Challenges in Reducing Freight Cost in an Industry

Published by MBA Skool Team, Published on June 29, 2016

In this current business scenarios, reducing freight cost is one of the important challenge. As an organization can’t increase their selling price to maximize their profit margin. Increase in selling price of a product could decrease its market share and slowly swipe away from the market. Other competitors could take the advantage and opportunity to maximize the market share by providing product to the customer at less price and better services. Providing best logistics solution to the customers require least freight cost, better usage of technology like GSM, Radio frequency identification to track vehicle and status of goods delivered to the customers.

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Below are the major challenges in reducing freight cost in an Industry:

• Mode of Logistics optimization: -

Optimizing mode of logistics require pre knowledge of availability of trucks, freight cost of mode of transport like truck, trailer, ship and rail. To get the estimation of logistics cost, knowledge of forecast demand of the customer, distance from the Industry to the destination point, holding cost of goods stored in stockyard, amount of tax paid to the state government, depreciation of truck etc. So, zero based costing help to estimate the total expenditure incurred in transporting the goods from the manufacturer point to the customer point. Below are the challenges and opportunity in different modes of transport over other.

1. Ship transport:

The major challenges in ship transport is that order of the product is bulk and if quantity of the product delivered is less than the optimum quantity, shipping charge is costly than road and rail modes off transport. A ship wagon usually holds a quantity of 5000 tons in transporting the material and transshipment cost is added to transport the material from port to cities. If the distance of the cities to port is high, transshipment is not preferred and so ship transport. Because total cost of transport is high than Rail and road transport. Ship transport is cheapest than all the modes of transport and organization chooses this mode of transport to minimize freight cost.

2. Rail Transport:

To send the raw material or manufactured finished product to distant places rail transport is preferred, but the main challenge is that railway network in countries are not spread across. So, to send in any cities where railway transport is unavailable, road transport is used as transshipment, which increase the overall freight cost.2700 tons of good is transported in one Rail wreck and in addition to the railway transport, organization has to pay stockyard cost to store goods in railway siding, if demand is uncertain.

3. Road transport:

Road transport is the most preferred mode of transport, as product can be directly delivered to the customer location based on the quantity demanded. If an organization has good relationship with the supplier or transporter, then transportation cost can be reduced. Major challenges in road transport are road freight is not standardized, sometime cost of new location are higher than the benchmark rate available at that location, Unavailability of skilled drivers is also one of the major challenges in road transport


• Implementation of Information technology.

Due to non-implementation of information technology, there is lack of communication flow from manufacturer to the customer point. Lack of proper tool sometime create difficulty to track the order to the customer side and result in delay of placed order. Sometime, wrong order is placed due to manual intervention and company has to incur huge cost. Technology could help to track the status of goods manufactured starting from raw materials to product produced in the plant to deliver the goods to customer destination. Information technology could help to decrease dispatch time in the plant location

• Managing negotiation with suppliers: -

Taking the lowest bid rate from different suppliers like raw material suppliers in steel industry, negotiation of automobile parts in auto industry and negotiation with transporter in logistics sector etc. help an organization to minimize cost and maintain relationship in long term over quality and customer satisfaction. Toyota manage good relationship with supplier, which help them to minimize inventory level and thereby minimize cost and achieve six sigma quality level.

• Managing inbound Logistics freight: -

Managing inbound logistics is a complicated issue and it is very difficult to get data of logistics operation for each and every process. It has severe impact on finance report of an organisation. Let us understand this with an example of a Retail store chain. In a retail store chain, to manage availability of the product in the store, multiple vehicles are required and to track the distance covered, cost incurred in supplying the products to different retail chain are difficult task to track. These cost are called hidden cost, as these cost don’t give any additional profit to company. To minimize the logistics cost, an organization should make record of distance covered by vehicles, type of service provided .so, that proper information of inbound logistics could be collected to know the overall impact of inbound logistics in overall cost.

• Lack of broad insight into cost incurred in logistics process

There is lot of hidden cost incurrent in logistics process, these cost one way or other increases freight cost, thereby diminishing profit margin of a company. From manufacturing product in the industry to handling product to the customer, there are lot of extra cost incurred. There is lack of information gap in different cost incurred in logistics process like state sales tax, excise duty charges, driver cost, Loading and unloading chares, depreciation cost of truck, fuel charges, insurance charges, toll tax and salvage value. These cost help to calculate zero based costing and help the organization to decide the cost on the basis of product delivered to destination location.

• Lack of standard procedures to find Long term freight

There is lack of standard procedure to find long term freight of transporter and freight rate depend upon seasonality and availability of transporter at the plant location. Sometime, transporter take the advantage of unavailability of trucks in the region and charge higher price than the market. In few places shipment cost is high due to presence of truck union and government regulation. Lack of standard procedure leads to bad relationship with the supplier and non-satisfaction of the customer.


This article has been authored by Sharad Prakash from IIM Kashipur

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