As businesses grow and expand, one of the most important aspects to consider is logistics management. Companies need a reliable and efficient supply chain optimization plan to ensure that their products are delivered to customers on time and cost-effectively. Freight absorption plays a critical role in achieving this goal.
Freight absorption refers to the process of allocating freight costs, shipping expenses, and transportation charges to the cost of goods sold (COGS). This means that instead of passing these costs onto the customer as a separate charge, they are absorbed by the business itself.
As mentioned earlier, businesses need to optimize their supply chain to remain competitive. By absorbing freight costs, companies can offer more competitive pricing while still maintaining profitability. It also helps reduce the impact of external factors such as fluctuating fuel prices or unexpected shipping delays.
Freight absorption is calculated by dividing the total freight costs by the number of units shipped. This cost is then added to the COGS for each unit sold.
There are several benefits to implementing a freight absorption strategy, including:
While there are many benefits to freight absorption, there are also several challenges that businesses may face when implementing this strategy. These include:
To successfully implement a freight absorption strategy, businesses should:
Freight charges are an additional cost that customers must pay when purchasing goods. Freight absorption, on the other hand, absorbs these costs into the COGS for each unit sold. This means that customers pay a lower price, but the business still maintains profitability.
Overall, freight absorption plays a critical role in logistics management and supply chain optimization. By accurately calculating and allocating freight costs to the COGS, businesses can improve their pricing strategies, remain competitive, and increase profitability.
