Ways to mitigate the impact of freight costs
Transporting goods has never been a particularly cheap exercise. Regardless of the mode of transport, moving freight requires many hours of labor, gallons of fuel (or tons of coal) and assorted fees for permits (particularly for import and export). In recent years, those expenses have soared to almost unaffordable levels. The increase in costs is due to a miscellany of factors including rising fuel prices, geopolitical turmoil and the COVID-19 pandemic, to name just a few.
Various questions arise: What affects transportation charges? And, perhaps more importantly, what can be done to alleviate the burden of surging prices? Let's take a look:
Factors affecting freight costs
As with any industry, prices are determined in part by supply and demand. It's widely known that expenses increase along with demand. The advent of the coronavirus pandemic led to unprecedented levels of e-commerce sales, as people couldn't make purchases in-store due to stay-at-home orders. The online shopping phenomenon hasn't begun to dissipate and, consequently, freight costs remain high as businesses struggle to fulfill high order volumes.
Naturally, fuel prices also have an impact on freight costs. The higher the cost of fuel (whether it's petroleum-based or derived from crops, coal or natural gas reserves), the more expensive transport fees become as companies need to break even. Factor in the thousands of miles that ships, planes, trains and trucks travel, and you have a high cost on your hands.
Global politics also determine freight costs. If there are any embargoes or trade bans within a region or between countries, companies have to use alternative routes that are often longer than preferred ones which can increase expenses. It also means there are fewer businesses available to ship goods, making demand higher than supply.
How to reduce goods transport expenses
Luckily, there are various methods companies can employ to allay exorbitant freight costs. Firstly, businesses can make use of smart technology driven by data and artificial intelligence to map the most fuel-efficient routes and effective ways of loading cargo (such as delivering in bulk). This can reduce the distance and number of trips, thus saving on labor and fuel costs.
Additionally, companies use cheaper alternative modes of transport. Rail is becoming increasingly popular because businesses can move large volumes of goods at lower prices than with cross-country planes or trucks. Further, organizations can also pay close attention to their packaging: It's wise to reduce the amount used and to utilize recycled materials, which are often cheaper than those being used for the first time.
Lastly (although this is by no means an exhaustive list), businesses can outsource their transport to 3PLs, otherwise known as third-party logistics companies. Because 3PLs specialize in freight, they'll have the necessary contracts with their suppliers and partners that help lower moving costs. This way, organizations don't need to worry about procuring expensive staff, fuel or technologies.