Moore on Pricing: It’s the year for dimensional rating in LTL

Shippers are about to experience a change in how carriers calculate domestic less-than-truckload (LTL) freight bills. Starting with a few carriers in the spot market in January, contract shippers will increasingly be approached by more carriers to start disclosing freight dimensions and weight with LTL freight tenders. 

Two things are driving this change. First carriers are trapped in a historic discount program that grew out of the former carrier conference rates. Discounts from published scales have reached over 90 percent and have become untenable.
Second, the classification system, dating to the 1930s, has led to deep dissatisfaction with the various classifications on the part of shippers and carriers. The frequent use of “freight all kinds” (FAK), in which various classifications are grouped into one negotiated class, has lost its credibility with shippers.

When combined with deep discounts, carriers end up with rates that don’t reflect the capacity utilized nor the risks and costs associated with the actual shipment. So, it’s no longer a question of “if,” but “when” one or more new rate systems will be implemented.

However, shippers should understand that they have a critical roll in shaping the outcome. This is not a time to be passive and await carriers’ decisions on how to set up rates unilaterally. And not all pricing models need to be the same. If your carrier tells you that they want to switch away from your current contract rate basis, tell them you want all the price elements on the table, not just dimensions. 

You also want to have transparency into release values, fuel costs, terminal costs, load factors and other key elements. But at the same time, you need to agree to put loading hours, payment terms, earlier tendering, load consolidations, and volumes on the table. To make this happen, shippers should be leading the discussion on the benefits of transparency and collaboration in order to improve costs and service for both the shipper and carrier. 

To make a successful transition, both the shipper and carrier need a system that holds all the rates and variables. I suggest a model that mimics the airline systems where variables can include class of service, capacity usage, time of departure, and time of arrival in addition to dimensions, weight, release value, and other factors. 

Having two systems calculating these factors in order for a match pay to be done is a waste of time and effort. The best part of the airline system is that there is only one system of record—the carrier’s. Just as travel sites and agents do today, machines can contact each other and get current rates instantly. 

A shipper’s TMS can call for a web-based rate and not have to maintain a separate licensed table of rates. Indeed, the technology for more complex rating exists, and the change is really in processes and in the nature of the contracts between shippers and carriers.

If you accept the premise that a new contract rating method is needed, as many carriers and shippers do, then take active steps to lead the discussion with your service providers. 

First, get your cost, service and volume numbers together. Second, pick a carrier that you know can do the job. Third, open a dialog on a new collaborative contract with a unique pricing model. Be ready to work hard—and be ready to see
measurable improvements in cost and service.