There is a lot of "buzz" surrounding Cube Based Pricing and for good reason. For decades U.S. and cross-border LTL shippers have been using a complex, convoluted LTL pricing scheme that dates back to the pre-Deregulation era. Class rates, published by rate bureaus or by individual transport companies have been based on the National Motor Freight Classification System (NMFC), a set of 18 product groupings that vary according to the density, stowability, handling and liability of the products in each selected class. These 18 groups contain a massive list of products. NMFC experts meet on an ongoing basis to debate whether a four pronged widget should be categorized as class 55 or class 60 freight. LTL carriers compete by offering discounts off the published class rates.

Certain tariffs such as Czar-Lite published by SMC3, the former Southern Motor Freight Carrier Association, has become one of the de facto industry standards. In addition, individual carriers (i.e. Yellow) published their own tariffs (Yellow 500) and specific (Commodity rate) tariffs have been developed for individual shippers. These are all based on the same set of product classifications and the same set of pricing principles. The hundreds of tariffs and the complexity of the system have only served to confuse shippers as they try to compare an 81 percent discount off tariff A to a 79% discount off tariff B.

Over the years there have been some refinements to this system. More shipper friendly approaches such as pallet pricing have gained acceptance by some carriers and freight brokers in some situations. Nevertheless the class rate system has survived since there has been no viable option or acceptable industry standard.

So what makes cube based pricing so attractive?

It is Simple

In addition to being a “breath of fresh air,” one of its most attractive features is its simplicity. The 18 classes have been shrunk down to 5 cube groups. The five groups are classified into stackable and non-stackable with the latter having an uplift charge. These groups are summarized below:

It Makes Sense

Cubic space occupied is a critical dimension in freight transportation. Since each trailer and container has a finite cubic capacity, this pricing methodology brings focus to the importance of product assembly and packaging. The Wal-Mart “green” initiative is focused on reducing shipping costs and product wrapping costs by 5% by 2013. Of course it also reduces fuel consumption and carbon emissions. As everyone knows, fuel costs have become a major component of freight costs in recent years.
The current LTL class system breaks shipments down into various weight breaks from less than 500 pounds through 1000, 2000, 5000, 10000 pounds and up. Shippers that move palletized freight are often required to pay for a minimum pallet weight of 1200 pounds or a minimum charge of $135 for a 50 pound box. Even if a company ships an 800 pound pallet, the company pays for 1200 pounds.
The cube based pricing system takes an entirely different perspective to shipment weights. With cube based pricing a carrier can quote on any weight. Since so much freight still moves at either less than 500 pounds and/or in a non-palletized form, shippers moving a group of packages that add up to 200 or 300 pounds are required to divert their freight to the courier companies’ small parcel shipment programs (i.e. UPS hundredweight program).
Under the cube based pricing program, the weight breaks have been reduced to five groups with four of them under 500 pounds. Here is how it works.

    Cube Group     Shipment Weight
    W1                          100 pounds
    W2                          200 pounds
    W3                          300 pounds
    W4                          400 pounds
    W5                          500 pounds or multiples of 500 pounds

From a shipper perspective, the benefit of cube based pricing is that a shipper pays for the space occupied by the company’s freight and the precise weight of the individual shipment, not according to some arbitrary pallet weight. Cube-based pricing more accurately reflects the true costs of handling and delivery.

It is Flexible and offers a menu of customer designated options

Everyone in the freight business is aware of the end of the week, end of the month and end of the quarter shipment surges. Currently, LTL shippers are given no incentive to ship freight at times when carriers have more capacity and emptier docks. The current class rate system does not encourage shippers to offer freight to carriers at dates and times when freight is less plentiful.
Cube based pricing changes this paradigm. The new system creates a “Win – Win” scenario for carriers and shippers. It provides shippers with attractive pricing for tendering freight at non peak days. It encourages shippers to provide carriers with freight when there is more capacity.
Another attractive option is allowing shippers to specify and pay for a designated delivery time (i.e. next day by 10:00 AM, next day by 2:00 PM, second day service by noon etc.) for each individual shipment. Again this provides shippers with expedited and standard group service options rather than having to call multiple carriers for each service. For each shipment, you pay for the precise level of service required.
Similarly, freight insurance is an option that shippers can elect to pay for. This will range from no cost for no cargo insurance to $0.50 per $100 dollars for more expensive cargo. Another option on the drawing board is a prompt payment discount. Shippers will be offered a scale of incentives according to whether they pay, in less than 30 days, less than 15 days or less than 7 days.

Putting Cube Based Pricing to Work

So how do you calculate your rate under cube based pricing? The shipper and carrier first agree on the cube group and density class. If a shipper is moving freight that corresponds to density group 3, the two parties agree on a class (say 85) and then on a base rate. A 1200 pound shipment in density group 3 would be priced at 500 pound rate and then scaled up to 1200 pounds. Any additional requirements (i.e. next day delivery by 10:00 AM, insurance would be priced separately and added to the bill. That’s it.

Summary

Cube based pricing is still a work in progress. It is being refined as this blog goes to press. Initial response from those who have seen a demonstration of its capabilities has been quite enthusiastic. This refreshing new development is one that should be monitored closely by LTL carriers and shippers. It has the potential to have a dramatic impact on an industry and pricing system that have long been in need of change. It could lead to a more unified approach to the pricing of parcel and ground shipments. More importantly, it offers LTL shippers the option of determining the precise shipping characteristics for each individual shipment and paying a specific rate custom designed for that shipment. It encourages every shipper to use the most efficient packaging possible to minimize space occupied while protecting the integrity of the product. For LTL carriers, it offers a simple, flexible pricing system that can be custom tailored to their customers’ requirements. Now, that is something to talk about. For more information, contact Hank Mullen at The Visibility Group (770 241-6630).

The US Court of Appeals for the District of Columbia has stayed its mandate overturning the Federal Motor Carrier Safety Administration's (FMCSA) Hours of Service 11-hour driving limit and the 34-hour restart provisions. The mandate is stayed until December 27, 2007. In the court's inital vacating of the driving provisions, it had indicated that FMCSA had failed to provide sufficent justification for the proposed driving provisions. Presumably, FMCSA will use the additional approximately 90 days to provide sufficient justification for the proposed changes. The American Trucking Associations had requested an 8 month stay and the FMCSA had asked for a 12 month stay.

In the October issue of 50plus.com, Gordon Pape, one of Canada's leading financial reporters, has written an important article entitled, The Quiet Superpower. In this article, Mr. Pape outlines the significant inpact that Canada''s oil industry will have on Canadians in the coming years. For those of you who have not red the piece, it is must reading. Here are some of the key themes and the impact of the changes that are taking place on the trucking industry.

The Turning Point

Mr. Pape highlights that Canada was a second tier oil producer until the price of crude oil hit US$40 a barrel and stayed there. At that point the the production of crude oil from the Alberta Oil Sands became profitable enough to warrant the investment of hundreds of billions of dollars in development.

Canada ranks Number 2 and is on its way to becoming Number 1

Canada apparently possesses the world's second-largest oil reserves with only Saudi Arabia ahead of it. According to one expert, Canada controls 56% of the world's investable oil resources. Once the Arctic opens up to serious exploration, which with global warming is becoming easier by the day, we may become number one. This certainly explains the tremendous interest in the region in recent months.
As Mr. Pope points out, a number of countries discourage foreign investment. As the price of oil rises and the process of extracting oil from the tar sands becomes more efficient, more multi-billion dollar projects are going to emerge. Canada's oil production could increase from one million barrels a day to four million barrels a day by 2020.

Canada and the United States - a symbiotic relationship

Canada is clearly becoming more important to the United States on a daily basis. Our close proximity and stable democratic government make our energy reserves very desirable to the United States. As Mr. Pape points out, the demand for our oil has had a major impact on the speedy rise of the Canadian dollar in recent months. While many experts predicted parity with the United States dollar, very few people expected it to happen so quickly.

Future Energy Prices

Jeff Rubin at CIBC World Markets has predicted that the price of crude oil will hit US$90 a barrel in 2008 and end the year at US$100, barring any unforseen event such as an act of terrorism, a production problem or a recession. Taking a longer term view, Canada's oil reserves are expected to last between 35 and 50 years, depending on the level of production. Mr. Pape makes the comment that Canada is just now entering its oil superpower status.

Financial Implications

Most Canadians will feel the effects of this oil superpower status for the rest of their lives. While the loonie will continue to ebb and flow, it will maintain its upward trajectory against the $US, even as the US recovers from its current housing crisis and economic downturn. Even the esteemed investor Warren Buffet has stated that he expects the Canadian dollar to be worth more than the $US for the next five years.

Implications for Shippers and the Canadian Trucking Industry

The most obvious impacts are that the Oil Sands area will continue to be a hot area for the next several decades and there will be great demands for drivers and trucking services in Alberta. With the increase in fuel costs, this will continue to place upward pressure on fuel surcharges and as a byproduct, the cost of moving freight. Of course, as the Canadian dollar increases in value against the $US, this will make US imports cheaper to Canadians and US exports more costly to Americans. In other words, the north - sourth balance of trade will shift and the movement of freight which has been in flux since the dollar hit a botton of $0.62 US and began to rise will shift along with it. Every shipper involved in cross-border trade and every trucking company engaged in cross-border trucking will have to be aware of these new realities and take appropriate action.

The Council of Supply Chain Management Professionals held its annual meeting in Philadelphia last week. Amid the familiar (Philly) sounds of Money, Money, Money (the theme song from Donald Trump’s The Apprentice) and The Hustle and a great keynote address from Carly Fiorina, the former CEO of Hewlett Packard, it was a decidedly downbeat conference. There is clearly a great deal of concern over the current state of the U.S. economy.
One of the panel discussions that included speakers from Schneider, Dell, Goodyear and Wall Street, provided some interesting insights into the state of the transportation industry in the United States. The consensus opinion was that it will take another six to eight quarters for the economy to turn around. The downturn in the U.S. housing market will play a big part in the drop in truckload activity. With the economic downturn there will be a significant drop in truck purchases and in driver recruitment. As a result, the expectation is that in late 2009 and beyond, there will be a severe capacity crunch, the likes of which we have never seen before. This will result in a large spike in truck rates. How’s that for doom and gloom?
The panel also addressed a number of other important topics. Shippers are no longer willing to pay for precision (time definite) services. These are now becoming the “price of admission.”
Congestion is growing at an alarming rate. One panelist commented on the tremendous investment that China is making in their infrastructure and how little the U.S. governments are making in theirs. The Port of Long Beach continues to be a trouble spot. More and more freight is being diverted through the Suez and Panama Canals and through the northeast ports. The Port of Savannah is now the fourth largest U.S seaport and the fastest growing.
The subject of procuring freight services also came up for discussion. One shipper commented on the need to invest in a very overused expression, carrier partnerships. His comment was “don’t dial down the routing guide” to the low priced, low quality carriers. The panelists also talked about taking a good look at how your carriers treat you during the good times and bad. Some carriers have taken advantage of the situation to push through large rate increases. Others demonstrated a more moderate approach by asking for reasonable increases. Shippers should not forget how they were treated by their carriers during this period.
One panelist mentioned that partnerships are two sided. As soon as there is a downturn in the economy, some shippers rush out to take advantage of their carriers by seeking rate cuts. Many partnerships are not as “open book” as they should be. Another panelist mentioned the need to look at “switching costs” in moving from one carrier to another. These costs should not be underestimated.
Many folks have labeled the current period as a “freight recession”. While it “looks and smells” like an economic recession, and the data seems to be there to support this in the United States, economists always seem reluctant to label a period as a recession until several quarters later. Whatever the proper term, the consensus is that the U.S. freight market is looking at eighteen to twenty-four months of tough times before it turns around.