Shipping is considered an essential part of the supply chain cycle. It may be very important that it became the glue that attaches each ring in the supply chain to its neighbor ones. Also, the cost of shipping, if the wrong decision was taken, can make someone seal a deal or lose it. Therefore, it goes without saying that knowing which mode of transport is the best for each shipment, and how to calculate the cost properly is very important for the profit and loss of the company.
Deciding which model of transportation should be used for any shipment usually depends on a number of factors. Some of these factors are weight, dimensions, the value of the shipment, description of the cargo, how urgent is it needed, pick up and delivery location, … etc.
Some shipments are too big to go through normal aircraft, also some commodities are considered too risky to be shipped by air and most (if not all) airlines refuse to take them on board (such as the fireworks or other explosive commodities)
If we have all the required details, the picture will be much clearer and the decision can be taken more confidently. However, in a normal scenario, the longer transit time is, the less shipping costs are. So a shipment of 1000 Kgs, will be much less costly to move it as sea freight LCL ( Less than Container Load) than airfreight. While airfreight usually at this weight is less costly than courier service.
Calculating the cost in each mode of transport is different whether it was air, land or sea. The formula is different and the name of each cost is different as well.
In airfreight, we can find charges that are calculated per Kg (or lb) and other charges calculated per set of documents (per shipment). Before we get into the airfreight formula, maybe we should go through types of weights. In airfreight, we have Net Weight, Gross Weight, Volume Weight, and Chargeable Weight. As definitions : Net Weight: The actual weight of the cargo with no packing materials or pallets. (reference: www.globitexworld.com/glossaries ) Gross Weight: The total weight of cargo including pallets, packaging materials, .. etc. as per cargo weight scale reading. (reference: www.globitexworld.com/glossaries )
Volume Weight: The weight of the cargo based on the volume ( ratio in airfreight is 1:6, each 1 Cubic Meter equals 166.667 Kgs )
Chargeable Weight: Is the weight that shipping costs are calculated based on and usually is the higher number between the gross weight and volume weight.
The formula in airfreight calculations is 1:6 which means that each 1 Cubic Meter is transferred into 166.667 Kgs. In mathematical look it will be:
Volume Weight = ( Length cm x Width cm x Height cm ) / 6000
For example, if a shipment is 100 x 100 x 100 cm with a weight of 275.0 Kgs
Gross weight will be 275.0 Kgs as per scale. Volume is 1 cubic meter ( CBM ) so the volume weight will be ( 100 x 100 x 100 cm ) / 6000 = 166.667 Kgs
In conclusion, the chargeable weight is 275.0 Kgs ( which is higher than the volume weight ).
If the airfreight rate is: 1.75 US$ /Kg, then total airfreight will be US$ 481.25 ( which is 1.75 x 275 Kgs ).
Of course, there is more in the airfreight calculations than just an equation but this should do the job for simple and straight cases.
Sea freight or Ocean freight is known to be a low-cost mode of transportation. However, in some cases, it may be a bit expensive. In sea freight, there are two types of shipping.
The first one is called FCL (Full Container Load) and the second one is LCL (Less than a container Load). Of course they both use the same container box (20 FT, 40 FT, 40 HC, … etc.) but in the lateral one, you pay for only utilizing part of this container and not the whole thing, which of course is even more economical.
Since whoever pays here, is paying for the whole box, then calculations are rather simple. There are charges per TEU – Twenty feet Equivalent Unit (40 FT/40 HC equals two TEUs), charges per container and charges per shipment. If the INCOTERM is EXW this means consignee (or buyer) will be paying for almost everything in regards to shipping.
For Example, if Trucking is US$ 500.00 / container, Export Customs Clearance costs US$ 100.00 per set of documents (or shipment), and freight charges are US$ 1500.00 / container, and if the shipment is 2×40 FT containers, then charges will be calculated as below:
Trucking : 2 x 500.00 = US$ 1,000.00 Export Customs Clearance: 1 x 100.00 = US$ 100.00 Freight Charges : 2 x 1,500.00 = US$ 3,000.00
Total charges for the whole shipment is US$ 4,100.00 all paid by consignee (or buyer). If the INCOTERM is FOB, then the consignee pays for Freight charges only, while the shipper pays for T
Trucking and Export Customs Clearance.
Based on the same example above, the shipper will pay for trucking and Export Customs clearance, that is: US$ 1,000.00 + US$ 100.00 = US$ 1,100.00
While consignee covers the freight of US$ 3,000.00.
With this mode of transportation, the cost of shipping is reduced to a very low level in many cases. Since payment covers only part of the container and not the whole box, then it is not based on a “per container” price as in FCL but more like based on gross weight/volume weight as in airfreight. Except that, in LCL shipments, the ratio between weight and volume ( referred to W/M in LCL movement ) is “ 1:1 “ which means that every 1 Cubic Meter equals 1 Ton. We will have some rates in the freight quote that are per W/M (weight or measurements(volume) whichever is higher) or per shipment.
Giving an example, if a shipment weight is 3.0 Tons while the dimensions per piece are ( 1.20 meters x 1.50 meters x 1.00 meters), 4 pieces. Freight will cost US$ 100.00 per W/M, trucking charges are US$ 600.00, then the cost of export customs clearance is US$ 150.00 per shipment. Based on the above the cost shipping is :
Weight : 3.0 Tons Volume : 1.20 x 1.50 x 1.00 x 4 (pieces) = 7.20 CBMs (Cubic Meters)
The volume is considered in calculations and not the weight.
Freight charges: 100.00 x 7.20 = US$ 720.00
Trucking charges: US$ 600.00
Export Customs: US$ 150.00
Total charges are: US$ 1,470.00
Of course, moving this shipment by air based on the weight of 3 Tons ( 3,000 Kgs) will cost much more than US$ 1,470.00 on EXW basis.
Moving cargo by land is very much similar than moving it by Sea. We have the FTL (Full Truck Load) shipments and the LTL (Less than Truck Load) shipments. Each one has its own calculations. In FTL the payment is made for the whole space on board of the truck, this is why rate will be mainly freight charges plus some extra fuel costs. But on the LTL movement, there is a ratio around the world except for North America (it is more dependent on the commodity, density, and volume of the shipment). In other countries, the ratio for land freight LTL calculations is 1:3 ( 1 Ton – 3 Cubic Meters ) or we can say that 1 Cubic Meter equals 333 Kgs.
After this, calculations can follow the same way in Airfreight :
Volume weight = Lenght (cm) x Width (cm) x Height (cm) / 3000
After we have spent all this time talking about how to choose the best cost for each shipment and how to calculate charges for each weight, this may be the best way to save the company extra costs, and make wiser decisions in regards to your shipping needs. BUT, imagine if you can do this lengthly process in just couple of minutes ??!! Because of this idea, Globitex came with the idea of digital freight forwarding. This is a concept where the whole quotation process, rate calculations, weight/volume estimate, and shipping process is automated in a way that puts you in a pretty much hands-on position and gives you a stronger grip on the movement of your orders. With Globitex digital freight platform, the whole process from quotation requests all the way to seeing your shipping documents and starting to monitor the whereabouts of your shipment may take no more than 3 minutes. Such ideas are only there to make our life better!