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Moore on Pricing: Capacity pricing and LTL freight

By Peter Moore, Adjunct Professor of Supply Chain
February 01, 2014

By now you’ve surely heard a U.S. Postal Service spokesperson talk about a parcel deal that they call “If it fits, it ships” with a simple form of capacity pricing. 

Shippers and carriers need to think about a future in LTL freight with loads up to 19,999 lbs.—or even more—that are sold on a capacity basis. If it fits with carrier operations, it ships with optimum pricing.

Our LTL pricing systems should look like airline systems in which the carrier sets pricing in their own web-based application and allows shippers and third parties to access the pricing, including contract pricing on a real time basis. The carrier can adjust rates based upon available capacity with pricing adjusting for capability, advanced booking, and long-term contracts. 

Variable prices for insurance waivers, fuel hedging, and transit time (express vs. flexible delivery times) could be established and adjusted as capacity is consumed in a lane. And like the air providers, the carrier price system becomes the system of record for auditing.

The implication for a shipper with a transportation management system (TMS) is that instead of a static rate, the system would call out to the carrier’s system for current pricing from an existing contract or to a market of carriers in real time. The shipper system has to be able to disclose dimensions, weight, value, delivery deadline, and availability time in order to get a dynamic rate from the carrier. 

Like the airline, the carrier system uses these variables, contract agreements, and internal operating practices to quote for a given day and class of service. The carrier rate system then sends the shipper’s TMS the contract or bid price and records it for settlement. This is the equivalent of issuing an airline ticket. The implication for freight payment is that we will only need to audit for service levels (e.g. on-time delivery) and will not need price matching third party audits. With current tracking software, carrier delivery times could be confirmed automatically, thus simplifying settlement of charges. 

Carriers have expressed frustration with having to respond to shipper RFPs based on old fixed-price tables. They want to have a way to incentivize shippers to better utilize their changing capacity; and for carriers this means creating an audit friendly pricing system that is accessible by shippers’ computers. This pricing system would display and distribute pricing by density, day of week, value, and other variables the shipper can impact with their internal decisions. This approach incentivizes the shipper to reduce package size, work on shipping and receiving hours, and book the carriers days in advance to allow them to match capacity to coming demand.

This may seem idealistic, but I have seen demonstrations of systems that will do this type of pricing and tracking for highway carriers. There are third party services with thousands of shippers and carriers connected doing complex rating—and air providers do it every day. 

For some reason we’re stuck in the old, static National Motor Freight classification-based pricing system with extra costs for shippers and carriers in tariffs, pricing tables, and outside auditors. Carrier discounts have reached an absurd 90 percent level to sustain antiquated price structures, and we’re unable to take advantage of dynamic changes in carrier operations and volumes that create opportunities for both carrier and shipper margins on any given day of the week. 

Shippers and carriers could work together dynamically to optimize the various factors that make up service and cost in LTL freight; however, the slow shift of service rate bureaus to “density pricing,” while admirable, is delaying the major change that industry needs to make. 

The shipper action list is short but critical. First, shippers should meet with carrier executives and discuss their willingness to move to dynamic and collaborative LTL pricing. Second, have the IT departments of the carrier meet with your TMS folks or your third-party TMS provider. You then need to agree on the price and service variables that both parties feel are important and measurable as well as the protocols for communication. 

Third, write an internal procedure that books freight as early as possible in the order cycle to give carriers maximum planning time. Fourth, establish standard costs for major freight lanes and begin measuring how dynamic pricing delivers savings while improving both carrier margins and your customer service performance.

About the Author

Peter Moore
Adjunct Professor of Supply Chain

Peter Moore is Adjunct Professor of Supply Chain at the University of Denver Daniels School of Business, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at .(JavaScript must be enabled to view this email address).

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