For companies operating in the transportation industry, freight costs can have a significant impact on the business organisations. From a manufacturer shipping finished products to an ecommerce retailer managing inventory, keeping these costs under control is crucial for long-term success. In this blog, we’ll talk about what is freight cost, why businesses should work to improve freight cost, key components of freight quotes, strategies & best practices to reduce freight cost.
Freight cost refers to the total cost of transporting goods from one location to another. It encompasses various factors, such as transportation model (truck, rail, air, ocean), the distance, the weight and dimensions of the shipment, and other additional charges levied by carriers.
Why Focus on Reducing Freight Cost?
The importance of how reduction in freight cost can benefit your organisation is listed below:
- Increased Profit Margins: Every penny saved on freight translates directly to increased profit margins. Reduced transportation expenses free up resources that can be reinvested in other areas of your business.
- Competitive edge: In a competitive market, lower freight costs allow you to offer better pricing to customers, making your products or services more attractive.
- Efficiency of Operations: Optimizing your freight processes often leads to improved efficiency throughout your supply chain. This can translate to faster delivery times and reduced overall operational costs.
Key Components of Freight Cost
Understanding the different components of freight cost is crucial for effective cost-reduction strategies. Here’s a breakdown of the key factors:
- Transportation Model: Each mode has its cost structure. Evaluate the pros and cons of each model and pitch them against your needs and preferences. Though trucks offer flexibility, they are expensive for long distances. Rail is cost-effective for bulk goods over long distances. Air freight is the quickest but most expensive option. Ocean freight is the most economical for large shipments across continents. Thorough comparison will aid you to select the right freight forwarder thereby optimising the cost.
- Fuel Expenses: International as well as domestic events lead to fluctuation in fuel prices. The carriers often add surcharges based on current market rates.
- Distance: Distance is the basic yet the most crucial factor that affects freight quotes. The longer the distance your freight travels, the higher the cost will be and vice versa.
- Shipment Weight & Dimensions: The weight and dimensions of shipment, its packaging, etc affect the cost of freight. Heavier and bulkier shipments require more resources to transport, leading to higher costs. On the other hand, light-weight shipment can be transported with lower pricing.
- Accessorial Charges: These are additional fees levied for services beyond basic transportation, like detention fees (if your truck is held up at the loading/unloading dock) or special handling for fragile items.
- Carrier Rates: Different carriers offer varying pricing structures. Established freight forwarders, offering a wide range of networks are more likely to charge a heavier fee. Make sure to negotiate the freight charges.
5 Textbook Strategies to Reduce Freight Cost
Keeping freight costs in check is a constant battle for businesses of all sizes. Here are five fundamental strategies to optimize your freight pricing:
1. Optimize Your Shipment Profile:
- Consolidate Shipments: Plan your shipments efficiently. Combine smaller orders into larger ones to take advantage of lower per-unit freight costs. This reduces the number of shipments you send, minimizing transportation expenses.
- Utilize Available Space: Ensure your shipments are packed efficiently, maximizing trailer or container space. Fill empty voids and prevent damage during transport. This strategy will go a long way to help you reduce freight costs.
- Dimensional Weight Pricing: Carriers often base pricing on dimensional weight even if the actual weight is lower. Choose the right packaging materials and dimensions to reduce the dimensional weight without compromising product protection. This can be particularly beneficial for lightweight, bulky items.
2. Use Different Transportation Modes:
- Selection of the Right Transportation Modal : Analyze your needs and select the most cost-effective mode for each shipment. Utilize cost-effective options like rail for long-distance bulk shipments while prioritizing airfreight for time-critical situations. Explore truck options for potentially lower costs compared to airfreight.
- Intermodal Transportation: Combine different modes like truck and rail for long-distance transport within a country. This can offer significant cost savings compared to solely relying on trucks. Intermodal transportation leverages the strengths of each mode, optimizing efficiency and reducing overall costs.t
3. Engage in Negotiations:
- Research and Compare Rates: Never agree to the first quote you receive. Get bids from multiple carriers to compare pricing and negotiate for better rates. Focus on building strong relationships with reliable carriers who offer competitive pricing and excellent service.
- Contract Negotiation: Consider long-term contracts with carriers for high-volume shipments. This can lock in more favourable rates. Negotiate volume discounts or service level agreements (SLAs) that meet your needs. Long-term contracts provide stability and potentially lower costs, while SLAs ensure consistent service quality.
4. Technology and Data Analytics:
- Transportation Management Systems (TMS): Invest in a TMS to streamline your logistics operations. A TMS helps optimize shipment routing, carrier selection, and track costs in real-time, allowing you to make data-driven decisions for cost savings and to reduce freight costs.
- Freight Procurement Software: Leverage software to automate freight quote requests, comparisons, and booking processes. This can save time and effort, potentially revealing lower-cost options you might miss manually.
5. Optimize Your Supply Chain:
- Inventory Management: Implement efficient inventory management practices to avoid overstocking or stockouts. This reduces unnecessary transportation due to frequent restocking or holding excess inventory that needs to be moved.
- Vendor Consolidation: Consolidate your suppliers to potentially reduce freight costs by negotiating better rates with fewer vendors. Fewer vendors can simplify logistics and potentially lead to more streamlined shipping processes.
- Lead Time Optimization: Negotiate longer lead times with suppliers if possible. This allows for larger, more cost-effective shipments and avoids the need for frequent, smaller shipments. Extended lead times can provide opportunities for consolidation and potentially lower costs.
10 Best Practices for Freight Cost Optimization
Adopting these best practices can further enhance cost-saving efforts in freight management:
- Supplier Audits: Regularly assess supplier performance, reliability, and pricing competitiveness. Collaborate closely to negotiate favourable terms and ensure consistency in service.
- Warehouse Optimization: Streamline warehouse operations to reduce handling times and improve efficiency. Optimize layout and workflows to minimize order processing and fulfilment times.
- Customer Collaboration: Work closely with customers to forecast demand accurately and plan shipments efficiently. Aligning production and delivery schedules reduces rush orders and transportation costs.
- Sustainability Practices: Explore eco-friendly logistics options such as consolidating shipments or using greener transport modes. Sustainable practices reduce environmental impact, simultaneously lowering operational costs.
- Process Improvement Initiatives: Regularly assess your internal logistics processes to identify areas for improvement. This can involve streamlining warehouse operations, optimizing loading procedures, or implementing new technologies to improve efficiency and potentially reduce freight costs.
- Audit Freight Invoices: Regularly audit freight invoices to identify billing errors or discrepancies. Verify charges against agreed-upon rates and terms to ensure accurate billing.
- Employee Training: Train staff involved in shipping and logistics on cost-saving practices and efficient shipment handling. Encourage a culture of cost-consciousness and continuous improvement.
- Off-Peak Shipping: Whenever possible, consider scheduling shipments during off-peak times. Carriers often offer lower rates for shipments outside of peak hours or days. A little flexibility in your shipping schedule can translate to significant cost savings.
- Flexible Delivery Options: Offer customers flexible delivery options, such as standard and expedited shipping. This allows them to choose the most cost-effective option based on their needs. Additionally, explore offering customer pickup options at designated locations to potentially reduce last-mile delivery costs.
- Benchmarking and Analysis: Benchmark freight costs against industry standards and analyze trends to identify opportunities for cost reduction. Use data-driven insights to optimize shipping strategies.
Conclusion
Reducing freight costs is a critical objective for businesses looking to enhance profitability and operational efficiency. Implementing these strategies and best practices not only lowers expenses but also enhances overall supply chain resilience and customer satisfaction. By prioritizing cost-effective shipping practices and continuous improvement, businesses can navigate challenges and exploit opportunities for growth in the global marketplace.
