The freight transportation system moves over 17.7 billion tons of goods valued at more than $18.1 trillion, or an average of 54.7 tons of freight annually in the United States. About 62.6% of this cargo and about 61.9% of the value is carried by trucks, which remains the primary mode of transport for distances less than 750 miles.
Goods move using a network of truck routes, railroads, waterways, and airports. The distance from origin-to-destination and the cost to ship play an important role in determining which mode(s) of transport are used in this multimodal journey.
Within road transport, there are two main types of shipping options – LTL or Less-than-Truck-Load and FTL or Full Truck Load. LTL is a type of transportation (shipping) service that is used for shipping small loads by shippers who do not have enough cargo to ship it as a Full Truck Load (FTL) whereas a Full Truck Load is just that – a truck full of your goods.
LTL shipments are usually between 151 and 20,000 lbs and shipping carriers apply “weight break” discounts on freight as the shipments increase in weight.
There is a lot of demand in the market for LTL carriers as businesses are starting to realize the cost savings LTL shipping offers. But LTL shipping rates could be quite high due to demand, and all shippers need to know what affects those rates, how they can leverage this knowledge, and reduce shipping costs effectively.
There is a multitude of factors that can influence the pricing of LTL shipping such as:
The Standard for Freight Identification and Classification is a standard set by The National Motor Freight Classification® (NMFC®) to provide a comparison of commodities moving in interstate, intrastate, and foreign commerce. This standard provides a basis on which freight negotiations may be carried out between the carrier and shipper. NMFC has classified cargoes under 18 different classes from a low 50 to a high of 500 – based on the cargo’s density, handling, stowability, and liability.
Lower classes of cargo are generally heavier and dense and do not damage easily, therefore lower in freight whereas higher classes of cargo are more volumetric and lighter–thus higher in freight.
Cargo Weight, Dimensions, Density
These are critical determinants of the freight class based on which the LTL rates are calculated. The freight rate increases in proportion to the weight of the shipment, the dimensions and the density of the cargo.
Zones and Transit Time
This is another critical determinant of the freight rates charged by carriers. The longer the haul, the higher the rate.
Seasonality influences LTL rates because of the supply and demand metrics attached to the season. Black Friday, Thanksgiving, Christmas are all heavy demand periods and shipping rates spike around the periods of deliveries for these days.
Even when there are rate negotiations with carriers, rates are not just rates. There are Tariff rates, Flat Rate, FAK, Named Account, Contracted Rates and there are several combinations of these.
Incredible progressions in the transportation industry (and its many benefits) are fast catching on, but so is the cost. A carrier with the ability to provide real-time data of your cargo using IoT, Big Data, Blockchain, etc., can command a higher rate than those who are not technologically fit.
Along with rates, volume-based discounts are probably one of the biggest influencers of how LTL pricing is set.
Usually termed as surprise items in freight pricing, these charges could influence the profit or loss of business quite heavily.
Due to complexities involved in understanding all the above factors, most shippers end up overpaying for the shipment of their goods. Many shippers end up overpaying because their service provider contracts disguise the actual costs and charge many fees and surcharges which are unnecessary.
Since there is no standard, it may be impossible for shippers to know the best-in-class standard costs across various transportation services. It is important for shippers, especially small businesses, to understand the freight transportation market, how it has evolved over the years, and to look for ways to lower shipping costs.
The main thing to understand here is that lowering shipping costs does not automatically mean negotiating the lowest LTL rates. You may be able to get these rates at times, but in the long run, using only this method will not be sustainable.
You’ve been shipping via less-than-truckload (LTL) carriers for years. Yes, they’re expensive, schedules are unpredictable. If you’ve thought, “I don’t have a choice”, then think again because there are definitely opportunities for you to lower your shipping costs and achieve better margins.
But, before that, it’s important to know some of the factors in freight shipping that carrier representatives don’t want you to know, such as:
- If not handled properly, LTL shipping could cost you much more than other modes of transport or shipping
- There could be a mid-year rate increase without notice
- Freight rates increase every year due to capacity crunch, fuel price increase, fuel surcharge or just plain old supply and demand metrics
- LTL costs depend on various factors and each carrier charges based on the best formula for them, making it difficult for you to forecast the costs for your shipment accurately
- Due to rehandling, LTL cargo may take longer than expected to reach the destination and this means you need to have buffer stock to cover for any delays or may even be forced to air freight your cargo to maintain your commitment to your clients
- Rehandling also increases the change of cargo damage which could also increase your insurance rates
But for every challenge there are solutions. Here, we give you 9 tips and strategies on how to effectively lower your shipping costs.
1. Plan your Shipments…Better
Planning is crucial when it comes to transportation because each mistake can be costly and erode the profits of not just the current shipment, but many others. One sure-fire method of reducing shipping costs is effective planning of your inventory cycle which means you only ship when you have to.
With effective inventory planning, you can avoid rush orders and express replenishment orders which will cost you much more than standard deliveries. Planning your deliveries allows you to negotiate effectively with your LTL carrier and work out a consistent schedule within the standard rates on offer.
The carrier will be happy to have a base load from you regularly. This also helps you reduce storage costs in your warehouse for excess inventory.
2. Know your Market Inside and Out
It is important to know who your competitors in the market are, not just from the standpoint of your own business, but also from the perspective of the LTL carrier you may be using. You need to know which carrier your competition may be using, and the areas where they may be better than you in terms of rates and services.
Contracting with those service providers will assist not just in reducing your shipping costs, but also in staying ahead of the competition and increasing your client base.
3. Get to Know Your Service Provider
In a lot of the cases, you as the shipper may be paying more because you did not vet the service provider and their capabilities thoroughly.
In the current freight market, it’s essential to have a service provider that can offer cost reductions on the back of their administrative capabilities and service such as:
- A sound financial background
- Technologically fit and capable of providing network and market analysis
- Business intelligence which can also enhance your business acumen
- The flexibility of service which allows you to choose the best options for your clients
Leverage the strengths of your preferred carrier and through analysis of historical freight shipping data, invoice audits, freight analysis, and contract optimization to negotiate the best possible contract rates for your shipments.
4. Make the LTL Carrier an Extension of You
By this, we mean once you have identified the best carrier for your shipments, use their strengths and resources to track, monitor and report the progress of the shipments instead of spending your resources which costs you time and money. Such tracking activity can include proof of delivery, cross-docking information where applicable, estimated shipment periods, etc.
5. Go for Speed
Time is of the essence in trade and in shipping; transit time is crucial, not just for your customers, but also you because the quicker your products reach their destination, the faster you get paid, reducing your cash outlay period and finance costs.
Negotiate early delivery discounts with your customers where possible and consider offering your LTL carrier(s) incentives for such deliveries while keeping your margins intact.
6. Negotiate Correctly
Many shippers lose out on significant savings because they don’t understand what types of rates should be negotiated. Carriers offer different kinds of rates – Tariff rate, Flat Rate, FAK, Named Account, Contracted Rate and there are several combinations of these.
As a shipper, you need to negotiate using the characteristics of your business in terms of volume, seasonality, weight, dimensions, density, routes etc and decide which type suits you best. For example, if you are a freight broker, you would definitely have a contracted rate along with a FAK angle so you can base your sell rates on those rates to your regular customers. As a broker, for certain customers with the regular volume, you may also negotiate with a carrier based on a Named Business or Named Account basis.
7. Consolidate, then Collaborate
In this huge market, you don’t need to do it alone. LTL carriers offer discounted rates based on consolidation of cargo with other shippers and this could result in huge costs savings for you.
You could also collaborate with known shippers on specific routes to combine the shipments in order to save on shipping costs. Or, if you have multiple shipments for different clients in the same area, consolidate it.
If you are a small to medium size shipper, it may be an excellent strategy to consolidate your shipments through a freight broker who may be able to help you reduce your shipping costs based on their FAK or volume-based rates that they enjoy with certain LTL carriers.
The use of FAK rates could be a game changer. FAK stands for Freight All Kinds which provides high shipping volume customers with the means to ship multiple items under a lower freight class, which in turn lowers the shipping costs.
While consolidating your orders, it’s wise to choose an LTL carrier that operates in most or all of the zip codes. This is important because when it comes to road freight transportation, the longer the distance, the higher the cost in general; when it comes to LTL carriers in particular if they don’t operate in certain areas, the goods may need to be transferred to other carriers which will increase your shipping costs.
This could also cause extra handling while transferring the cargo which not only leads to additional costs but could also lead to associated costs such as insurance for any damages that may happen during the rehandling of cargo.
9. Optimize Space
Pallets are designed to optimize space and dimension utilization. Select carriers that have the latest technologies for your LTL shipments. Using this, you can calculate the dimensional pricing of your palletized shipments. Palletized cargo is also cheaper to transport as the carrier can optimize the space on the truck due to the standard dimensions of the pallets.
Final Thoughts on Shipping Cost Reduction
Shipping costs are the single largest logistics cost component in a supply chain. Therefore, for any shipper, controlling and lowering shipping costs should be a priority.
In summary, there are several ways in which you can effectively lower your shipping cost. Forget the “this is how it’s always been done” and follow the above tips to reduce shipping costs and make your business profitable.