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MANAGED LOGISTICS

What Goes Into a Freight Rate?

Dec 21, 2021

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Behind every completed customer delivery several people and processes worked together to make it happen. Getting product onto a truck and making a delivery are the most visible parts of logistics, but the complexities of getting it right go a lot deeper.

Like most things, with transportation you get what you pay for. This makes finding the right balance of cost and service for every shipment important — but optimizing these is easier said than done. Regardless of the delivery to be made, shippers have several mode choices when it comes to fulfilling it. All are unique, yet each has the same goal of moving goods to where they need to be in good shape and on time.

Shipping Cost and Service

A big part of what makes these decisions complex is how freight rates are calculated for each shipping method. The key to understanding freight rates is understanding the inputs that go into rate calculations, the main ones being mileage, transit time, fuel costs, and accessorials. The reason large distances incur higher transportation costs is that the amounts of fuel, driver time, and other expenses are greater due to the greater number of miles to be traveled.

Transit time is how long the shipment will take to get from its origin to the destination. This is an important consideration that shippers need to be aware of, because each mode can have a different transit time over the same distance. Together, distance and time are the biggest drivers of shipping costs, by far.

Another major cost component is fuel surcharges, which change based on the market price of diesel. While this was not the case 10+ years ago, now it is common for carriers and other logistics service providers to raise and lower fuel surcharges weekly as the price of fuel changes.

Accessorials are additional costs that can be incurred during a shipment, such as detention or some other form of special handling. Typically, these are billed ad hoc and are not part of the base rate of a shipment.

The impact of each rate cost factor we’ve outlined differs depending on the method of shipping.

The primary modes of freight shipping are:

  • Less Than Truckload (LTL)
  • Truckload or Over-the-Road
  • Intermodal

Less than truckload (LTL) is typically used for handling shipments of about 150 to 15,000 pounds (or up to about 12 pallets). As the name suggests, these shipments will fill only a portion of a normal-sized truck. LTL rates are calculated using an exhaustive classification system that assigns a freight class and considers the shipment weight along with the origin and destination zip codes. Most LTL carriers have “published” rates available to any company but that are often discounted for shippers with steady volume. The final rate calculation is based on a cost per hundredweight (weight/100) as determined from a tariff table that accounts for class and distance.

Truckload (FTL or full truckload) is used when a single shipper produces enough cargo to fill up an entire truck. Truckload rates are a simpler calculation, using a cost per mile traveled or a flat door-to-door rate. A variable fuel surcharge is often added, as dictated by the market price of diesel fuel. For the most part, the type and amount of product being shipped does not impact the freight rate as long as the normal freight insurance is adequate and the total weight is under 45,000 lbs.

Intermodal relies on a combination of trucks and rail to transport a shipment. A drayage company picks up a container specifically designed to be placed on a train and takes it to a “ramp,” where it gets loaded onto a train and then travels to its destination, gets unloaded from the train, and is delivered by another drayage company. Cost-wise, it operates similar to truckload, with rates being based on an amount per mile or a flat rate.

With all the options, and each having its own advantages and disadvantages, the hard part for a shipper is knowing how to choose the best carrier and mode for each shipment. For any company shipping more than a few loads per day, technology is likely the best answer.

Freight rates and contracts can be complex, so simply calculating a single freight rate is hard — considerably more so when taking into consideration multiple carriers and mode options. Logistics technology that can store complex rate tariffs and assist with accurate rate calculations is the simplest way to make sure shipments are being optimized for cost and service.

This technology is necessary for making the best shipping choice. However, it can be expensive. If your company is looking to optimize the shipping process, TransImpact provides decision support tools that manage the customer’s own carrier rates and ensure the best routing decisions are made on every shipment.

Visit TransImpact to learn more.

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