Is There A Better LTL Pricing Scheme? (November 01, 2009)
November 1, 2009
In the past issue, we examined the pricing of less-than-truckload freight, a somewhat ambiguous category encompassing shipments weighing typically between 100 and 10,000 lbs. The US is the only countr...
In the past issue, we examined the pricing of less-than-truckload freight, a somewhat ambiguous category encompassing shipments weighing typically between 100 and 10,000 lbs. The US is the only country using a freight classification-based pricing system for LTL shipments. While many recognize the shortcomings of class-based pricing and have weighed the advantages of moving toward a density-based pricing methodology, real barriers to change remain. This issue, we examine the situation north of the border.
Domestic LTL freight in Canada and some cross-border freight has for years been rated using a density-based pricing methodology. What can we learn from the Canadian experience? To answer this question, I spoke with Laura Tizzard of L.T.
Traffic Services. This is what she had to say: “Although there was less application of a classification system, there once were commodity-based tariffs in place (in Canada) to cover all products and shipping lanes domestically. The only ‘rate quotes’ that existed were simple agreements as to the amount of discount a customer might qualify for. Carriers were forced to work on a level playing field and the competition between carriers was based more on service and value-added products than on rate structures,” Tizzard explained. “Now, there is no standard tariff being applied. There are only rate quotes specifically named for a shipper with rates negotiated between the shipper and carrier. Many carriers are now attempting to develop their rates based on a ‘cost plus’ structure. For TL carriers, it is a fairly simple process of establishing pickp, handling, line-haul, and delivery costs per load. However, for LTL carriers, the process becomes much more complicated and difficult to measure. Each measure of those cost categories is dependent upon how many different shippers contribute to the load and how many different products are involved. The make-up of every load is different, the structure difficult to predict and dependent on customer delivery
eadlines. If carriers had the time and space available to hold freight and plan their loads for greatest profit and efficiency, that would be nice, but the reality is that consignees no longer carry large inventories and shipper products are sent as needed. Carriers have to move the freight when they receive it in order to meet the delivery requirements to satisfy consumer needs.”
Canadian LTL carriers now need to measure the space occupied by each shipment in order to distribute the costs throughout the load and measure the profitability of each component. To that end, they are using DBP and CBP price structures. Although some shippers may not see
ubing reflected in their invoicing, they are, in fact, paying based on the density of their product.
“While the seven items suggested by SMC3 would be ideal and something to strive for, the reality of achieving that standard and consensus among shippers and carriers has not been reflected in the Canadian trucking industry. After deregulation, pricing became a free-for-all largely
ependent on what the other guy was offering. Shippers went along with the new pricing because they witnessed the competition and received lower rates. At the time, shippers felt they were finally getting a deal, but now find it difficult to measure themselves against their competition. They truly have no way of knowing if they are getting the ‘best’ deal or whether their competitor has achieved something they have not,” Tizzard says, adding that perhaps now is the time to bring back a standard that shippers can measure themselves against.
However, whether the tariff is based on class, commodity description or density factors is not the real issue. All of those methods simply give the product a category or name.
“The real issue is what rates or prices are connected to those product categories. As long as shippers insist on discounts and want a better rate than their competitors, and as long as carriers are willing to comply and give never-ending discounts, then the tariff (whatever it is based on) will at some point become irrelevant,” she cautions.
The Long and Winding Road
Clearly, the road to cube-and density-based pricing will be long and winding. These are significant hurdles to overcome. While the move to these types of pricing systems is inevitable, it will take time and a major collaborative effort between shippers, carriers and the companies designing these tools to make the move a reality. The other challenge, in light of the highly competitive nature of the US economy and the culture of freight rate discounting, will be to see whether one or more of these tariffs can at least serve as basic LTL rate benchmarking tools over time.