Palletization Software Can Help LTL Shippers Avoid Potential $6b in Space-based Rating Adjustments

PalletizationTaking their lead from UPS, FedEx, and other parcel carriers, LTL freight carriers are starting to supplement traditional NMFC class-based rating and are applying space-based (also referred to as “dimensional” or “dim weight”) rating to freight in an effort to maximize the cubic utilization of vehicles. This change has many shippers guessing about what to quote for shipping costs because they don’t know what the weight and dimensions of a shipment will be until they build the pallet.  By then it’s too late. The latest generation of palletization software provides shippers with a way to build a virtual model of the most cost-effective way to ship, thereby taking the guesswork out of space-based rating.

Supply and demand are moving carriers to space-based rating

Why are freight carriers introducing space-based rating?  The answer is simple. They are sick of hauling air for free.  The growth of e-commerce and 40% more residential deliveries have created more demand for smaller and more frequent parcel and LTL shipments.  But it has also introduced more light, bulky packages that are causing trucks to max out their capacity before they reach their weight limit.  Freight carriers want to be able to meet the demand for capacity, or alternatively get paid by shippers who waste capacity.   Freight carriers will now apply a cubic minimum charge (CMC), using dimensional weighing devices at their terminals to rerate those shipments that are light relative to their size.

ABF introduced space-based rating on August 1, 2017.   Judy McReynolds, CEO of ABF’s parent company, ArcBest, said, “We believe this initiative is the natural step for us to take now to ensure that the value we provide is appropriately reflected in the compensation we receive for our shipping and logistics services. We view this as a logical complement to the current weight-based pricing common in the LTL industry.”

Most freight TMS systems don’t automate “palletization”

The result of this new rating methodology is the same for freight shippers as it has been for parcel shippers: they are surprised to find unexpected dimensional rate “adjustments” on their carriers’ invoices.   It is estimated that the space-based rating will represent a 7-9% increase in additional LTL carrier revenue.   With LTL revenues running at $58b, according to the latest Council of Supply Chain Management Professional (CSCMP) report, CMC represents a potential $6b price increase for shippers.

Most shipping operations are not set up to identify CMCs.   According to Todd Polen, vice president of pricing for Old Dominion Freight Line Inc., many legacy TMS may be able to determine freight rates based on cube, but they only do so at a carton level and not when cartons are stacked on a pallet.  Determining the cube for an entire pallet is not something a TMS is able to do.

New palletization technology pre-determines cost-effective pallet building

Containerization is a feature commonly used in WMS and load planning systems, but rarely does a WMS take transportation costs into account.  The latest generation of palletization technology uses complex algorithms to instantly determine cost-effective pallet building in real time, avoiding CMC rating situations whenever possible.

Palletization APIs enable a WMS, OMS, and TMS to send XML requests containing order SKU weights and dimensions, available carton sizes, carrier designations, and packing rules such as lay flat, don’t pack with, and zone picking constraints.  Algorithms determine the optimum way to pack SKUs within appropriately sized cartons to maximize density.  They then build the pallet and rate the shipment to determine whether traditional class-based or cube rating will apply.  Palletization APIs then return the results, along with loading diagrams.

Conclusion

As Stifel managing director David G. Ross said recently at the SMC3 Connections 2017 conference, “Dimensional pricing is the way we’re moving.  Anybody trying to fight it, it’s like holding onto your fax machine or VCR. It’s easier for the shipper, it’s easier for the carrier.”  To reduce unexpected CMC charges, shippers are going to have to be a lot smarter about how they assemble shipments.  Palletization technology can definitely help.

Bob Malley is CEO of Pierbridge, Inc. with many years of experience in the TMS software industry.  He founded Tracer Research Inc. in 1989, where he launched Clippership, a leading parcel carrier management software product. In 1998, Tracer was acquired by Kewill Systems Plc. Bob was appointed President of the eCommerce division, served as a Board Director, and was later promoted to CEO. Bob left Kewill and joined Pierbridge as a Board Member in the fall of 2002 and then as CEO in 2004. 

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