Ways you can simplify product classification

By Lou Buratti -- Logistics Management, 5/1/1998

One way you can improve motor carrier service and reduce costs--particularly in a multi-divisional organization--is by reviewing your product classifications. Whether your company has five or five hundred facilities, the product-classification process is the same.

The key to achieving a simplified commodity-class rating system is to never forget the objective--that is, to create a system that is user friendly for departments such as traffic, sales, purchasing, and sometimes production. Your system should eliminate as many of the naturally confusing transportation factors as possible, so that someone unfamiliar with transportation can apply it. This means you should avoid using the National Motor Freight Classification as much as possible.

Many traffic managers make the mistake of trying to eliminate classifications strictly as a means of lowering costs. That's important, but it is not the main reason for commodity rating. One of the greatest benefits of commodity rating is that just about everyone in the company can figure out the cost of a shipment when necessary. In fact, the biggest favor you can do for others is to have only one or two classifications. A good commodity rating system would work as follows:

Let's say your natural class of inbound materials is between 50 and 85 and your outbound is Class 70. You could ask the carrier to implement an FAK Class 60 for all freight classes 50 to 85 on all inbound, outbound, and third-party shipments. Why Class 60? Well, the carrier will get some benefit on the Class 50 freight, as it will jump to Class 60. You, on the other hand, will reduce costs for all shipments under and including Class 85 to Class 60. The second tier of this plan should include an FAK class 92.5 for all products from Class 92.5 to 500, or Class 250.

Under this system, almost all of your freight will fall into these classifications unless you make Ping-Pong balls or napalm. Will this also reduce your overall costs? It should, but you need to know that in advance. You should know exactly what percentage of your freight is class 50, 60, 70, etc. You also must know what percentage of your shipments fall into the "absolute minimum" charge category. This way you will always know the impact of the pricing.

Now you have a commodity base-rate system, with a single rate base for all of your company's divisions. Some divisions may have an FAK Class 50; some may be 85. Each one of the divisions, however, can use the rating disks provided by the carriers (or ones you purchase) to calculate the cost of almost all of their shipments.

Though the ideal would be to eliminate classifications for rating shipments completely, it's not possible to do so. The goal is to eliminate them almost entirely for your outbound products and include 75 to 90 percent of your total inbound freight in the classes you decide upon and implement in your contracts.

Here are a couple of points that are extremely important. First, make sure these areas are covered by your company's insurance. Sometimes dropping classes through the use of "FAK" pricing can cause the loss of some coverage with carriers. Check it out before setting things in cement!

Second, make sure you "freeze" the specific edition of the National Motor Freight Classification that you use in your contract. If you do not make exact reference to the edition with a complete product description and a product class subsequently changes, it could destroy or radically alter your entire pricing structure. This is extremely important and another reason why contracts are absolutely essential to this type of program.

Louis G. Buratti Jr. is president of LGB Traffic Management Consultants, Leominster, Mass., a company that offers freight payment, freight audit, and consolidation services as well as logistics consulting. He can be reached at (508) 466-6918 or by e-mail at lou@lgbtmc.com.