As many of you know, the National Motor Freight Classification has been the foundation of the LTL pricing structure for domestic U.S. and Canada - U.S. LTL shipments for many years. Here is a proposal to create a density/cube based LTL tariff that has been developed by Hank Mullen of Mullen Associates and Peter Moore of Capgemini. Please take a few minutes to read the proposal and offer your comments.
Sun Setting On The National Motor Freight Classification
Will technology enable the replacement of the National Motor Freight Classification with a transparent density and cube-based system? Some folks have begun to ask some tough questions.
Since the 1940s, motor carriers have been permitted to collectively determine rates and practices that apply to the transportation they provide. Under the Reed-Bulwinkle Act (Reed-Bulwinkle), now codified (as to motor carriers) at 49 U.S.C. 13703, motor carriers acting collectively could be immunized from the antitrust laws by submitting the agreements governing their collective activities to the Interstate Commerce Commission (ICC) and now to the Surface Transportation Board for approval.
Most collectively set rates are for Less Than Truckload (LTL) movements established in conjunction with the National Classification Committee (NCC) classification procedures. Classification, which involves the grouping of commodities with similar transportation characteristics into categories, or “classes”, does not involve the actual setting of rates but is a part of the motor carrier ratemaking process. Every commodity that can be shipped by truck is placed into a class with other commodities that have similar transportation characteristics. Each class is assigned a number, which increases as transportability becomes more difficult. In order to reach a final price, carriers using the classification procedures typically apply a rate to the class that the commodity falls. Under the current regulatory framework, a carrier on its own may determine the rate applied to the class, or a motor carrier rate bureau may set it collectively. For example, if a commodity was rated class 85 and the individually or collectively set rate for particular shipments of commodities rated class 85 were $6.00 per hundredweight, then the carrier would charge its customer $600.00 for transporting a 10,000 pound shipment.
In 1956 the ICC approved the creation of the NCC to be the predominant classification body for the motor carrier industry. In 1980, the NCC established an agreement to promote competition. The agreement was called the Motor Carrier Act of 1980 (the 1980 Act), which substantially reduced federal motor carrier regulations. While the ICC was still in existence, it investigated the activities of the NCC to determine whether they conformed to the aims of new legislation. The ICC found that continuing the NCC’s antitrust exemption was consistent with the new, pro-competitive National Transportation Policy, but only if the classification process were modified so that it focused on only four factors related solely to transportability: density, stowability, liability, and dificulty of handling.
1) Density (weight per cubic foot)
2) Stowability (including excessive weight and excessive length)
3) Ease or difficulty of handing (including special care or attention necessary to handle the goods)
4) Liability (including price per pound, susceptibility to theft, liability to damage, perishability, propensity to damage other commodities with which it is transported and propensity for spontaneous combustion or explosion)
There are 18 freight classes that start at class 50 (lowest cost per hundred pound) and go to class 500, (highest cost per hundred pounds).
The Commission (ICC) stated that density is “the most important transportation characteristic in the line haul.”
Most carriers can have different base (published) transportation rates for each year. In some cases customers have requested to utilize base rates that go back as far as 1992; less a negotiated discount that can reach over 85%! Carriers find themselves in a complex system, which is expensive to administer and supports attorneys, auditors, freight settlement houses and consultants attempting to reduce errors.
It is necessary for the shipper to understand all of the above information. Additionally, shippers must have an understanding of the Carrier Rules Tariff, the Bill of Lading terms and conditions and fuel charges. There are only a handful of specialists who understand the nuances of the National Motor Freight Classification (NMFC). 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.
Borrowed in 1936 from the railroads Uniform Freight Classification (UFC) of creating a “simplified” table of classes, the NMFC has outlived its classification process for which a rate can be assigned. International modes of ocean and airfreight have long utilized a cube/weight calculation designed to serve the needs of craft with limited capacities. Due to modern warehouse and transport management systems, the cube and weight tables exist and the origin, destination, service requirements and value known. Carriers currently have the ability to use a cube/density-based scale to quote a rate. A tariff that reflects cube and density will provide valuable planning information for terminal cross-docks and long haul load equipment selection for the carrier. Further, computers can store other shipper choices in service levels such as release value for insurance and delivery date windows to take advantage of cost saving efficiencies in day of week variations. Add to this the ability for systems to communicate with each other in load tendering, tracking, invoicing and settlement and you have the ingredients for a transportation transaction without the need for paper, auditors and the NMFC.
A Collaborative Solution
The Visibility Group is a consortium of companies, with a shared vision of a cube-based LTL transport system, which has begun to encourage and cajole the industry forward.
Mullen Associates: Provides consultation to and coordination of interested parties.
Capgemini: Provides process and technical integration services for carriers and shippers.
Georgia Southern University: Provides research and best practices to support change.
Benefits To Shippers And Carriers
Changing a system currently based upon ambiguous classifications to a more exact system of cube and density benefits the shipper by providing an understandable rate structure that, with some innovation in packaging (e.g. nesting) can allow for self-control in cost reductions. Cube based pricing is a system currently used internationally and should now be used domestically to allow for uniformity in systems, data and metrics.
In addition to be being beneficial for shippers, cube and density benefits carriers with a system that allows for accurate cube and density information at time of tender to enable operational planning and improved utilization of equipment. For the immediate future, it will allow for a change in the classification/FAK LTL rating system, which has become permeated with massive discounts, complex exceptions and paperwork.
The bad news is for the multi-billion dollar legal, post-audit and audit firms who obtain revenue from the artificially complex NMFC-based system of rating LTL in the United States. The new system, when adopted, will allow for pre-rated paperless autopay transactions between the shipper and the carrier. This process will utilize standard calculations and meaningful rate discount programs that support greater efficiency in load optimization, labor and fuel usage.
Hank Mullen of Mullen Associates and The Visibility Group have over thirty seven years of experience in the trucking industry including an in depth understanding of Freight Classifications and ICC (Interstate Commerce Commission), NMFTA (National Motor Freight Traffic Association), NCC (National Classification Committee), NMFC (National Motor Freight Classification), DOT (Department of Transportation) and STB (Surface Transportation Board) Regulations, and Rate Bureau actions. He has substantial expertise within the LTL, TL, and Package industry providing Benchmarking, Rate Comparison Analysis, Invoice Auditing and Tariff and Accessorial Charge evaluations.
Peter Moore is a Vice President in the global Supply Chain practice of Capgemini. Mr. Moore leads the Logistics & Fulfillment as well as the RFID practices in North America. Mr. Moore has over 30 years of experience in manufacturing, third party logistics services and consulting. With deep operational knowledge in all aspects of Supply Chain, Peter has provided strategic and tactical leadership and consulting to general manufacturing, eCommerce, agricultural, consumer, and retail, pharmaceutical and chemical firms both in North America and in Europe.