Moore on Pricing: Shippers and carriers need to get smart on LTL costs

By Peter Moore, Adjunct Professor of Supply Chain
August 01, 2013 - LM Editorial

In the past months, ABF Freight System and UPS Freight announced 5.9 percent general rate increases, effective May 28 and June 10, respectively. Con-way Freight will raise its LTL rates 5.9 percent on June 24. On June 10, FedEx Freight announced a 4.5 percent GRI in non-contract base rates effective July 1, and other large carriers are expected to follow suit over the next several weeks.

However, these reported jumps in prices seem curious to shippers who are experiencing price deflation as competition heats up in consumer markets.

A shortage of capacity does not seem to be the problem. The trucking industry continues to buy new equipment and appears to be expecting growth. New Class 8 truck orders are 27.7 percent higher than last year, according to freight transportation research firm FTR Associates, and hiring is 3 percent above last year according to the U.S. Bureau of Labor Statistics. This indicates that capacity is increasing, and therefore more competition should be popping up to solicit more freight from shippers.

Carriers appear to be attempting to increase operation margins from 96.4 percent back to the 93 percent range that they enjoyed in 2008. Many shippers are pushing back as they simply can’t pass these increases on to their customers, and they don’t necessarily see improved services at the level that will help them win more business. 

However, we are seeing new ideas emerging in the LTL pricing market. The increased use of density pricing is an example. Density pricing, based on a combination of weight and cube, allows shippers and carriers to work together on packaging and pallets to find savings for both parties.

Density deals with two critical variables in freight transport: space capacity and weight capacity usage of the carrier’s equipment. As the dimensions and the weight are known quantities, it can serve as a more efficient determination of freight price. Depending on how much capacity you’re using, the trucker can charge you a portion. 

Of course there are many more variables, including time, distance, and insured value being just three. And for sophisticated shippers and carriers, the negotiation of contracts involves balancing each of the elements affecting their freight. 

“You need to improve efficiencies, know your costs, and arrive at a fair and equitable rate for the service you’re providing,” says Old Dominion’s CEO David Congdon. These words don’t just apply to smart carriers, but to shippers as well. This simply means that the market needs to change the way it thinks about LTL freight pricing. 

LTL pricing is not a simple table with applicable discounts, as many rate bureaus would have you believe. Both parties need to put aside these tables and unbundle rates into component costs. Together, they need to begin to test adjustments to the operational drivers of these costs. This means fully understanding who pays for insurance, how long trucks were held for unloading, who will load and unload, pickup hours, accessorial service needs, density of the freight, and a dozen or more other variables.

The goal should be transparency and flexibility to help both the carrier and shipper save money. Of course, the 800-pound gorilla in the room is the transportation management systems (TMS) we now use for freight pricing and payment.

Most of these are simplistic when it comes to freight price look-up, and many will not hold dimensions needed for density pricing calculations—at this point, they’re seeking one number for each load that can be applied based upon tables. New work is emerging here as well, with cloud based software services providing the ability to manipulate and confirm price changes in real time and provide variables in many price elements. 

It’s clear that the market will need these tools to allow better deal making and easier freight audit and payment in order to ring out more profit for carriers. Both parties need to strive for what FedEx Freight CEO William Logue calls “the right volume at the right rate into the right network.” Only then can we see productivity gains improve margins for carriers rather than price increases well above the general inflation rate.

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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