How to Calculate the Cost of Transport
Jun 9, 2023
8 mins read
In the midst of an outdoor movie screening of “Trucks,” a film about a town overrun by driverless trucks, a person from the crowd, who runs a transport service company, jokingly mentioned that while phantoms could handle the task, they couldn’t effectively control transportation costs.
Want to know how to control transportation costs, and make each delivery profitable? Click this!
Managing a transportation business and its costs is no easy task. Every transport business must identify if they are spending the right amount on the transportation expenses. To achieve this, calculating and monitoring transport costs becomes essential. Join us as we delve into the world of transport cost management.
What is the transportation cost in logistics?
Transportation cost is incurred for a business to transport finished products, raw materials, and employees. It is the money an enterprise takes to transport goods or services to customers on time. When we say transportation, it includes all services like air, road, water, railways, and intermodal transport.
Transport cost is the most critical cost that determines the profitability of an enterprise involved in a logistics operation. Keeping these low helps companies improve the profitability of their business.
Transportation costs vary from business to business and may consume significant revenue for a third-party logistics provider or a distribution company. A software service company must only transport a few sales reps or technicians.
What are the types of transport costs?
The transport costs are categorized into six types based on the expenses borne by the trucking company. They are:
1. Freight transportation costs
Freight transportation costs are incurred from the large-scale movement of products and goods. It is calculated based on the distance goods travel from the pickup point to the destination point. The farther a business transports a good, the higher its transport costs will be, since workforce, fuel, and mileage is high in these scenarios. It is the actual shipping costs calculated for delivery, pickup, handling, billing, insurance, and collecting.
2. Last-mile delivery costs
Last-mile delivery is the final phase of the supply chain process, where the product is delivered to the customer from the nearest warehouse. It is also the most expensive part of the supply chain. A recent Insider Intelligence survey confirms this by stating that last-mile delivery contributes to more than 53% of shipping costs. It involves dispatching orders to thousands of customers, necessitating businesses to handle more vehicles, delivery routes, drivers, and money.
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3. Fixed costs
Expenses like driver wages, tax, depreciation, general supervision charges, salaries of operational managers, and insurance are borne by the owner even if the vehicles aren’t operated.
4. Vehicle operating and running costs
Vehicle operating and running costs are variable costs that depend on the number of trips and distance covered. These costs arise during the vehicle’s operational period, which is why they are referred to as running costs.
5. Vehicle maintenance costs
Vehicle maintenance costs are expenses in maintaining the vehicle’s health, including its wear and tear, overheads, and necessary repairs. It includes both regular maintenance and unexpected expenses involved in vehicle repairs. These costs include depreciation and insurance costs.
6. Employee transport costs
Employee costs are expenses borne when an employee (sales rep or field service technician) travels to various customer locations. These costs can increase if your business requires on-field technicians working on post-sales service, repair or maintenance.
How to calculate the transport cost in logistics?
In the previous section, we saw that fixed and variable costs influence transportation costs. Fixed costs remain constant irrespective of whether the vehicles are operational or not. So, variable costs are the ones that determine the transportation cost in logistics.
Based on these factors below, a business can calculate and minimize the variable transportation costs that impact profitability. They are:
- Package weight, size, and density
- Delivery speed
- Delivery failures
- Handling of goods
- Destination of goods
Let’s look at each one of them.
Cost of transportation is primarily influenced by the distance traveled. The farther the distance, the higher the transportation cost incurred due to factors such as mileage, people, and shipping. Long-distance shipping, especially international trade, attracts added custom fees and surcharges.
The best way to reduce the distance traveled is by optimizing routes and the best tool to generate optimal routes is route optimization software. Using route optimization software helps businesses to save transportation costs in terms of fuel and delivery time. It also generates cost-efficient routes that ensure your drivers complete all their deliveries before the scheduled time.
Other ways to reduce the cost of transportation due to distance
- Adding fulfillment centers to areas that are farther from central warehouses
- Ensuring full capacity of trucks when long-distance deliveries or shipping are done
- Outsourcing the logistics services or minimizing the number of deliveries
2. Package weight, size, and density
When the package size and weight are bigger and its density, the freight costs will be higher. Bulky, heavyweight, or oversized products attract more transportation costs than small, lightweight packages. Some large-sized products require special handling and demand last-yard deliveries instead of last-mile deliveries.
The best way to deal with large and bulky packages is to use low-weight and high-quality packaging. This increases efficiency and helps businesses reduce freight rates even if they outsource the shipments.
3. Delivery speed
Is there a necessity to deliver more packages on-demand, same-day, next-day, or in the next 48 hours? If there is, it adds to your transport expenditures. How? When your business sets out to make faster deliveries, it increases transport costs in terms of overtime or paying drivers for night shifts. Also, faster deliveries demand costly infrastructure, which might require your business to use planes instead of ocean freight for long-distance shipping.
To simplify this, sending packages on sea freight with a deadline of six months is cheaper than rushing the job with airplanes. So, delivery speed determines the cost of transportation, like distance.
Eager to find out why same-day delivery is the true game changer in logistics? Click here!
4. Delivery failures
Delivery failures can multiply the last-mile delivery costs and waste your money. Say that a customer is unavailable at her destination when the delivery agent delivers the shipment. This forces the on-ground staff to deliver on the second or third attempt. Experts in logistics and supply chain cite that reattempted deliveries can multiply the last-mile delivery costs up to 4x.
The best way to avoid these delivery failures is by enabling customers to set delivery time windows and providing customized and timely notifications on order progress. Also, it is better to keep an eye on the First Attempted Delivery Rates (FADR), which helps your business determine how many first-attempted deliveries are completed successfully and focus on increasing it.
Want to find out why FADR is the metric for CEP and retail success? Click here!
5. Handling of goods
Another critical factor that determines the cost of transportation is the goods handling. Special handling is required for fragile or hazardous goods, and it attracts expensive package costs. When shipping perishable and glass products, we use thermocol ( polystyrene) and air packets to safeguard perishable and glass products from jerks during shipping. Goods requiring special handling have higher costs to ensure they are adequately packaged and shipped safely, increasing transportation costs.
6. Destination of goods
The destination of goods plays a critical role in calculating transportation costs. Some urban or interurban delivery routes have excellent highway connectivity and bypasses for convenient and faster transportation. But many rural or regional areas have road connectivity issues that must be addressed or maintained. Driving in rural and regional areas will increase fuel consumption and driver wages, increasing transportation costs.
Keep transportation costs in check and bring them down with Locus’ Customer experience and dispatch management platform
Managing a transportation business isn’t an easy task. Transportation service businesses are caught between increasing customer expectations and rising delivery costs. There is a need to ensure an exceptional customer experience despite increased transportation costs and falling profit margins. So, there is a need to keep transportation costs in check and bring them down. But how’s it possible? Investing in a Transportation Management System (TMS) is the best way to minimize transportation costs and amplify the revenue flow.
One such software that assists transportation companies in managing their shipments is Locus. With its automated optimal route recommendations, Locus’ Transportation Management System minimizes the distance traveled and reduces fuel consumption. Its insights and analytics enable your business to monitor the fleet’s performance and operational inefficiencies. Its delivery orchestration feature helps your company select a cost-efficient carrier and obtain a branded tracking experience even if you outsource deliveries to third-party providers.
Are you looking to keep transportation costs in check and cut them down?
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How to Calculate the Cost of Transport
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