Implementing rates is one area that people continue to underestimate or under plan during a Transportation Management System (TMS) installation. On the surface it seems relatively easy. However, once you dig into how your company uses its transportation rates, you start to get a feel for the complexity and level of detail that needs to be addressed.
As we all know, every dollar not spent correctly in transportation is a dollar of lost profit. And it’s too easy to overspend by picking the wrong mode (parcel, LTL, TL) or carrier. So, it’s critical to start with the right rates and have a repeatable way to maintain them over time.
Let’s start with some basic definitions so we are all on the same page:
- Tariff – The carrier’s pricing agreement with your company that states how rates are determined, areas serviced, accessorials and other items.
- Rules Tariff – Rules and conditions of service that apply on shipments. Each carrier has one. You will find accessorial charges and many other important pricing information in this lengthy document.
- Base Rates (also called a rate base) – The LTL carrier’s cost per hundred pounds (CWT) you are shipping. You might be using the carrier’s rate base (i.e., 2014 Con-Way 599) or a neutral base rate (i.e., Continental 2013 or Czar Lite 2009).
The primary issues that create implementation difficulties are:
The Complexity of Your Transportation Network
Generally, a more complex transportation network utilizes more types of rates for direct, multi-stop TL, pooling and other cost-saving transportation strategies. Add to this the number of DCs and modes used and you have a challenge with the number of carrier rates necessary to support such a network. Accurate freight costs are critical for this, as well as, simple requirements such as up-charging your customers (pre-pay and add).
Does your organization use different carrier agreements for every DC or inbound/outbound site? While necessary to achieve the lowest freight costs, it creates competing rate structures within the TMS. Different locations and departments may have negotiated different rates. The TMS must be able to manage these so that one site doesn’t use a carrier agreement that isn’t valid for that geography. The TMS must be able to correctly assign the right pricing to every shipment by selecting preferential location-specific pricing when it exists, while still supporting more general company-wide pricing.
While TL pricing is relatively easy, LTL pricing is hard. Parcel can be hard depending up on how it’s used. For LTL, most people believe that you simply apply a discount to an LTL rate, add fuel and you’re done. Unfortunately, it’s much more complicated. Unless your TMS provides a methodical way to enter LTL agreements, and takes into account the pertinent rules tariffs, deficit weight and another calculations required, you could face an enormous implementation cost, and a lot of service charges, every time you update your rates.
For parcel, it’s far more advantageous for your TMS to rate small package internally vs. reaching out to your small package vendors for every rate call. Using parcel in your optimization process is a great money saver. However, if your TMS doesn’t rate internally, it makes optimization improbable due to the latency of obtaining these rates and the millions of rates an optimization algorithm uses. You might need to use a 3rd party parcel solution which increases implementation and software costs. But that pales in comparison to the potential savings in most organizations.
Quantity and Complexity of Pricing Agreements
The sheer number of pricing agreements at shippers and 3PLs can create an expensive problem. It’s normal for large shippers to have a few hundred and 3PLs to have tens of thousands of pricing agreements (for their carriers and their customers). It’s very difficult getting that many into a system. This is where importing capabilities and extensive rating options are important. Many TMS solutions actually increase the number of rating profiles you must have because they can’t correctly address multiple geographies and rate types.
Also, most shippers and mid-range 3PLs find that negotiating from the carrier’s rate base is more effective than using a single, neutral rate base. While mostly correct, it can increase the complexity of managing the rates unless your TMS has an easy way to assign different rate bases to the pricing agreements.
Let’s say that you work really hard and get all of your carrier agreements and customer upcharge profiles entered. Validating that rates are correct is just as important as any part of the implementation. You need a plan to do this in an automated manner. If your TMS has a tool to test rates or perform batch rating or analysis, you should use it extensively. Simply take a spreadsheet of shipments with audited net rates, batch rate them through your TMS with the correct dates (to get the right fuel surcharge), then output them to the same spreadsheet so you can see the shipment information – both the audited rate and TMS rate. Subtract the two rate columns and see where you have a discrepancy.
Maintaining Your Rates
One of the bigger challenges is how you maintain the validity of your rates. These can change based on the agreement with your carriers, which probably provides for annual changes to a rate base, annual negotiations, or automatic updates by your parcel carriers.
With a few pricing profiles it’s easy to change each one independently. However, as you scale the number of pricing profiles it becomes very difficult. Ensure you have tools to make global changes such as independent carrier profiles vs. location-specific profiles, updating rate bases and searching for similar pricing agreements to update accessorial charges. Global change management can make the difference in correct vs. incorrect rates in larger companies. For 3PLs, that’s the difference between making a margin and losing money.
Rate entry and maintenance can make the difference in a TMS implementation success or failure. As some of the primary goals are to reduce costs through proper carrier selection, optimization and freight bill auditing, it’s imperative to get correct rates through your system. Otherwise, your success will be significantly diminished.
Geoff Comrie, VP of Business Development at 3Gtms, has 20+ years of logistics and technology sales and management experience. He became VP of Business Development after the company he founded, Transite Technology, was acquired by 3Gtms in 2013. In this role, Geoff is responsible for corporate partnerships and new market development. As CEO of Transite, he led the company from inception to becoming a recognized provider of an innovative midmarket TMS. He was the primary driver for the company’s transportation management product strategy, sales and operations. Prior to this he held sales and management leadership positions with several companies, including Pansophic and Siemens. Geoff is a graduate of Western Illinois University with a bachelor’s degree in computer science.