For shippers, calculating freight costs can be one of the hardest expenses to predict and can seriously impact the bottom line. Using a transportation management system (TMS) can help optimize your shipping process and cut freight costs for LTL, truckload, intermodal, LCL, FCL and air shipping. But first, it is helpful to understand how freight rates are calculated.
Shipping Factors That Affect Freight Costs
When using a freight calculator to find rates, there are several factors to be aware of that will affect the costs, including:
Freight Class
Before a commodity is shipped, it’s assigned one of the 18 freight classes as determined by the National Motor Freight Classification (NMFC). This assignment is based on four factors:
- Density
- Handling
- Stowability
- Liability
Freight classes range from 50 to 500. The higher the freight class, the higher the freight rate.
Packaging
Freight costs are determined by the dimensions of your package along with its weight, which also affects the freight class. For example, it will be cheaper to ship a piece of furniture that is unassembled than a piece of furniture that is assembled, since you can fit the unassembled furniture into a smaller package.
Mode of Transportation
Shipping a product overseas will cost more than just driving a truck down the coast of the United States because of the distance and shipping mode involved.
Delivery Requirements
You can incur surcharges for special delivery requirements such as a phone call prior to drop off, a request for inside delivery or a need for your shipment to be delivered to a limited access location like a storage unit, church, school or private commercial location.
Weight
The shipping industry uses the hundredweight pricing model, which means that freight costs are calculated per hundredweight (CWT). Carriers consult a pricing chart that lists these costs and weight brackets. Under this model, the more your shipment weighs, the less you pay per hundred pounds.
Density
As one of the first factors that determines freight class, density is calculated as the weight divided by the volume. The denser the shipment, the lower the freight classification. Remember the unassembled vs. assembled furniture example? The unassembled shipment is going to be denser than the assembled, resulting in a lower freight classification.
Distance
The further your freight needs to travel, the higher the price per hundred weight will be. Plus, associated freight costs such as fuel, driver-time and equipment will also affect the price.
Base Rates
Every carrier sets their own base rate, which is usually delivered to you as a quote per 100 CWT. This figure is based on volume, demand and gross costs.
Freight All Kinds (FAK)
This is a concept that lets you ship multiple products in different freight classes together under one freight class.
Minimums
Some carriers require a minimum freight spend if you want to ship with them.
Accurate Information
It’s imperative that you have the most precise information possible before getting a freight quote, especially if you’re using a freight rate calculator. The more precise your information — like weight and distance — the more accurate your quotes will be.
Accounting for Freight Cost Fluctuations
Supply and demand has a major effect on freight rates and accounts for much of the volatility that shippers experience. Some of the major factors that can affect supply and demand are
Weather and Natural Disasters
If inclement weather causes a delay in normal delivery schedules, carriers must make up the lost revenue by passing the costs on to the customers.
Economy
The health of the economy naturally impacts the shipping industry. In a strong economy where consumers are spending money, the trucks delivering the goods are at capacity. During a recession, the opposite is true. If a recession hit and a recovery quickly followed, this sudden spike would affect capacity and cause freight rates to increase.
New Regulations
More regulation usually means higher freight costs. For example, the recent regulation requiring drivers to spend less hours on the road affects carriers, who then pass that cost on to the customer.
Seasonality
During peak shipping seasons like Christmas, freight rates naturally increase. This is known as a PSS or peak season surcharge. Similarly, there is a winter surcharge (WSC) that can also increase shipping rates.
Fuel Costs
When fuel prices increase, so does the cost to ship freight. This is passed on to the customer via a BAF surcharge, also known as a bunker adjustment factor.
While these are the primary drivers of cost fluctuation, there are other surcharges that may be levied including the CAF (currency adjustment factor), IMO (for hazardous materials), the heavy weight charge and more.
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