TOTAL LANDED COST

Joyce Johnson is a senior product manager for International Fruit Distributors, a major U.S. based food processing company. Fruit Distributors, based in Long Beach, California, sells a wide variety of fruit concentrates, flavors, and extracts used in many popular food products. One of Joyces responsibilities is to negotiate the annual purchase contracts for fresh fruit extracts. One of her larger products is mango concentrate, which comes from fruit grown and harvested on a seasonal basis in various countries around the world. Recently, Joyce was examining the costs associated with using 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 supplies a unique variety of mango, world renowned for its flavor. Papa Growers is the sole source of this variety, so access to this grower gives International Fruit Distributors a distinct advantage over other fruit 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 its processing plant near the coast. At the processing plant, the fruit is sorted, cleaned, pureed, concentrated, and packaged for transoceanic shipment. The processing plant packages the mango concentrate (currently priced at $0.39/pound) in sealed foil bags. These bags each hold 50 pounds of product. The foil bags are then placed in specially designed cardboard boxes for shipping. The cardboard boxes are stacked on wooden pallets, 40 boxes to a pallet, for loading into climate controlled overseas containers. These metal 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 ship one full TEU container load per month, based on International Fruit Distributors MRP-based requirements. Through demand forecasting techniques, International Fruit Distributors estimates that its demand for mango concentrate is relatively constant throughout the year. 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 $250 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 15 percent of the original unit purchase price (excluding freight charges). After passing customs, International Fruit Distributors moves each TEU to a public refrigerated warehouse until needed for processing. The average storage time in the

warehouse is one month. The cost to move the TEU from dockside to the warehouse is included in the monthly storage charge of $10.50 per pallet. The public warehouse also charges a one-time fee of $6.25 per pallet to cover their general and administrative costs. Accountants at International Fruit Distributors estimate the inventory carrying charge at 24% percent annually, which can be assessed by calculating the carrying cost per month, and then applied against the original unit price of material in storage. International Fruit Distributors does not pay the invoice from Papa Growers for the mango concentrate until the TEU reaches the local U.S warehouse, thus limiting its holding or carrying cost. When mango concentrate product is required at International Fruit Distributors Los Angeles processing plant, a local freight company moves the TEU container for $275 per shipment. Accountants estimate that receiving and quality-control procedures at the plant add costs totaling $8 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 3 percent of the total concentrate. Again, this estimate is based on the original product purchase price. Production engineers calculate the budgeted factory yield of the mango concentrate when blending into various company products is 98 percent. In other words, International Fruit Distributors wastes 2 percent (in terms of original purchase price) of the product by volume during production. Product is shipped FOB to grocery stores and other customers, meaning the stores take ownership of the product at the Los Angeles plant and assume all shipping costs to their locations. Occasionally, due to quality inspection oversights, spoilage of mango concentrate will not be detected until after the product is shipped from the Los Angeles plant, requiring the removal of tainted product from grocery store shelves. International Fruit Distributors incurs additional out-of-pocket costs totaling $25,000 for each incident. The company's records indicate that such incidents occur about once every six months. In addition to the other costs, Joyce notes that International Fruit Distributors requires that the mango concentrate delivered cost includes a 17 percent assessment from 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.