Long ago, a LTL (less-than truckload) neutral rate base (NRB) was promoted as way for shippers to more easily compare shipping costs between carriers because carrier contracts and the actual rating process were both complex. A NRB was seen as a compromise based on simplicity, but neither the business interests of the shipper or carrier were optimized.
I believe, however, that neutral rate bases have outlived their purpose.
Today, modern transportation management systems (TMS), with robust contract and pricing management capabilities, have negated the need for a NRB and allow for both shippers and carriers to reap the rewards of a well-negotiated, collaborative contract.
How is this done? There are many LTL carriers in the U.S. and not one of them services every part of North America equally. For many reasons — too many to get into here — some regions and lanes make stronger business sense than others. And when the needs of the shipper are aligned with the strengths of the carrier, both the shipper and the carrier enjoy a profitable and healthy relationship.
It is well known that almost no two carrier contracts are identical, even year-to-year by the same carrier. What appears to be a conspiracy between carriers to make their contracts difficult to compare is more a reflection of how well carriers know their costs to the penny. This results in complex and different rate structures — what kinds of costs are associated with certain kinds of freight, how much to charge for specific accessorials, how much it costs to service various lanes and facilities, and so on.
Modern Contract and Rating
This is where highly-detailed contract management systems are invaluable in quickly determining the complete and actual costs of a shipping transaction. These systems account for every detail and nuance, providing shippers with reliable, least-cost choices within seconds.
There are many contract management (CM) systems around. Strategic and functional value boils down to detail and process, not the pretty colors of a user Interface. It can certainly be intimidating when you first look at a very granular CM system because it just “looks complicated” due to all of the carrier contract information that needs to be entered. But the work is absolutely necessary and can mean the difference between getting back a simple estimate versus the actual cost, or even if the freight can be delivered to a certain address.
Hard Work + Detailed Input = Reliable Output
I cannot overstress this point.
Here’s a real-life example of what can happen if a contract management system isn’t robust enough to consider important details:
You have a 2,000 lb. shipment moving from Atlanta to New York City, with a freight class of 55, requiring an inside delivery by the carrier.
ABC, an “undetailed” contract management system, returns a hundred-weight (CWT) rate of $93.99, yielding a gross freight charge of $1,879.80. After your well-negotiated discount, the net freight charge would be $375.96.
You ultimately choose to use this carrier because, according to the transportation management system’s utilization of ABC contract management, this was the least cost carrier.
Unfortunately, this shipment is going to cost you much more than $375.96.
ABC does not take into account the additional accessorial cost for Inside Delivery even though it’s clearly stated in the carrier contract. ABC simply has no capability to have this detail recognized in the contract management system. Inside Delivery has a cost of $14.50 per CWT, yielding a total charge of $290 for this accessorial.
Further, ABC doesn’t recognize there is an automatic additional delivery charge of $60 for delivery into the borough of Manhattan.
So the total cost is actually $725.96, not the $375.96 returned by ABC.
Ouch!
In summary, to lower your transportation costs, use your own negotiated carrier contract in tandem with a modern transportation management system. This delivers lower shipping costs and better accuracy, which is important in delivering fundamentally good customer service and if you are looking to build a certain margin into your shipping services.
But, if you are still going to use a neutral rate base, then do a bit of homework. With carrier acceptance being neutral, pick a neutral rate base that is not really governed by the carriers, is cost-effective and offers the highest value, because your financial benefit, as shown above, can be compromised by up to 20 percent. In addition, look for a NRB that uses modern technology that any current and future software can use, offers the most rating options, and offers friendly licensing terms.
You can view transportation management as simply moving freight from one point to another. Or you can view it more strategically, as a way to save money, increase customer retention, and as a profit center. It is this strategic perspective that is driving shippers and 3PLs to adopt sophisticated transportation management systems. But as you evaluate TMS solutions, it’s important to remember that it all starts with well-negotiated carrier agreements, and the utilization of a robust contract management system.
Geoff Comrie is the CEO of Transite Technology. He has twenty years of experience in technology sales and management, with companies such as Pansophic and Siemens. Geoff has funded Transite from its inception in 2002 and has been the primary driver for product strategy, sales, and operations. Geoff is a graduate of Western Illinois University with a bachelor’s degree in computer science.
It’s a good idea but, until LTL sales reps also change their ways of thinking, a lot of customers will continue to receive contracts based upon the old ratebases. They are creatures of habit, not willing to put in the work to change, especially when they’ve been doing it for years. Shippers will likely have to force the issue to get reps to do the analysis and change the rate base.
I am curious what input you would have to the problem this creates in being succeptible to the yearly GRI?
Annshanley makes a great point about trying to change behaviors of folks in the carrier sales community. The carrier’s utilization of modern contract and pricing management on the customer-level is a big factor in enabling such change. Without strong technology, it’s very difficult to do reliable analysis and make customer-specific modifications.
Being in a number of carrier and 3PL conversations, it think it’s interesting that many folks actually seek the ability to be more customer-specific in their contracts and pricing. They recoginize it gives them a competitive edge, while creating a healthier relationship and partnership with their shipper customers.