How Do You Calculate Freight Cost Per Unit?
International trade has evolved over time from maritime and rail to include airfreight today, all with different cost implications and advantages to both shipper and buyer. Currently, a new shipment concept, the courier services, has gained popularity for the movement of lighter goods needed across vast distances in the shortest time possible.
Courier companies like UPS, FedEx, and USPS are at the forefront of logistics trends in 2020 going forward while offering great flexibility to clients, especially in shipping rates and convenience of cargo sizes.
If you are involved in e-Commerce and seeking ways of upscaling your online business through competitive prices, you need to get the lowest possible shipping rates. Courier services might appear expensive compared to shipping by sea. Still, they are best for small to medium size cargo and weights from as low as 10kgs to one ton delivered in the shortest time possible besides generous discounts for regular shippers.
It is important to understand that your freight costs depend on various factors that include the medium of transport, size and weight, distance, and type of cargo. Here are factors to consider as you calculate freight cost per unit for your shipments.
Importance of landed costs in pricing
Trade thrives on competitive pricing of products that earn the seller attractive margins and the buyer a good bargain. Understanding costs and managing these prudently will determine the profitability of your business and boost your sales.
If most of your sales are overseas, shipping costs become a big factor in your final price. Freight and delivery costs, if any, added to the initial price of product ex-factory form the final landed cost and hence invoice price.
Since landed cost plays a crucial role in the pricing of export sales, you must choose the mode of transport carefully with emphasis on affordable rates to reap maximum benefits. Get as many freight quotations as you can from various service companies, including possible future discounts on volumes to help you arrive at a competitive landed cost (sale price).
Generally, freight costs vary depending on the mode of transport with airlifts costing more for heavier cargo but cheaper and faster for lighter parcels. Keep in mind that landed cost includes other expenses like insurance, customs taxes and tariffs, currency conversions, packaging, port handling charges, and documentation fees.
It is important to know the freight implications on landed costs so that you discuss this with the client offering different options based on the mode of transport before settling on one that is mutually beneficial.
Take care that you include every item of cost from the warehouse to the client’s doorstep, including your profit margin and keeping this as realistic as possible to remain competitive. Conversely, if both in agreement, you could export your products on FOB terms transferring the shipping costs to the buyer.
An overview of shipping costs
Shipping costs start on the warehouse floor with crating or container packing, transfer to port or pickup by courier, port formalities at origin and destination, bills of lading fees, transit and final delivery at the client’s premises.
All these activities, including freight forwarders, are paid for separately, which collectively form shipping charges and eventually, the landed cost when added to the primary product price.
Port handling charges
Ports levy terminal handling charges and other fees that should be taken into account in calculating shipping costs. These charges are dependent on the size of the crate or container and if there is a need for extra services like reefer plug in points. These are set tariffs and non-negotiable and can be used as actuals in calculations.
Customs tariffs, both export and import duties, as well as any value added taxes, are published in official schedules for every country at their ports. Collect these to help you calculate overall shipping costs.
If terms are doorstep delivery, then include destination customs charges and port clearance in your costing. The courier, shipping line, or freight forwarder can assist in sourcing these destination charges beforehand.
Insurance and certification
To mitigate against loss in transit and protect your business from expensive claims, you must include an insurance cover for the cargo. As much as this is for your own good, it is also a transport industry requirement and must be factored in the shipping costs.
Provide for the cost of important documents like certificates of origin and any other quality control certification that may be necessary for the product being shipped.
Courtney Hall, who works as an accounts and mathematics paper writer for essay writing services currently works for Genuine essay writing service UK. She suggests to carry out extensive due diligence to establish all requirements and related charges to avoid losses either due to underestimated costs or high estimates that price you out of the market.
Final costing (landed) per unit
The final cost of a product is the sum total of all expenses from production to the shelf or doorstep. To calculate this cost, you start with production expenses that include all overheads incurred, materials, staff, and incidentals.
You then add to this the shipping costs from the warehouse to the client’s premises as well as your profit margin to arrive at landed cost per unit. This is if the product under review is a solitary unit. If it is a large consignment, divide the overall cost by the number of units to arrive at landed cost per item.
Calculating unit freight cost
If it is one unit in one consignment, then the freight cost will be calculated based on weight and volume according to the carrier’s tariffs. However, if it is a large shipment with multiple units, you have to consider the type of packaging and mode of transport in your calculations.
For sea and rail transport, the size of container and terms of usage i.e., FCL or LCL, will determine the cost. Containers come in 20’, 40’ closed or open-top versions as well as reefers and cost differently. Full container load (FCL) option attracts demurrage charges, whereas LCL does not as long as goods are moved within the free period allowed.
Putting all these factors into consideration and getting your figures from the carriers right will help you calculate freight costs per unit with accuracy. It further helps to compare different carriers to get the best rates that will enhance your competitive edge when the landed cost is applied.
Sea freight per unit
Sea transport is convenient for large consignments that can be delivered without urgency as voyages can take a number of days. However, it is comparatively cheaper than air transport, which translates into a low landed cost of the product. There are shipping line charges that include actual freight, documentation (B/Ls) fees, and container demurrage, if any, besides port and customs levies.
Ronald Martin worked for a renowned sea freight company and looked after their Asian operations. He is currently working for professional writing services and his current assignment is with Essay writing service UK. He also teaches for the online basic course in sea freight forwarding.
He says that you have options for what container to use depending on the size and type of cargo. You may require an open-top container for out of gauge cargo or a reefer for perishable goods. These special containers cost more. If you have a small quantity that cannot fill a container but still prefer sea transport, then go for consolidation on LCL terms where you can share one unit with others.
What is a Full Container Load?
Full container load means that the shipping line provides you with an empty container that you pack your goods into, seal and return to quayside. Shipping lines have set tariffs for container sizes, with discounts depending on loyalty, type of cargo, and destination.
For containers, the volume does not matter, and they are designed for specific weights not exceeding 40 tons for 40’ units. Consider a contract with the shipping line if you frequently move export cargo for better rates.
Advantages of Less Container Load (LCL) option
When opting for LCL, volume and weight matter as the consolidator levies a prorated charge on weight and space (volume in cubic meters). This works well for shippers with low quantities wishing to use sea freight but unable to fill a full container.
You simply hand over your goods to the consolidator, who then packs the container under one sea freight bill of lading with a list showing individual consignments. Do not accept any figure the consolidator offers; insist on the breakdown of charges to decide whether it makes financial sense.
Pros and cons of FCL and LCL
When you opt for an FCL container, you pay full freight charges for it even if your goods take up only three-quarters of it. This could be expensive; however, it guarantees the security of goods in transit until received by the consignee as you secure it with marked seals alongside the customs and shipping line’s own.
LCL is comparatively cheaper as you only pay for weight and space occupied in the shared container while still enjoying low sea freight tariffs. The consolidator handles the rest of the shipping activities at the port of origin and obtains the shipping line Master Bill of Lading.
The consolidator then issues House BLs to individual shippers sharing the LCL container to forward to their consignees to claim their goods at the destination. The security of goods can be compromised if the consignee is not present at the time of stripping the container.
Sea freight quotation
As you work on your shipping costs, one component is vital to your estimates, and that is a freight quotation. A comprehensive freight quotation comprises the following items.
● Basic sea freight charge
● Inland haulage if applicable
● Documentation fees
● Bunker adjustment factor
● Terminal handling charges
● Currency adjustment factor
Other costs may include the customs clearance, security and any more arising from time to time in different port and customs jurisdictions. If your consignment is intended for door delivery, take care to get all destination charges necessary to guide your final landed costing.
If you desire frequent updates on voyage progress, you may be charged more for container tracking to keep you informed of the expected time of arrival at the destination.
Balancing costs across various items
The trick in getting the best out of sea freight is in moving bulk shipments. Pack into the chosen FCL container size as much as you can and when the overall freight is distributed evenly among the items, it yields a low cost per unit. Load container with this calculation in mind to earn you an advantage on sea freight.
For LCL consignments, you have to put emphasis on volume and weight when packaging for consolidation. This is so because freight will depend on these measures. Pack in such a way that when freight cost is distributed across units, you get a competitive landed cost.
Calculating freight costs on arrival
For either shipper or consignee, it is possible to calculate freight cost per unit after arrival. All it takes is putting together actual bills and extracting exact figures for ocean freight and inland haulage involved in the shipment.
Knowing this helps in the final costing of the goods and future projections when importing. At this stage, one can avoid using estimates as all bills will be in.
Global trade has grown immensely over the years and now includes consumer products that need fast movement. This calls for efficient and affordable modes of transport to facilitate both traditional trade and e-commerce. Freight costs and logistics are a major component of these services and quite critical to the profitability and sustainability of the business. Both shippers and buyers look for the best deal when moving goods.
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