Where do freight rates come from?

Shippers should not assume they are always being charged using the same formula; different cargo calls for different rates, and few companies ship only the same item in the same size and quantity every single day. Routine freight audits and accurate shipping data are a must.

Also, remember that freight rates are often negotiable. For example, shippers may find they qualify for cost-per-pallet pricing, which can edge up savings by up to 36 percent, according to our calculations.

The carriers weigh in

It’s not that carriers are malicious or even deceptive. Remember, their margins are often narrow. If they can apply standard rules to shipping costs, they will, in order to remain sustainable.

“Pricing is more an art than a science,” explains Doug Munro, president of Maritime-Ontario Freight Lines Ltd. “Irrespective of how a carrier theoretically calculates the price for a job, the market will set the price, especially as demand rapidly wanes in this economy.

“Shippers should also note that some rates today are not sustainable—that some carriers are pricing for cash flow, to keep their equipment moving.”

Frank Prosia, president of Trans-Pro Logistics, Inc, agrees that low rates won’t last long. “In the future,” he says, “there will be upward pressure on pricing, as there will be fewer companies due to the economic downturn and fewer drivers in an aging population that won’t be replaced.”

Costs are also ramped up when shippers do not have freight ready on time. As Vincent Mazzei, president of Trans-Plus, notes, “the wait time to pick up and deliver shipments to consignee is a serious problem—not only for the carrier but also for the shipper. Someone always ends up paying.”

The bottom line

Fundamentally, shippers will always take issue with price and carriers will always be dedicated to controlling costs. As with any occasionally adversarial partnerships, a happy medium is often difficult to find. In the Canadian logistics industry, it exists more often than not, but as both sides press for advantage there is conflict.

My conclusion is not that prices are too high or that carriers are gouging shippers: it’s that shippers don’t understand the ebb and flow of their funds toward the carriers, or don’t have the time internally to determine those costs. Misunderstandings are often the result. Hopefully with better knowledge of both sides we can start to clear the air.