What is the Freight Cost? (6 Tips to Calculate It)

3/9/2023

What is the Freight Cost? (6 Tips to Calculate It)

The freight and logistics industry relies on competitive pricing modules that companies have to take into account before agreeing to the payment. Freight is one of the most important costs for inventory-keeping companies. 

But first things first. What is the Freight Cost? 

Freight cost is the cost that is charged by a carrier for shipping goods to a destination location. The company or the individual who wants the goods to be transported is the one that incurs the freight costs. 

The freight costs depend on many factors such as:

1. Fuel Costs

Fuel costs are the primary determining factor that shipping companies include in their pricing modules. The cost is charged according to the price at the time of shipment. Naturally, if the prices are low, transportation will be less expensive. 

2. New Rules and Regulations 

Rules and regulations differ according to the country. If the government introduces laws where truck drivers aren’t allowed to work more than eight hours a day or if it increases the service tax on shipping goods, the freight costs will increase. 

3. Distance

The rule of thumb is that the longer the distance between the pick-up point and destination, the higher the costs. But the rates also depend on the geographic location, transportation mode, capacity, and the complexity of the delivery. 

In the trucking industry, distance is divided into five main categories:

  • Short Haul - The distance is less than 250 kilometres and the pricing is charged for the whole day than the rate per mile. 
  • Mid Haul - The distance is less than 500 kilometres and the pricing is similar to short haul. 
  • Tweener - The distance is between 500-800 kilometres and the rates are billed on a rate-per-mile basis as there is no need for the compensation contingencies that are used on shorter hauls. 
  • Long Haul - These typically include distances between 800-1200 kilometres. The rates are again determined on a rate-per-mile basis and the pricing depends on the current market pricing conditions. 
  • Extended Long - Any distance longer than 1200 kilometres is considered an extended long distance. 

4. Weather Conditions 

Weather is a prominent variable when it comes to determining shipping costs. Since it is a disruptive factor, a change in weather conditions naturally raises shipping costs. 

High-risk weather conditions increase concerns about safety and many drivers understandably back out. This brings a gap in supply since there are fewer trucks and drivers to meet the demand. 

Tips for Calculating the Freight Costs

1. Understand the Cargo Dimensions & Weight 

It is important to consider the dimensions of the cargo before ensuring shipping. Carriers take into account the volumetric weight rather than the actual weight. 

This is specifically taken into account when the weight of the goods isn’t higher per se but it ends up being heavy because of the packaging that may be required. The cargo weight is the actual weight of the shipment. 

When you calculate the freight shipping cost, keep in mind that the cost of freight is calculated on the volumetric weight or actual weight, whichever is higher.

Also, understand that if the goods are transported in one unit in one consignment, then the cost will be calculated according to the weight and volume based on the freight provider’s shipping prices. 

However, if it is a large shipment and you’re transporting multiple freight units, you should consider the packaging and mode of transportation. 

2. Determine the Value of the Shipment Contents

While the value of the goods is secondary, it is just done to determine if they’re fragile or of high importance. Examples include glasses, and important documents like passports, antiques, etc. 

In such cases, the goods are insured which impacts the overall freight costs. Insurance keeps the shipper at ease since they can get the claim in case the items are lost, damaged, or stolen. 

3. Consider the Demand and Supply of your Freight 

Demand and supply are the driving forces that define the costs of any industry and the shipping industry is no different. As the supply of the carriers increases, you’ll witness a decrease in the shipping rates. 

If the demand for freight is high, so does the price associated with the shipment. While calculating the freight costs, it becomes imperative to take into account the market framework that is a result of the seasons, places, and equipment types. 

4. Consider the Urgency of the Shipment

There’s a strong correlation between the urgency of the shipment and the money you pay for it. In hindsight, it is best to plan your shipment well in advance. In the truck industry, there is a term called ‘lead time’. It is the warning time you provide to your freight partner before transporting the goods. 

Your job is to know how much time is the appropriate lead time. To optimise your costs, you need to ensure that you notify the shipping provider in advance to avoid last-minute steep prices. 

5. Leverage Shipping Cost Estimators

As we spoke of numerous factors that impact the overall pricing, it is a good practice to automate the calculations and get an idea of what the end-cost structure would look like. A lot of freight providers create shipping software for order fulfilment

These estimators require you to add the variables that we discussed and the fixed costs incurred during the shipping process. It is a good way for clients to know how much they will have to pay. It makes it easy for them to differentiate these costs and see how much each service will cost. 

6. Consider Balancing Costs Across Various Items

There are various methods you can use to ship your freight. The idea is to get the best out of sea freight through bulk shipments. When you choose to opt for Full Container Load (FCL), the overall freight cost is distributed evenly among items and it results in a low cost per unit. 

On the other hand, when you opt for Less than Container Load (LCL), consider the volume and weight when packaging as the pricing will eventually depend on these measures. This way, you can optimise the landed costs as the freight is distributed across units. 

Concluding Thoughts

Although it may seem easy to simply take into consideration the variables and calculate the freight costs, you need to know that the shipping industry is volatile. It would be a good practice to consult experts who have extensive knowledge of the market dynamics and see how to optimise the costs associated with shipping. 

 

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