How are Freight Rates Calculated?

Interstate highways have been increasingly busier than ever carrying goods and commodities, spanning into regional and transcontinental markets. We eventually see these goods on our shelves, in our hospitals, on a dealers’ lot, or directly on our doorsteps. Yet, we rarely stop to think about how a fraction of the price we pay as consumers is derived from the cost of the freight required to deliver the goods to us. Commercially, freight costs are an added business expenditure that can be adjusted and reflected upon through the price of the goods.

Knowing this, it is practical to seek an understanding of how freight rates are calculated in order to effectively establish revenue-generating pricing for your products by considering both inbound and outbound logistics activities. Having knowledge of what goes into the freight calculation process leaves you better informed on what logistical decisions to make for your own supply chain.  Truckload and LTL (less-than-truckload) shipments are the most common modes for transporting goods domestically and will be the main emphasis here in regards to freight rates determination. In commercial operations, shipments have to travel by ground at some point in time, and this is usually by an LTL or truckload carrier.

Whether you move your product with a dedicated carrier, an experienced freight broker, or your own fleet, your rates will be calculated utilizing a freight classification system that takes the following into consideration...  

Weight

Freight classes are based on the weight of product, per cubic feet, or its density. This density is assigned an NMFC (National Motor Freight Classification) code within the range of 50 – 500, with 50 being the densest (think heavy sacks of tightly packed sand) and 500 being the least dense (bags of goose feathers).

These codes, published by the NMFTA, help to standardize freight classification based on the commodity’s density, handling, stowability, and liability – which all contribute to how LTL carriers price their freight rates.  

Distance

Distance is another factor in the calculation of freight rates. When shipping regionally, freight is commonly cheaper. Extending the distance farther than a couple hundred miles increases the amount of fuel and driver resources needed to move the package(s) from origin to destination.  

Size

Sizing of the shipment matters. The larger a package, the more expensive it is to ship. This embodies both weight and dimensional aspects of a shipment.

When a package requires more space on the carrier, it limits any additional freight from being loaded onto the carrier – reducing the per-package contribution towards freight costs. Heavier items tend to bear a greater drag on the carrier, requiring more fuel to be burned during transportation.

Packages and pallets that cannot be stacked also exponentially increase the cost of shipping the goods, as there is more dead space that cannot be used. It is the drivers’ goal to fill their trailers or containers and move as much freight as possible in one run. If you are consistently shipping similar goods with standard packaging by LTL, then implementing a FAK (freight of all kinds) rate agreement with dedicated carriers may best suite you.  

Need to expedite your freight?

Expedited freight transport is generally only available by air and road carriage but comes at a much higher price tag. When shipping by either air or land freight expeditiously, you are asking for a more direct and speedier shipment, meaning you want a dedicated truck or air carrier to move your goods sooner than what the standard transportation mode allows. You are essentially paying a premium to bypass the basic means of transport.

When you start exploring various modes of transport, freight rate calculation gets a bit more involved.

Air rates, a form of expedited freight carriage, is a quick way to ship and receive goods from all over the globe as soon as the next day, but it comes with a hefty price tag and restrictions. Rates for air carriage can vary, but with airline restrictions and fees like fuel surcharge and package handling guidelines, rates are still higher than the other modes of transportation.

Ocean carriage rates are generally cheaper than all other modes. The inland transportation costs from dock door to port are covered under the LTL or truckload rate. Any port loading and unloading fees associated with ocean carrier shipments and respective fuel surcharges are put in place by the ocean carriers.