Is the pricing model for less-than-truckload (LTL) shipments, based on the National Motor Freight Classification (NMFC) schema established in 1936, in need of reinvention?
The authors of a whitepaper published today by the University of Tennessee, in partnership with Translove and Supply Chain Visions, certainly think so. Here is an excerpt from the executive summary:
The National Motor Freight Classification has outlived its key use (borrowed from the railroad’s Uniform Freight Classification (UFC) of creating a “simplified” table of classes to which a rate can be assigned). This clone is the basis for pricing transportation commerce for shipments from 150 lbs to less than 20,000 lbs., which are classified as Less-Than-Truckload (LTL). It is the authors’ opinion that this approach for pricing and structuring LTL transportation commerce is based on a dogma that is an accepted industry practice, but is actually archaic for today’s businesses.
The paper—“Unpacking Transportation Pricing: A Whitepaper Challenging Transportation Pricing Models”—provides a short (but interesting) history of how LTL pricing came into existence. It also provides a good overview of how rates are calculated, including the impact of freight classifications, base rates, minimum charges, weight alterations, fuel surcharges, accessorials, rules tariffs, and numerous other factors. I recommend you read the paper to get all of the details, but here is the bottom line, as anyone who deals with LTL shipments already knows: calculating how much an LTL shipment will really cost is not an easy or straightforward process. Here is how the authors of the paper put it:
It is necessary for the shipper to understand all of [the factors that affect rating], in particular the base rates to use, the NMFC rules, the carrier’s rules tariff, the bill of lading terms and conditions, and existing fuel charges in effect at the time of shipment. Specialists who understand the nuances of the NMFC are few. The average shipper is not capable of negotiating as well as the carrier who has years of experience in the rules, classes and exceptions. A whole industry of professionals has grown up to support the shipper, including consultants, auditors, and attorneys. All extract a portion of the value of the transport system.
There has to be a better way, right?
The authors (Peter D. Moore, Hank Mullen, Lynnette Guess, and Alan Van Boven) propose taking a Vested Transportation approach, based on the five rules of Vested Outsourcing (which Kate Vitasek details in her Vested Outsourcing book). You can read the whitepaper to see how the authors align the five rules to transportation, but here’s my overall opinion about it: Over the past couple of years, I’ve drunk enough of the Vested Outsourcing Kool-Aid to firmly believe that it can transform the way shippers and carriers/3PLs work together (you can read all of our related postings here), but not so much that I don’t recognize its limitations and how difficult it is to implement.
For example, back in February, I wrote about a shipper that could have saved millions of dollars by putting its freight out to bid last year, but the company decided to take a long-term, strategic view instead and maintain its current rates with carriers (see “On Courage, Trust, and Patience in Logistics”). The shipper knew that capacity would tighten again down the road, and when that day came (which it has), the shipper expected its carriers to maintain their commitments to them and not abandon them for other shippers willing to pay an extra cent or two per mile. Did the strategy work? When I followed up a few months later, the shipper said that “the jury was still out” on its strategy, but there were troubling signals ahead (see “Revisiting a Shipper’s Decision on Transportation Rates”). “Maybe when all is said and done, transportation is a commodity after all,” said the logistics executive. “I don’t believe it is, but most players in the market behave like it’s a commodity.”
The authors of the paper propose several ideas on how to improve the status quo, such as eliminating class-based LTL pricing.
There are a few other options out there, but one of our favorites for efficiency, greening and cost-reduction is space-based pricing, also known as cube-based pricing. This allows the carrier to price by the space occupied, which should be the most important measure in load factor. In the LTL industry, most equipment will “cube out” well before the weight limit of the equipment. “It is almost universally agreed that the space occupied by merchandise should be the predominating factor in the fixing of a classification and also the value of the article should have some weight” (1897 ICC Annual report, emphasis added).
We have certainly seen some carriers experiment with new pricing models, such as Con-way Freight with its True LTL Pricing model (see “The Green (and Social Media) Side of Con-way’s TrueLTL Pricing”). But has the time come for the industry as a whole to make a more aggressive push towards mothballing the National Motor Freight Classification schema? As highlighted earlier, there are many consultants, software vendors, and others who would hate to see it go because they have built entire businesses around the complexities associated with LTL pricing. But what do you think? Post a comment and share your viewpoint!