There is not much mystery in how carriers go about setting their freight rates. The “cost-plus” pricing model is the simplest and most widely-used approach by many carriers. The carrier totals up costs for doing business and then sets a desired percentage of profit.
The latter element — the profit margin — can be highly subjective for each carrier and opens the door to negotiation. As any business leader knows, if you set your margin too high, you can lose business to equally qualified competitors. Set it too low and you may not be able to ride out unexpected costs or economic dips. Setting a profit margin is as much an art as it is a science.
All that said, it is worthwhile to also remind the customers of carriers that they, too, can influence freight rates — not just through negotiation on the profit margin side, but also by working in close partnership with a carrier to help avoid unnecessary costs or cost increases.
While some freight rates cost increases, such as labour or fuel, are largely unavoidable for your carrier and, by extension your company, there are many things you can do to mitigate the impact of rate increases while ensuring you have strong carriers that can grow with your business.
First, make it clear to your carrier it must do everything possible to reduce its own costs and maximize its own efficiencies. Then, take the opportunity to ask your carrier what your business can do to reduce the cost of handling your freight and servicing your clients. You may be surprised what you learn.
While some costs are unavoidable, a portion of your rate derives from factors specific to handling your freight and how efficiently you work with the carrier. For example, have you discussed your packaging and whether it allows carriers to maximize space utilization?
Or, have you ensured your scheduling requirements are not adding costs to the carrier’s day and, thus, your rates? Multiple pickups in a day or an inflexible pickup/delivery schedule may force your carrier to build-in inefficient waiting time.
So, use your freight rates negotiation meetings to allow each party to talk about ways to work better together because you will often find that the most effective solution is always the most cost-effective. To learn more about working in partnership with your carriers, please speak directly to a DTA Client Manager.
Transportation and Logistics Departments:
We provide your logistics team with data and reports on shipping patterns and associated costs, including: origin and destination; drop ship locations; actual weight; cube weight; customer or supplier name; transfer between locations and/or warehouses; and any other industry specific fields clients require.
Please call or email us with any Logistics Management questions.