Maximizing Tariff Management with ERP, Effective Landed Cost, and Integrated Financials

With recent changes, managing tariffs has become more critical than ever. Leveraging a combination of key tools and processes, such as Enterprise Resource Planning (ERP) systems, landed cost, and integrated financials can significantly enhance an organization’s ability to navigate the complexities of tariffs effectively. 

Managing Landed Costs for Tariffs

One vital component that plays an important role in understanding and mitigating the impact of tariffs is the concept of landed cost. Landed cost refers to the total spend involved in transporting a product to its final destination. It includes elements such as product price, shipping, insurance, customs duties, tariffs, taxes, handling charges, and other fees incurred during the import process. While landed cost management does not directly reduce or eliminate tariffs, it provides businesses with strategic ways to offset their financial burden through optimization and cost-saving measures across the supply chain. 

By adopting detailed strategies to manage the components of landed cost, you can minimize the impact of tariffs on your bottom line. This may involve negotiating favorable shipping rates, optimizing packaging methods to reduce handling and storage expenses, enhancing logistics efficiency, exploring alternative suppliers or ports of entry, and utilizing trade programs like Foreign Trade Zones (FTZs). Additionally, companies may choose to work with a licensed customs broker or other legal expert to investigate if a more appropriate, lower duty classification is warranted. Reclassifying the goods under different Harmonized Tariff Schedule (HTS) codes would thereby reduce the overall tariff costs within the landed cost calculation. 

ERP Solution for Your Tariff Management

Microsoft Dynamics 365 Finance and Supply Chain Management is not only an ERP solution with strong financial management, but it also offers distributors a simpler way to estimate landed costs through the landed cost module. Leveraging it, you can allocate landed costs to multiple purchase orders, recognize accruals for items in transit, and so much more. 

Consider the example of HomeStyle Furniture Co., an importer of custom wood tables from Vietnam that faces a 25% tariff imposed by the U.S. government. Before the tariffs were enforced, their landed cost per table stood at $200. After tariffs, it jumped to $250—a 25% increase, eating into their profit margins. Through strategic actions, the company was able to manage their landed costs as detailed below: 

1. Negotiated Better Ocean Freight Contracts: Securing improved shipping terms reduced shipping costs by $15 per unit. 
2. Changed Packaging Strategy: Switched to a more efficient flat-pack method, saving $10 per unit in handling fees. 
3. Utilized a Foreign Trade Zone (FTZ) in California: Deferred duties by utilizing an FTZ and reclassified some partially assembled tables under a lower HTS code with reduced tariff rates. 
4. Switched to a Blended Manufacturing Strategy: Sourced certain components domestically to diversify duty exposure and further lower average tariff expenses. 

By implementing these cost-saving measures, HomeStyle Furniture Co. was able to optimize their landed costs and mitigate the financial impact of tariffs: 

• Base product cost: Before Optimization – $120, After Optimization – $120 
• Tariffs: Before Optimization – $30, After Optimization – $18 
• Shipping & handling: Before Optimization – $35, After Optimization – $20 
• Insurance, customs, fees: Before Optimization – $15, After Optimization – $12 
• Total Landed Cost: Before Optimization – $200, After Optimization – $170 

This example shows how the strategic combination of ERP systems, landed cost management, and integrated financials offers businesses a comprehensive toolkit to manage tariffs effectively. By optimizing landed costs, organizations can mitigate the impact of tariffs indirectly, safeguard profit margins, and enhance their competitive edge in the global marketplace. To see how to effectively orchestrate this for your supply chain business, contact the Sikich experts today.