In normal circumstances, a longer distance has a higher freight rate. In actual situations, distance has very little or no effect on freight rate. Supply and demand is the real factor affecting freight rate.
How are freight rates determined?
Generally speaking, freight rates are determined by 4 factors
- Freight destination
- Transportation mode
- Distance
- Freight weight
Freight Destination
Freight destination plays a major part in your freight rate. If your freight goes to an isolated place, or it is difficult to reach then your freight rate will be high. For example, shipping a package to Honolulu is expensive. Because there are not so many trucks going to Hawaii.
The freight rate to Alaska is also higher than other states. It is the same reason that fewer trucks going to Alaska, so the freight rate is high.
If your freight destination is close to a carrier’s hub, then your freight rate will be low.
Your freight rate will not be higher than standard if you ship freight to Kentucky, Tennessee, and Georgia because several major carriers like UPS and FedEx have hubs and headquarters in these states.
DHL’s headquarter is in Bonn, Germany. You will get a better deal using DHL when shipping freight to Europe because DHL has a good network of hubs in Europe.
Transportation Mode
4 major transportation modes are Air, Ocean, rail, and truck. The fast you want your freight the more expensive your freight rate is.
- Air
- Air freight rate is the most expensive among these 4 transportation modes
- Air transportation is popular to move high value, perishable products in a small volume
- Popular products shipped by air are computer parts, machine parts, flowers, seafood, etc
- Ocean
- Ocean freight is the most economical transportation method for international shipping
- Oecd.org indicates that around 90% of international traded goods are moved by ocean
- Ocean freight rate is much cheaper than air but ocean freight takes 3-4 weeks while air freight only takes 1-2 days
- Rail
- Rail is the most economical transportation method for domestic shipping
- Popular freight shipped by rail is bulk goods such as grain, sand, coal, and mineral
- Ocean containers can also be shipped by rail
- Truck
- The majority of domestic goods are shipped by truck
- The truck is fast and efficient
- The truck can pick up and deliver at the door
Distance
Distance is one of the major factors to determine your freight rate if we do not consider supply and demand in the market.
But in most cases, supply and demand decide your freight rate.
There is approximately the same distance 1450 miles from Texas to California or from Texas to Pennsylvania. While the freight rate is much higher goes to California than goes to Pennsylvania. The average truck rate goes to Californians is between $5000-$6000 but the average rate goes to Pennsylvania is around $4000.
California has several big ocean ports such as Los Angeles, and Long Beach, so the demand for trucks is high, that is why the freight rate goes to California or goes out of California is high.
With a volatile fuel market, not so many trucking companies are willing to charge you a cost per mile. Most truckers will give you a lump sum truck rate from one place to another, plus a fuel surcharge rate of 45% around.
The fuel surcharge rate is updated daily. if you want to calculate your trucking cost per mile, use truck rate plus fuel then divide by the total distance of miles
Trucking cost per mile
(Truck cost + fuel surcharge) / total miles
Freight Weight
Freight rate is based on either dimensional weight or actual weight, whichever is larger. If your freight is heavy then carrier will use the actual weight to calculate the freight rate. If your freight has large volume then carrier will apply dimensional weight when calculate the freight rate.
What is dimensional weight?
Diemensional weight is known as the volumable weight of the freight
How to calculate dimensional weight?
Diemensional weight= ( Length x Width x height )/ Divisor
Length, Width, height are in inch. different carriers have differnt divisor numbers. UPS divisor for daily rate is 139
What causes freight rates to rise?
There are several factors such as shortage of labor, high fuel price, contribute to high freight rate, but i believe the real cause is high market demand but low supply. Retailers need get goods on shelf, Manufactuers need get raw material or parts to factory, E-commence need get goods to their warehouse, but less vessels, less labors at port.
We have high demand on one hand and on the other hand we have shortage of labor, shortage of vessel and shortage of containers. High demand, low supply create the rise of freight rate everywhere.
Ocean freight rate tripled or quadrupled compare to pre-pandemic, especially from Asia to USA. There are thousands, millions of cargoes can not get on vessel. The high demand creates rocket high ocean freight rate.
How to reduce freight costs?
It is difficult to reduce freight cost if the market demand is still high.
We can try to reduce freight cost use below strategies:
- Avoid busiest ocean lane, buy raw material or goods from diverse countries
- Plan ahead and leave enough transit time of the freight. The longer you can wait, the cheaper is freight rate
- Buy in bulk and save on individual shipping cost
Will freight rates increase or decrease?
It is hard to predict the future freight rate with so many things uncertain.
China, Thailand, banglasesh, philippines, vietnam,Taiwan, Japan, are all major suppliers of raw materials, consumer goods, computer parts, etc. if these countries need fight vessel space to ship their products to US, then the freight rate is probably going to stay high for a while.
When there is no competition, money is not an object.
