Freight Cost Explained: What Does Freight Cost Mean?
Freight costs are critical since they directly impact the profitability of businesses involved in international trade. Freight cost is determined by a multitude of variables, including the distance traveled, the weight and volume of the shipment, the mode of transportation chosen (e.g., air, sea, or land), and the specific services required.
Understanding Freight Costs
Freight cost meaning the amount paid to transport goods from one place to another.
This transportation can be via land, sea, or air. The cost of freight is influenced by a multitude of factors, including the distance traveled, the weight and volume of the shipment, the mode of transportation chosen, and the specific services required.
Freight Documents
Several documents are integral to the freight cost for shipping.
Bill of Lading (BOL): A legal document that serves as a contract of carriage between the shipper and the carrier. It outlines the terms and conditions of the shipment, including the description of the goods, the port of loading and unloading, and the freight charges.
Commercial Invoice: A document that provides detailed information about the goods being shipped, including their value, description, and country of origin.
Packing List: A document that lists the contents of each package in a shipment, including the quantity, description, and weight of the goods.
Types of Freight Charges
Freight costs can vary depending on the mode of transportation, the specific services provided, and the distance traveled.
Common types of freight charges include:
Base Rate
These are the fundamental charges based on the weight and volume of the shipment, the distance traveled, and the mode of transportation.
Base rates are typically calculated using a specific pricing formula, such as per hundredweight (CWT) or per cubic meter.
Surcharges
Fuel surcharges, security surcharges, currency exchange surcharges, and peak season surcharges are additional and applied for various reasons.
Fuel surcharges are often based on the price of fuel and are adjusted periodically to reflect changes in fuel costs.
Security surcharges may be applied to cover the costs of enhanced security measures, such as additional inspections or screenings.
Currency exchange surcharges may be applied to offset the costs of fluctuations in exchange rates.
Peak season surcharges are applied during periods of high demand for transportation services, such as the holiday season or specific trade events.
Accessorial Charges
Freight fee to additional services that are not included in the base rate, such as customs clearance, insurance, warehousing, and special handling.
Customs clearance charges cover the costs of processing customs documentation and ensuring compliance with import and export regulations.
Insurance charges are applied to cover the costs of insuring the shipment against loss or damage.
Warehousing charges are applied for storing the goods at a warehouse or distribution center.
Special handling charges may be applied for shipments that require care or attention, such as hazardous materials or fragile goods.
10 Strategies to Reduce your freight shipping costs
Here are 10 strategies on how to reduce freight costs:
1. Reduce the amount of filling used in packing your products
Excessive filing can increase the weight and volume of your shipment, leading to higher freight costs. Use the minimum amount of filing necessary to products during transit.
Consider using void fillers that are lightweight and space-efficient.
Select packaging materials that are durable, but also lightweight and cost-effective. Avoid using excessive amounts of cushioning or protective materials that can add unnecessary weight.
Ensure your packages are the appropriate size to fit efficiently into shipping containers or pallets. Avoid using oversized boxes that can waste space and increase transportation costs.
2. Ship less frequently
If you have multiple shipments going to the same destination, consider consolidating them into a single shipment to reduce transportation costs.
This can be achieved through groupage services or by coordinating with other shippers.
Coordinate your shipments to avoid peak shipping seasons or times of high demand, which can lead to higher freight rates, therefore, by scheduling your shipments strategically, you can often secure better rates and avoid delays.
3. Use incoterms to reduce freight costs
International Commercial Terms (Incoterms) are a set of standardized trade terms that define the responsibilities and costs shared between the buyer and seller in international trade.
Select the Incoterm that best suits your specific needs and aligns with your desired CFR cost freight allocation. Consider factors such as who is responsible for transportation, insurance, and customs clearance.
4. Track each shipment proactively
Use tracking tools to monitor the progress of your shipments in real-time, which allows you to identify potential delays or issues early on and take proactive steps to address them, minimizing additional costs.
By identifying potential problems early, you can implement preventive measures to avoid delays or disruptions, such as rerouting shipments or contacting carriers to resolve issues.
5. Get the right transport insurance
Evaluate your specific insurance needs based on the value of your shipments, the risks involved, and your risk tolerance.
Select insurance coverage that adequately protects your shipments without overpaying for unnecessary coverage.
Consider factors such as declared value, coverage limits, and exclusions.
Work with your insurance provider to negotiate favorable rates and terms for your transportation insurance.
6. Consolidate shipping
If you have multiple shipments going to the same destination, consider consolidating them into a single shipment to reduce transportation costs, which can be achieved through groupage services or by coordinating with other shippers.
Schedule your shipments to avoid peak shipping seasons or times of high demand, leading to higher freight rates.
7. Utilize a digital freight booking platform
Digital freight booking platforms allow you to compare rates from multiple carriers and negotiate better deals, helping you secure the most competitive rates for your shipments.
These platforms can streamline the booking process, reducing administrative overhead and saving time.
Digital freight booking platforms can provide valuable data and insights into your shipping operations, helping you identify areas for cost reduction and optimization.
8. Explore multimodal transportation savings
Consider combining different modes of transportation, such as rail, road, and sea, to reduce overall costs.
Multimodal transportation can be particularly effective for long-distance shipments
Carefully plan your multimodal routes to minimize transportation time and costs. Consider factors such as infrastructure, customs procedures, and transit times.
9. Streamline inventory
Optimize your inventory management practices to avoid excess stock, which can lead to unnecessary storage and transportation costs.
Use accurate demand forecasting to ensure you have the right amount of inventory on hand to meet customer needs without excess stock.
Prevent stock outs by maintaining adequate inventory levels and optimizing your replenishment process.
10. Leverage a TMS for freight cost optimization
A Transportation Management System (TMS) can automate various tasks, such as freight rate negotiation, shipment tracking, and reporting, saving you time and effort.
TMS software can provide valuable data and insights into your freight operations, helping you identify areas for cost reduction and optimization.
A TMS can give you better visibility into your supply chain, enabling you to make more informed decisions and proactively address potential issues.
