If your business involves inventory – whether you are a wholesaler, manufacturer or retailer – freight charges are one of the key costs of doing business. Transportation costs are often highly uncertain; a merchant may not know the freight cost for a shipment until the carrier sends an invoice weeks later. Although freight costs are often uncertain, they are not a total mystery; as with most outgoings, they depend on a range of economic circumstances. Let’s look at some of the factors that affect transportation costs.
The cost of maritime and land transport is, of course, related to the price of fuel. As fuel prices fall, container ships and cargo trucks become cheaper to operate and the price of transport goes down. Savings (or losses) are passed on to consumers – either indirectly or through a fuel cost component built into a carrier’s pricing model. And of course, if fuel prices increase, carriers will pass the additional expense on to merchants.
The labor market for commercial drivers
Increasing wages and competition among carriers for truck drivers can have an upward impact on transportation costs. As older drivers retire, carriers may struggle to find operators for their vehicles. Recruiting new drivers is difficult; the job can be tough and typically requires a different class of driver licence (courses to certify new commercial drivers can take weeks or even months to complete). Moreover, many logistics companies struggle to compete with ‘in-house’ truck driving positions that tend to pay better and may offer less stress.
Demand for freight
Pricing depends on the volume of product being shipped by operators just as much as it depends on the actual, underlying costs. If capacity is limited, operators may be inclined to sell limited space at a premium. On the other hand, if business is slow, a carrier may be talked into offering a more competitive rate, at least in the short term.
Merchants who can offer a carrier regular, consistent business are well placed to receive a preferential rate, especially if demand across the industry is low.
Some trucking companies operate an older, smaller fleet. While these trucks are entirely adequate, newer trucks are designed to maximize storage space, allowing a truck to split space even further.
Regulation may directly impact the freight industry and its bottom line; for example, governments often set maximum driving hours for commercial operators. Other government regulation may also impact freight costs; for example, New Zealand’s Emissions Trading Scheme has been estimated to increase freight costs by several dollars for every thousand kilometers travelled.
International maritime shipping has become fraught with the dangers of pirates and rogue governments. The World Bank estimates that the losses from global piracy amounted to approximately USD$18 billion in 2014, pushing up the price of everyday freight as carriers were forced to change shipping routes and pay higher insurance premiums.
Your reputation as a merchant
The price quoted by a carrier will, at least in part, reflect the carrier’s expectations as to the packing of pallets and the time to load. If you have a reputation for loading quickly, you may be charged a slightly smaller rate to compensate.
Topics: carrying costs, freight costs, purchase orders, recosting, supply chain management