Connecting Domestic Pricing to the Global Supply Chain

Jan. 1, 2009
Today's global manufacturing and shipping patterns significantly influence freight transportation within the United States. In recent years the ocean,

Today's global manufacturing and shipping patterns significantly influence freight transportation within the United States. In recent years the ocean, air, rail and trucking industries have individually responded to shippers' changing needs, adapting their services according to demand. As the nature of carriers' service offerings changed, their pricing structures were also modified to reduce ambiguity and reflect real-time cost considerations.

However, the pricing structure and methodology of the less-than-truckload (LTL) segment is based upon a rigidly structured freight classification system that does not conform to the transportation requirements of a global supply chain network. Consequently, opportunities for efficiency and collaboration are underutilized or completely missed by the LTL carriers.

The LTL industry has been part of the US transportation system for more than half a century. Its baseline pricing structure was originally adapted from the railroads and involves assigning a class designation to freight according to its characteristics (density, stowability, handling and liability). Although it soon became LTL industry specific, this freight classification system was further ingrained into LTL carriers' pricing structures through longtime economic regulation.

Today there is a stark difference between the domestic LTL system of classifying freight and the global standard of density-based shipment characterization. While the classification-based system may remain viable on domestic traffic, the LTL industry is missing an opportunity to tap into import and export traffic that competitors are entering.

With density-based pricing, the physical volume and weight of a shipment are used in lieu of a class to determine shipping costs. Density-based pricing more accurately reflects the transportation costs associated with a shipment's physical characteristics and provides a common, comprehensive and reliable language for global trade; therefore, density measurements have become the worldwide standard when determining transportation base pricing.

In a world where international door-to-door pricing is supplanting pricing by mode, the classification-based LTL pricing system is incongruous for dealing with import/export traffic. The pressure to move to a standardized density-based pricing system can only grow as borders are crossed.

In the LTL world, cubic capacity utilization and distance are two of the most significant cost factors when moving a shipment. Generally, carriers fill a trailer's finite cubic capacity before they reach the regulated weight limit. Those who favor moving to density-based rates argue that carriers should price their services based on the resources used, such as a shipment's space and weight utilization or its density components. Obviously, the distance the shipment moves would also be encompassed in the pricing.

An added benefit of density-based pricing is that once the physical metrics of the shipment are known technology can apply that intelligence in load optimization software to enhance load planning, equipment utilization and labor management. Today's radio frequency identification (RFID) and bar-coding technologies promote information transfer through simple scans-this information transfer could include shipment density for automated rating. Efficiencies such as these can be shared throughout the supply chain since, once captured, shipment metrics can be passed from mode to mode from origin to destination.

Density-based pricing scenarios also give shippers more control over their transportation spending. Freight re-classification is a lengthy process involving a board hearing, but under a density-based system, a shipper can redesign their packaging for improved space utilization (which increases density) and receive immediate freight savings on the very first shipment.

Shrinking freight volumes in the LTL market, fluctuating energy costs, environmental concerns and infrastructure congestion all contribute to the growing need for optimizing the LTL industry's load factors. Today's classification-based structure uses averages to determine an individual shipment's density and its resultant class, while density pricing provides shipment information that facilitates accurate load optimization and system efficiency.

LTL carriers who offer international shippers and freight brokers a density-based pricing scenario make themselves available as a player in the global supply chain. Shippers also benefit from the density standard, simplifying their operations through common, standardized processes and technology systems for both domestic and international shipments.

The consequences of failing to modernize the LTL pricing model are plain to see. However, there is work to be done; planning, effort, foresight and a systemic realignment of the industry's thought processes are all required. But in the end both the carrier and shipper will realize new opportunities to more closely match the transportation service to the shipper's needs.

Daniel M. Acker has been active within the motor carrier industry for over 30 years. His background includes managing daily operations and administration, with heavy emphasis in the cost, financial and statistical areas. As Senior Vice President of Research and Economic Analysis for SMC3, Acker oversees the company's economic updating of its CzarLite benchmark rate products, SMC3's Carrier Cost Index (CCI) and other industry studies.