will have a significant impact on their costs. The ability to post vendor invoices before physical receipt of goods, the ability to subsequently receive (owned) goods-in-transit, and the ability to adjust over/under deliveries after physical delivery and count verification, are all supported by added capabilities in Dynamics 365 Landed Cost.

Duty Calculation

Now that the impact of Incoterms have been established, we can move on to understanding duty calculation. Duties are derived from tariff schedules based on the Harmonized System (HS), or in the United States, Harmonized Tariff System (HTS) codes. These define duty rates on imported goods. To determine the duty cost for imported goods, a buyer needs to know several things about them. Those include:

  • Country of origin (COO) for the goods themselves. This may be obvious if the goods are manufactured in a country like China or India, but may also be more complicated if, using Hewlett-Packard printers as an example, they are manufactured in Vietnam and purchased from a supplier in Vietnam, but contain a significant number of parts, and therefore costs, from Chinese electronic components. The calculation of COO can be based on where the majority of the component costs came from, which could be China in this example.
  • Duty rates: Once the COO is determined, a schedule of tariffs called HS or HTS codes can be used to determine the Duty rates and basis for those goods. HS/HTS codes are published rate tables based on the value of groups of products called commodities. They are referred to as “Harmonized” to indicate commonality across countries, but that is not the whole story.
  • The first four digits, and to some extent the first six digits of the harmonized codes are generally common across all member countries. This accounts for 90% of countries globally, and almost all those nations are engaged in international trade. Generally, the United States uses an eight-digit HTS code to group goods into commodities for duty calculation purposes. Some countries go as far as 10 to 16-digit HS codes to define their duty classifications. They can vary widely as you examine the additional digits.
  • Duty rates are typically designed to protect a country’s domestic products and companies from low-cost international goods by leveling the playing field by adding a tariff to penalize imports. Depending on what you are importing, the COO, and your destination country, duty rates can vary significantly.
  • In addition, every country’s duty rates change over time. For both economic and political reasons, they tend to change every 6 to 18 months in many countries. That makes it imperative that a buyer keeps up with these costs over time. International trade agreements can stabilize duties, and tariff battles can destabilize them.
freight boat carrying a large shipment

Many organizations find it necessary to enlist the assistance of third-party agents or brokers in countries where they do a large amount of international procurement to coordinate their processes. These include consolidators that work across a number of local suppliers to combine multiple POs and goods into common containers to maximize the cube or weight to full container levels to reduce shipping costs. Moreover, organizing local transportation providers to get multiple suppliers’ goods to the port of exit to take advantage of favorable carriers, shipping rates, and sailing schedules. In addition, possibly handling payments to local carriers and port costs to consolidate those costs into a single invoice. These third-party agents take on many forms that will be discussed in a later article.

 

Duties represent a significant added cost to imported goods. The ability to define them for each of your products and the destination countries that you import into is a valuable feature of Dynamics 365 Landed Cost.

The Role of the Dynamics 365 Landed Cost Module

The Dynamics 365 Landed Cost Module provides the tools to manage this data, in totality, as Auto Costs providing the financial and supply chain visibility your finance organization will need to control costs. Auto Costs are typically defined:

  • at the voyage level, e.g.: broker fees, bunker adjustment fees, port fees, etc.
  • at the container level, e.g.: freight, insurance, document fees, etc.
  • and at the PO line item level, e.g.: duties, inspections, certifications, etc.

Auto costs are based on a number of variables including the Incoterm, container type, service vendor and carrier rates, valid date ranges, etc.

 

Furthermore, the landed cost module provides financial visibility and invoice management across the landed cost business process. It will provide your supply chain managers, buyers, planners and sales personnel with complete visibility of availability of goods involved in a much longer lead time and more complex inbound transportation process with Journey Templates to identify all transport legs and activities, including their lead times.

 

The Dynamics 365 Landed Cost Module provides a comprehensive solution to an organization’s inbound logistics and landed cost needs.

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