- Freight cost and total logistics cost
- Visual map: freight, warehousing, inventory and service level
- Components of total logistics cost
- How to calculate the freight of a load
- Example: three delivery frequencies compared
- Who pays the freight: Incoterms and contract
- Where to reduce total logistics cost
- Step by step to build the calculation
- Common mistakes and limitations
- Frequently asked questions
Freight cost and total logistics cost
Freight cost is the amount paid to move cargo from one point to another. Total logistics cost adds to freight everything that the way you move and hold material causes: warehousing, capital tied up in inventory, order processing and stockout losses. Deciding on the lowest freight alone usually raises the total.
That happens because the components offset one another: shipping small and often raises freight but reduces inventory and stockouts; shipping in one go lowers the cost per kilogram but ties up cash and space. The right calculation compares the total, not one line.
Visual map: freight, warehousing, inventory and service level
The map shows the components of logistics cost, the freight calculation by chargeable weight and the comparison between three delivery frequencies.
Components of total logistics cost
- Transportation: inbound and outbound freight, plus surcharges and insurance charged by the carrier.
- Warehousing: rent or depreciation of space, labor, equipment and systems (see WMS and picking and storage).
- Inventory carrying cost: cost of capital, insurance, obsolescence and shrinkage, usually expressed as an annual percentage of average inventory value.
- Order processing: issuing, checking, shipping documents and the administration of each shipment.
- Stockouts and service level: lost sales, contract penalties, expedited freight. On the service target, see service level and fill rate.
Total logistics cost = transportation + warehousing + inventory carrying cost + order processing + stockouts
To compare products and periods, divide the total by units moved (logistics cost per unit) and by revenue (percentage of sales).
How to calculate the freight of a load
In less-than-truckload road freight, the carrier charges for the greater of actual weight and dimensional (chargeable) weight. Dimensional weight is the volume in m³ multiplied by a dimensional factor in kg/m³, defined in each carrier's tariff. On top of this weight-based freight come components such as a value-based charge (a percentage of invoice value), a risk or insurance charge and tolls. Names and bases vary by carrier and contract, so check your contracted tariff.
Fictional example, with a factor of 300 kg/m³: a load of 1.2 m × 1.0 m × 1.5 m = 1.8 m³ and an actual weight of 400 kg.
| Item | Calculation | Amount ($) |
|---|---|---|
| Dimensional weight | 1.8 m³ × 300 kg/m³ | 540 kg |
| Chargeable weight | greater of 400 kg and 540 kg | 540 kg |
| Weight-based freight | 540 kg × $0.90/kg | 486.00 |
| Value-based charge | 0.3% × invoice of $20,000 | 60.00 |
| Risk charge | 0.2% × $20,000 | 40.00 |
| Tolls | tariff value | 25.00 |
| Total freight | 486 + 60 + 40 + 25 | 611.00 |
Dimensional weight applies because the load is light for the space it occupies. Shrinking the carton or improving palletizing lowers the chargeable weight and with it the freight.
Example: three delivery frequencies compared
Fictional example: an item of 2 kg and $50 per unit, annual demand of 24,000 units (revenue of $1,200,000). Inventory carrying cost: 20% a year of value; storage of $6 per average unit stored per year; $150 of processing per shipment. Average inventory is half of each delivery lot plus safety stock, which falls with more frequent deliveries (600, 450 and 300 units).
| Item ($/year) | Monthly (12 deliveries) | Twice a month (24 deliveries) | Weekly (48 deliveries) |
|---|---|---|---|
| Lot per delivery | 2,000 units | 1,000 units | 500 units |
| Freight per delivery | 3,000 | 1,750 | 1,150 |
| Freight per kg | 0.75 | 0.875 | 1.15 |
| Average inventory (lot ÷ 2 + safety stock) | 1,600 units | 950 units | 550 units |
| Annual freight | 36,000 | 42,000 | 55,200 |
| Warehousing ($6 × average inventory) | 9,600 | 5,700 | 3,300 |
| Inventory capital (20% × $50 × average inventory) | 16,000 | 9,500 | 5,500 |
| Processing ($150 × deliveries) | 1,800 | 3,600 | 7,200 |
| Expected stockout cost | 4,000 | 2,000 | 1,500 |
| Total logistics cost | 67,400 | 62,800 | 72,700 |
| Per unit | 2.81 | 2.62 | 3.03 |
| % of revenue | 5.62% | 5.23% | 6.06% |
The monthly option has the lowest freight ($36,000) but the highest inventory and stockout cost. Weekly brings inventory down to a minimum, yet pays $55,200 in freight and $7,200 in processing. Twice a month wins at $62,800: a saving of $4,600 (6.8%) over monthly and $9,900 over weekly. The lowest freight was not the best decision.
Who pays the freight: Incoterms and contract
Before comparing costs, define who bears each leg. In international trade, the Incoterm fixes where cost and risk pass from seller to buyer; in domestic trade, a freight clause such as prepaid or collect plays a similar role. A lower purchase price can hide freight the buyer pays later, so compare offers on delivered cost, not only item price. The same logic applies to equipment, with total cost of ownership (TCO).
Where to reduce total logistics cost
- Consolidate loads: combining orders for several items or suppliers in one shipment lowers freight per kilogram without raising item inventory. The milk run does this at pickup, and cross-docking does it in distribution.
- Cut safety stock: less variability in delivery and demand allows lower stock (see safety stock).
- Improve packaging and palletizing: more parts per m³ lowers dimensional weight.
- Shift inventory to the supplier: models such as VMI and consignment move the carrying cost.
- Track turnover: idle stock raises capital and warehousing cost (see inventory turnover).
Step by step to build the calculation
- List the five components and the owner of each data point: transportation (invoices), warehousing (cost center), inventory (accounting), orders (administration) and stockouts (sales).
- Set the company's inventory carrying rate with the finance department.
- Build the table per alternative, like the one in the example, for the same period and the same demand.
- Calculate the total, the cost per unit and the percentage of revenue.
- Test sensitivity: vary freight, the capital rate and the service level and check whether the ranking of alternatives changes.
Common mistakes and limitations
- Comparing freight only: ignoring inventory and stockouts leads to the delivery that is cheapest per kilogram and most expensive in total.
- Forgetting dimensional weight: the invoice for light loads comes out higher than actual weight suggests.
- Using an unrealistic capital rate: without the company's rate, carrying cost is understated.
- Treating stockouts as zero: lost sales and expedited freight have a cost, even if hard to measure; use a documented estimate.
- Data from different periods: mixing months with and without seasonality weakens the comparison.
- Example values: rates, dimensional factor and surcharges are fictional; use those from your tariff and contract.
Frequently asked questions
What makes up total logistics cost?
Transportation, warehousing, inventory carrying cost, order processing and the cost of stockouts or service level.
What is dimensional weight?
It is the load volume in m³ multiplied by a dimensional factor in kg/m³; freight uses the greater of actual and dimensional weight.
How do you calculate logistics cost per unit?
Divide the period's total logistics cost by the units moved. In the example, $62,800 ÷ 24,000 = $2.62.
Does the lowest freight mean the lowest logistics cost?
No. In the example, monthly delivery has the lowest freight ($36,000), but twice-monthly has the lowest total cost ($62,800).
How does inventory enter logistics cost?
Through average inventory times unit value times the annual carrying rate, plus the warehousing of that stock.
What is a value-based (ad valorem) freight charge?
It is a percentage charged on the invoice value of the cargo to cover transport risk.
Sources
- BALLOU, R. H. Business Logistics/Supply Chain Management. Pearson.
- CHOPRA, S.; MEINDL, P. Supply Chain Management: Strategy, Planning, and Operation. Pearson.
- BOWERSOX, D. J.; CLOSS, D. J.; COOPER, M. B. Supply Chain Logistics Management. McGraw-Hill.
- COYLE, J. J. et al. Supply Chain Management: A Logistics Perspective. Cengage.
Keep studying: trusted sources and links
- CSCMP: Supply Chain Management Definitions and Glossary
- ILOS: Instituto de Logística e Supply Chain (in Portuguese)
- Wikipedia: Freight transport
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About the author
Lean Manufacturing & Behavioral Management Specialist
Over 20 years in the automotive and metalworking industries (GM and Dana), Lean Manufacturing practitioner since 2006. SENAI instructor and mentor in Brazil’s Brasil Mais Produtivo program, delivering consulting, training and audits for 50+ companies, combining quality, productivity and people development.