Landed cost for process industries - An Oracle solution
Look at the mirror directly or through spectacles, you are most probably seeing through it or seeing just the glass. Look deep into it - In all chance it contains sand from Australia, soda ash from China, both processed in Taiwan, manufactured in India using Italian machinery and recipe combination verified in American Laboratories. Each of these processes adds cost towards freight, storage, taxes and duty. Some part of the money you paid was actually for these. As a user you need not know the profitability and margins. But for the manufacturer this is of utmost importance. Normally the landed cost charges are applied to different items based on weight, volume and quantity.
Oracle Process Manufacturing Financials supports Landed Cost management (LCM), a web based application which is part of Oracle E-Business suite and a milestone for customers to track and control the cost of landed goods. Oracle Landed Cost management application is seamlessly integrated with Oracle Process Manufacturing (OPM), Oracle Purchasing, Oracle Inventory and Oracle Payables.
These costs are initially estimated as Estimated Landed Cost (ELC) and then updated with Actual Landed Cost (ALC), as when they become known, allocating them to shipments, orders, and products. Accordingly the estimate versus the actual cost comparison through LCM workbench would highlight improvement actions on controlling the landed costs. Oracle Process manufacturing customers irrespective of using different cost methods can use the Landed cost management features.
OPM - Landed cost management application supports two basic scenarios of receiving flows. First one is Landed Cost management as Pre-receiving and the other is Landed Cost management as Servicing. Unique selection of either of the flow can be made and henceforth the Organization would operate exclusively as Landed Cost management for Pre-receiving or Servicing. Let us consider a routine procure to pay flow as an example and understand how the landed cost for items are arrived.
LCM as Pre-receiving:
LCM as Pre-receiving is used when we intend to calculate the Landed cost estimation before we receive the goods in Organization with reference to Purchase order. The LCM Pre-receiving functionality has the flexibility of varying the item quantity and price defined in Purchase order. The charges associated with the items are generated and validation is performed manually to derive the Estimated Landed Cost (ELC). The Pre-receiving details from LCM module are passed on to the Receiving applications and receipt of goods and receiving transaction takes place for the same quantity.
LCM as Servicing:
The Servicing scenario is used when the receipt of items into inventory happens followed by automatic creation of Estimated Landed Cost. The receipt happens with reference to Purchase order quantity and price, which cannot be changed like pre-receiving. This scenario is favorable when you assess that the landed cost of an item remains constant with known service providers without much variation to the charges.
Through Oracle Payables, the Item invoice and freight invoices are created and matched to the receipt of the item with actual prices. This information is passed back from Oracle payables module to the Landed cost management in order to calculate the Actual Landed Cost (ALC) and the relevant account postings happen to General Ledger. For both Pre-receiving and Servicing, the Actual Landed Cost could be viewed and compared with Estimated Landed Cost. This would help to analyze and control the Landed cost charges. The Oracle Process Manufacturing reports display the history of the landed cost adjustments made to the item.
Without knowing the landed cost of a product and realizing the profit margins would end up exhausting your pocket. These landed costs is usually 30 to 40% of the product cost which may even go beyond this if unnoticed and uncontrolled. Lot many hidden costs would put up your profitability at risk. The usage of LCM application gives the opportunity to identify areas of potential cost reduction, more accurate product profitability reporting, and increased competitiveness by sourcing of materials from foreign locations.