Sourcing Math

How to Calculate Landed Cost, Tariff Burden, and Reshoring Payback

The four formulas that decide whether reshoring or nearshoring pencils out: total landed cost, tariff burden, relocation payback, and the carrying cost of lead time.

Every reshoring decision reduces to comparing total landed cost per unit across two or more origins. The base formula: Landed Cost = Ex-Works Price + Freight + Insurance + Duty + Brokerage + Handling + Inventory Carry + Quality Cost. Run a real part. Ex-works China price is $8.40. Ocean freight allocated per unit is $0.62, marine insurance at 0.35 percent of CIF value adds $0.03, and a 25 percent Section 301 duty on the $9.02 CIF value is $2.26. Brokerage and handling split to $0.11. That lands the unit at $11.42 before inventory carry, versus a $10.90 ex-works domestic quote. The Nearshoring Landed Cost calculator automates this stack.

Tariff burden is its own line and drives most of the swing. Tariff Burden = CIF Value times (MFN Rate + Additional Duties). CIF equals FOB price plus freight plus insurance, so a $8.40 FOB part with $0.65 freight and $0.03 insurance carries a $9.08 dutiable value. Apply a 3.7 percent base HTS rate plus a 25 percent Section 301 add, or 28.7 percent combined, and duty is $2.61 per unit. On 120,000 units per year that is $313,200 in annual duty alone. The Tariff Burden Estimator and Import Duty Scenario Cost tools let you test rate changes without rebuilding the sheet each time.

Reshoring payback tells you whether the switch is worth the capital. Payback Period (months) = One-Time Relocation Cost divided by Monthly Landed-Cost Savings. Suppose retooling, requalification, and PPAP for a domestic supplier costs $340,000. If landed cost drops from $11.42 to $10.90, that is $0.52 per unit, and at 10,000 units per month the monthly saving is $5,200. Payback is 340,000 divided by 5,200, or 65 months. That fails most three-year hurdles, so you would either negotiate the domestic price down or find volume. The Supplier Relocation ROI and Reshoring Cost Comparison calculators surface this directly.

Lead time carries a real dollar cost that offshore quotes hide. Carrying Cost of Lead Time = Average Inventory Value times Annual Holding Rate, where Average Inventory equals (Daily Demand times Lead Time in days) plus Safety Stock. A part costing $9.00 with 400 units per day of demand and a 55-day ocean lead time ties up 22,000 units of pipeline inventory, or $198,000. Add safety stock of 8,000 units, $72,000, for $270,000 tied up. At a 22 percent holding rate that is $59,400 per year. A domestic 7-day lead time cuts pipeline to 2,800 units. The Lead Time Reduction Value tool converts saved days into cash.

Getting freight per unit right matters because it flexes with container fill. Freight Per Unit = Total Shipment Cost divided by Units Per Container. A 40-foot high-cube holds roughly 2,350 cubic feet usable. If your carton is 1.2 cubic feet and packs 45 units, the container holds about 1,880 boxes times 45, near 84,600 units, but weight often caps first. At a $4,200 all-in ocean rate that is $0.05 per unit if you fill it, but a half-empty container doubles that to $0.10. Always compute against realistic fill, not theoretical capacity, or your landed cost understates by 40 to 100 percent.

Duty drawback and origin rules change which number you use. If 30 percent of a nearshored assembly's content still originates in a tariffed country, only the qualifying regional value content escapes duty. Regional Value Content = (Transaction Value minus Non-Originating Value) divided by Transaction Value, times 100. A $15.00 unit with $4.50 of non-originating parts has RVC of 70 percent. If the trade agreement requires 60 percent, it qualifies; at a 65 percent threshold it fails and duty applies to the full value. The Country of Origin Cost Risk calculator flags where a bill of materials sits against these thresholds before you commit tooling.

Sensitivity analysis prevents a single-scenario decision. Rebuild landed cost at three points: a low case with freight at $2,800 per container and duty at 10 percent, a base case at $4,200 and 25 percent, and a high case at $7,500 and 25 percent plus a 10 percent surcharge. On the same $8.40 part those yield roughly $10.60, $11.42, and $12.90 landed. If your domestic alternative is fixed at $10.90, offshore wins only in the low case. Tie each input to a source: freight from your forwarder's rate sheet, duty from the HTS code, holding rate from finance, demand from the S&OP plan.

Assemble the full comparison as a total cost of ownership per unit, not a piece price. Sourcing TCO = Landed Cost + Quality Cost + Supply Risk Premium + Working Capital Cost + Change Management Cost, all per unit and annualized. On our example, offshore TCO is $11.42 landed plus $0.18 quality (a 1.5 percent defect rate at $12 disposition), plus $0.06 risk premium, plus the carry already counted, reaching about $11.66. Domestic sits near $11.05 once its shorter lead time is credited. The Sourcing Total Cost of Ownership calculator rolls these lines into one comparable number so procurement and finance argue from the same figure.

Published 2026-07-01.