BY DARREN ASHFREIGHT COST SOLUTIONS

MOST MISLEADING FREIGHT CHARGES EXPLAINED

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1The 7 Most Misleading Freight Charges Explained

Everyone knows freight charges are confusing, and the process of calculating freight costs is needlessly time consuming and headache inducing. This is no accident. Freight companies love to confuse and bedazzle their customers into paying more than they should for their freight. Making sense of your freight monthly invoices can be a challenge at best. If you have requested a quote from a transportation provider, how do you really know if you’re really getting a good deal if it’s not clear exactly how they are working out their costs? If you don’t want to be taken advantage of, then it’s essential that you have a solid understanding of the tricks that freight companies use to overcharge their customers, and that you know how they calculate their costs. Do you know your volumetric weight from your dead weight and are you aware that two different transportation companies may charge completely different amounts to deliver to the same destination?Although we could probably write an encyclopedia on the many and varied freight charges that transportation companies like to impose on their domestic freight customers, we thought it best to limit it to seven of the most confusing. These are the charges that we find people often come unstuck and the ones that can lead to customers paying more than they should for freight, often without realising. This e-book will give you a better understanding of how freight charges work and the different options available to you when trying to negotiate for a better deal.

“If you don’t want to be taken advantage of, then it’s essential that you have a solid understanding of the tricks that freight companies use...”

INTRODUCTION

2The 7 Most Misleading Freight Charges Explained

Determining where an item is being shipped to should be the most straightforward part of working out your freight rates but even this seemingly simple process can be stressful and hard to understand. Why? Zone to postcode files are the main reason why comparing costs to get freight from A to B is such a minefield.In Australia there are multiple transportation companies who ship to all manner of locations, in both metropolitan and regional areas. Unfortunately, there is no standard system of divvying up the different postcode areas so freight companies group postcodes together into their own different ‘zones’ and quote costs based on transporting from one zone to another.Doesn’t sound too bad? It wouldn’t be if there was a single standardised system, but unfortunately every transport company groups their postcodes slightly differently which means that they also charge differently as well. This is where the issue is for you, the transport customer, especially when it comes to metropolitan areas. Don’t ever assume you know what postcodes are included under a metropolitan delivery zone – you would be surprised how many variations there are and just because one company includes your destination postcode in their metropolitan area, doesn’t mean the others will.

Tip: Always get a breakdown of your freight provider’s zone to postcode files so you can see exactly what you are going to be paying for each destination. Then you can compare overall and find the provider that will give you the best rate on all your routes.

DESTINATION CHARGES

3The 7 Most Misleading Freight Charges Explained

The fuel levy is a common cause of confusion between customers and freight providers. If you’ve dealt with more than one transportation company you will probably have noticed that the fuel levy varies significantly between providers. Fuel levies are presented as a way for freight companies to recoup any losses caused by fluctuations in the price of diesel, especially when the Australian dollar is weak against the US dollar. While it’s undisputable that diesel prices fluctuate, when you take into consideration the wholesale price of diesel (not the retail price) and the tax offsets and rebates provided by the government, the fuel levy would appear largely to be a revenue raising exercise for freight companies. Fuel levies are usually calculated as a percentage of the operator’s overall costs but it’s important to note that there is a big difference in how high a percentage of the overall costs fuel will be on a long haul trip compared to a short haul one. The percentage of costs for fuel can be as low as 15-20% on a short trip, but as much as 50% on a longer trip and your fuel levy should be calculated accordingly – this is not always the case. Another way that transportation companies catch out their customers is by using fuel prices that are backdated and not current market rates as the basis of their calculations. All other fees like maintenance and wear and tear on vehicles are calculated according to current market rates and your fuel levy should be too.

Tip: Transparency is essential when it comes to learning how your transportation company calculates your fuel levy. Always ask for a breakdown of fuel calculations and costs, and make sure that when the fuel prices are down and the Australian dollar is high, that the fuel levy also goes down!

FUEL LEVY

4The 7 Most Misleading Freight Charges Explained

It’s all very well to negotiate a fantastic kilo rate however do you know how many kilos you will actually be charged for? When it comes to charging for freight, many people assume that they will be charged per kilo of the actual weight of the item being shipped (deadweight). If that is the case, they may then be quite surprised to find they are charged for a substantial number of kilos more than their consignment actually weighs.The reason for the extra kilos is volumetric weight (or cubic weight). Many items being shipped are not charged according to their actual weight, but based on a standard formula that takes into account the dimensions of the item as well as how heavy it is. A package may be light but bulky, which means that although not heavy as a similar sized object, it will still take up a certain amount of space in a truck. Cubic weight takes this space into account to ensure that charges are fair and freight companies are not making a loss when transporting large volumes of lighter freight.When it comes to working out which rate to charge for, most freight companies will take the higher weight of the two but unfortunately this can lead to much higher costs than the customer was anticipating, especially for lighter objects.

How is cubic weight calculated?While deadweight is easy enough to work out, cubic weight is a little more complex. To calculate cubic weight, the freight company will use the formula of length x width x height x cubic conversion factor. This cubic conversion factor can be a minefield, especially for those customers who are transporting items that are light yet bulky.The standard cubic conversion factor for the majority of transport providers is 250, but this is obviously not the true value for every item being sent. Real cubic conversion factors can be as low as 180 which means that if you are charged for a standard 250 conversion factor you could be paying more than 25% extra in charge weight than you should be.

How can I calculate my cubic conversion factor?If you want to work out the actual conversion factor of your items you will need to look at the dead weight and the cubic weight (NOT the charge weight which already has the conversion factor added to the equation). Divide the physical weight by the cubic weight and the number you have remaining is your actual cubic conversion factor. Is it close to the standard cubic conversion factor your freight company charges? If it’s much lower you could be paying way too much for your freight, especially when you factor in any other charges and rates your provider adds on.

VOLUMETRIC WEIGHT VS. DEAD WEIGHT

5The 7 Most Misleading Freight Charges Explained

When you signed on with your freight provider they probably gave you a rate card with a variety of different charges and rates on it. A basic charge combined with a kilo rate is one of the most common ways that transport companies charge their customers. As long as you are well informed about their zone to postcode files and are aware when minimum charges are applied this can be a cost effective option.The basic charge is used when you are sending something that is below a certain weight. Even with the most attractive kilo rate in the world, if you aren’t aware of when the minimum charge applies, you could end up paying a lot more than you think if your consignments aren’t meeting the minimum weight required for the kilo rate to kick in. Even when you do send over the minimum weight for your kilo rate to apply, make sure you are also aware that your charge weight might not be calculated on the actual deadweight of your freight, but on its cubic weight, which can be much higher.

Tip: Make sure that great kilo rate you have successfully negotiated applies to all the different zones you are sending to, or you could end up paying schedule rates which are a lot higher and don’t give you any volume discounts.

BASIC CHARGES AND KILO RATES

6The 7 Most Misleading Freight Charges Explained

As an alternative to a kilo rate, some freight providers charge according to pallet or carton rates. These may seem attractive but like many other charges they can often be misleading.

Pallet ratesPallet rates are based on weight per pallet and they can be cost effective if you are making use of the full weight you are paying for. On the other hand, if your pallets are under the weight you’re being charged for, you could find that your rate per kilo increases significantly.

Tip: If you are using a pallet rate, check what weight you are being charged for and make sure it matches what you’re actually sending.

Carton ratesCarton rates can work out well if you are sending a relatively small number of cartons, no more than three or four with each consignment. If you start sending more, or the weight of the cartons is more than 25 kilos you will probably be better off with a kilo rate. Kilo rates make use of volume discounts which means that unlike carton rates, the more you send, the cheaper your per kilo rate will be. Carton rates don’t work on the same system so while the rate per carton may be reasonable at first, once you start sending larger volumes, you won’t see any reduction in your cost per kilo.

Tip: If you send small numbers of cartons regularly it is worth establishing a cost guide so you can easily work out when it is viable to send your freight using a carton rate and when it would be more cost effective to use a kilo rate and basic charge. This way you can be sure you are always using the most effective method for your business and keep your invoices as low as possible.

PALLET RATES AND CARTON RATES

7The 7 Most Misleading Freight Charges Explained

The volume discount is one part of your invoice that actually works in your favour as long as you are making the best use of it. Most freight companies offer volume discounts and this means that the more you send, the less you should pay per kilo. Volume discounts are usually organised into brackets and if your business is like most successful businesses, over time your volume should increase as your business grows which means your per kilo rate should reduce.If your freight provider doesn’t offer a volume discount, talk to them about it. If they do, check that the discount they offer is in line with industry standards, especially if you are planning to send large volumes or your business is likely to grow in the future.

Tip: Regularly check your freight provider’s volume discount brackets against the amount you are sending so you can determine when you have moved into the next bracket. Don’t rely on your transportation company to do this for you, many are strangely unobservant when it comes to providing extra discounts to their customers!

VOLUME DISCOUNTS: WHEN MORE IS LESS

8The 7 Most Misleading Freight Charges Explained

Annual rate increases are a freight provider’s way of thanking their long-term customers for their loyalty. It’s a reward that many customers, unsurprisingly, don’t appreciate! The annual rate increase is justified as the transport provider’s way of covering CPI costs and increased manpower, trucks or any inflationary costs they are dealing with.Usually annual rate increases are between 3% and 5% and this can add up significantly over time. When you add in the increased costs that come with sending higher volumes of freight due to inevitable business growth, customers can end up paying well over 10% more each year for freight and if their business is growing, it could be as much as 15%.

Tip: When you move to a new provider, always negotiate for fixed rates. If your freight costs are increasing year on year it’s extremely important that you pay attention to your volume discount brackets. This could allow you to offset some of the pain from annual rate increases by reducing the additional amounts you pay for freight as a result of your business growth each year.

ANNUAL RATE INCREASES

9The 7 Most Misleading Freight Charges Explained

Knowledge is power, and once you understand what you’re paying for, you will be more aware if you’re being ripped off. Knowing how freight charges work makes it easier to negotiate with your freight provider for the best rate and level of service to meet your business’ operational needs.The transport industry often makes use of smoke and mirror techniques to conceal ridiculous and nonsensical charges that can be a minefield for the unwary customer. Hopefully this e-book has helped you understand how your freight provider is calculating your freight costs and given you an insight into some of the ways they may be pulling the wool over your eyes. For many companies, freight costs make up a significant portion of their overall costs and finding ways to save can make a huge impact on their business bottom line. If this is the case for your business, or you just want to find more ways to understand and reduce your freight charges, a freight audit is highly recommended.A freight audit uses specialised software and trained professionals with experience in the transportation industry to identify any overcharges and find ways to cut costs that could potentially save your business hundreds of thousands of dollars a year. At Freight Cost Solutions we provide a full auditing service and unlike freight brokers and transport companies, our business model places our customers’ interests first. We can help you understand your freight costs and ensure you get the best possible rates from your provider.

CONCLUSION

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“Knowing how freight charges work makes it easier to negotiate with your freight provider for the best rate and level of service to meet your business’ operational needs.”