2015 NASSTRAC Part 2: Tackling the Move to Density-Based Freight Pricing
Last week we covered key highlights from the 2015 NASSTRAC Annual Shippers Conference & Transportation Expo. I mentioned the ‘Is the LTL Industry Ready for Density-Based Pricing’ session which I found to be the most interesting and important to our industry right now. One factor stopping carriers from moving more aggressively toward density-based pricing is their own internal systems. The carriers need to ready their pricing, costing and invoicing systems so that they all contain dimensions.
Making the Move Towards Density-Based Pricing
Today, density-based pricing exists for shipments to Alaska, Hawaii and Puerto Rico. But the carriers that support these shipments currently rate invoices by hand. We know this because we’ve found several rating errors ourselves, and in discussions with these carriers they told us they have one to three people who perform this rating using an Excel spreadsheet. They also have to put new processes in place at their terminals that will allow them to efficiently and accurately measure the dimensions of the freight. It’s a very different environment than parcel where each box is conveyed and crosses a scale and scanner to capture the weight and dimensions automatically.
Four Challenges Shippers Have to Overcome
How will a Less-Than-Truckload (LTL) carrier capture the dimensions and weight for freight that isn’t palletized? How will this work with a pallet that has odd dimensions? Pyramid or pipe dimensions? Once the carriers solve these problems, it will shift to the shipper. The shipper will then face four main challenges:
- How will they perform an RFP? Traditionally shippers utilize a common rate-base for all of their carriers and a single or tiered Freight All Kind (FAK) structure. This allows the shipper to compare the discount percentages by hand and know that an 80% discount provided by carrier A will beat a 79% discount provided by carrier B. With density-based pricing you have to wonder what the rate-base will look like. Will the carriers provide a single price-based on density, or are they going to continue to have their lanes and use the density as a multiplier against that lane price? Or are the LTL carriers going to adopt a zone approach like parcel currently has in place?
- How will freight audit companies capture the dimensions? Many freight payment and audit companies do not have advanced technology, and often times they don’t even capture freight class. In my opinion, this is because they are tactically focused on paying the bill and trying to create as many adjustments as possible to justify their existence. With density-based pricing they now have to capture three additional fields: length, width and height. Their systems have to accommodate storing this data as well as the rating if they are truly going to audit the charge.
- How will the TMS capture and utilize the dimensions? The shipper’s Transportation Management System (TMS) has to now capture the dimensions of the pallet or item being shipped, and use it to determine the rate and store the additional fields. The challenge is that many TMS software packages that understand LTL do not support parcel, so this is a very new concept. Then you have to wonder how you are going to do mode determination between parcel and LTL. Most companies do not have good master data. Even the companies that have good master data that contains the weights and dimensions of their items will struggle.
Cartonizing an order to predict what size box and the number of boxes a given order will be packed and shipped in will be easy compared with having to predict the way a pallet will be loaded with the boxes. The reason why is because cartonizing relies on having a finite number of boxes that have fixed sizes. The TMS software methodically ‘packs’ the items into different box sizes, finding the most optimal number of boxes for a given order. A pallet has a footprint of 40′ X 48′ but how high are you going to stack the boxes on a pallet? If you have to place a single box on a pallet you have created about 13 cubic feet for each one foot tall box on a pallet.
I can’t even begin to explain all of the possible combinations and permutations that are possible now. This shows that the cartonizing algorithm as well as the standard box sizes will absolutely affect the price of an LTL shipment.
- How will they prevent a huge rate increase? How can you possibly compare your old class-based price to the density-based price? Shippers are not capturing dimensions on their LTL freight today; the LTL carriers are not capturing the dimensions on their invoices; and the Freight Payment and Audit providers don’t have fields for the dimensions. This means all of the historical data that you’ve been meticulously capturing, cleansing, and standardizing is useless and can’t be used to predict how density-based pricing will affect your LTL cost.One suggestion posed to the panel at NASSTRAC was to have the carrier invoice in parallel. For example, leveraging an invoice using the current class system and also providing the rate using the new density pricing. I don’t see this happening because it will clearly show the shipper is taking a huge price increase. All we have to do is look at what dimensional weight did to parcel prices when it was introduced to all ground shipments in 2009 when it replaced the old oversize package definitions.
Tackling Density-Based Pricing with RateLinx
All four of these challenges can be addressed using the RateLinx Enterprise Solution where you can use collaborative carrier strategies to significantly reduce your freight spend. ShipLinx TMS has supported dimensions and density-based pricing for LTL shipments since 2008. It also has cartonization and pallet-building algorithms that will automatically perform mode determination between parcel and LTL. An interface is available with many of the dimensioning systems such as a CubiScan, and can read the actual dimensions of the freight and weight when producing the bill of lading.
Because of ShipLinx TMS’s support of density-based pricing, our FP&A solution has been capturing dimensions and volumes for more than seven years, and is auto-rating invoices using density-based pricing. Through the integration of the ShipLinx TMS data and FP&A data, our Rate Modeling is capable of providing the comparisons between the class-based rate and a density-based rate to ensure that shippers aren’t unknowingly taking a huge rate increase.
Because of how we currently model rates by using the carrier’s rate-base, this has already allowed the shipper to better align with their carriers and prevent the rate imbalances that exist when using a common rate-base with an FAK. The Dashboard will then allow you to view the density-based rates as compared to the class-based rates through an easy to understand graphical Key Performance Indicators (KPI’s).
Density-based pricing is a challenge worth tackling. If you have any questions or would like to learn more about how RateLinx can help you start making the move to density-based pricing, send me an email and I will get back to you right away.