Freight pricing has been an interest of mine for many years, particularly the pricing of less than truckload freight. This somewhat ambiguous category encompasses shipments weighing typically between 100 and 10,000 pounds. A white paper entitled The Path to Density-Based Pricing: Connecting Domestic LTL Pricing to the Global Supply Chain, published by SMC3 in September, 2008, places the current status of LTL pricing in the United States in context.

The Current LTL Pricing Structure in the United States

“Over the past two decades, globalization of the supply chain, industry consolidation and competition in the freight transportation marketplace have brought sweeping changes to the less-than-truckload (LTL) industry. In this era of dramatic change in our nation’s business climate, there is one system that has not experienced any fundamental alteration – the industry’s traditional classification-based rating structure. . . . A holdover from the railroad era of the early 20th century, the classification-based pricing system is confusing to the non-expert, costly to implement, and difficult and burdensome to manage. Furthermore, some argue that it produces pricing that bears little relationship to actual transportation costs and that it hinders the LTL industry’s ability to compete against air freight and parcel carriers. . . .

The United States is the only country using a freight classification-based pricing system for LTL shipments; the rest of the world uses density measurements to drive transportation pricing. While many recognize the shortcomings of class-based pricing and have weighed the advantages of moving toward a density- based pricing methodology, real barriers to change remain. For one thing, freight classification has been the industry standard for more than 70 years. Changing this entrenched system would require nothing less than an industry paradigm shift. . . .

Pricing for international oceanic and air freight has long been based on cube and weight calculations. The rest of the developed world, including Canada, Mexico and European countries, uses density measurements to set transportation prices. The United States is the only country where a segment of the trucking industry uses a class-based rate system as the basis for trans¬portation pricing.”

A couple of years ago I became aware of a new LTL pricing methodology entitled “Cube Based Pricing.” At the time, it struck me as a clever way of simplifying the complex National Motor Freight Classification system, of creating a system that correlates the pricing of LTL freight directly with the space occupied on a trailer and of bringing the pricing of LTL freight in the United States (and to a lesser degree in Canada) more in line with how freight is priced in many parts of the world.

I wrote a piece on this topic (see Cube Based Pricing – The Scoop on the new LTL Pricing System, published Oct. 1, 2007) that became the most frequently read posting on this blog. To this day, that blog continues to receive a significant number of readers on a monthly basis. Clearly the piece struck a chord with thousands of shippers and carriers.

Cube and Density Based Pricing

Since there was so much interest, I thought it would be enlightening to revisit this topic to see how far Cube Based Pricing has progressed over the past two years. This blog will explore the current status of two similar LTL pricing methodologies, Density Based Pricing (DBP) and Cube Based Pricing (CBP). Under a density-based system, dimensional weight measurements combine the physical volume and the weight of a shipment to determine shipping costs. Density is computed by dividing the weight of an item by the product of its dimensions in length, width and height, which determines its volume. The typical unit of density measurement is pounds per cubic foot in the English system, and kilograms per cubic meter in the metric system. Cube refers to the cubic space occupied on a trailer and this pricing approach reflects essentially the same set of parameters.

While there are likely a number of companies developing and refining a version or one or both approaches, I will focus specifically on the DBP product from SMC3 and the CBP product from the Visibility Group. Both companies are based in Atlanta, Georgia. To prepare this blog I reviewed the most recent sales collateral from both companies on these topics and interviewed Danny Slaton, Senior VP, Business Development, SMC3 (www.smc3.com) and Hank Mullen, President and Lynnette Guess, CEO, The Visibility Group (www.thevisibilitygroup.com/). Here is what I learned.

Both companies have been hard at work on developing and refining their respective products. Neither product has gained any level of market acceptance although both products are being used on a very limited basis. Danny Slaton indicated that 7 – 8 carriers are using the pricing tool, primarily for import / export. In his view, “the pricing methodology will gain traction as global trade increases and companies require the cost of shipping LTL freight from Beijing to Toronto. As more companies seek to link their global ERP system to their TMS system and these systems are linked to emerging weighing and measuring technologies, the data points required for density formulas will be commonplace. This convergence of technologies will further enable the adoption of DBP”.

Hank Mullen’s take was similar to Danny’s. There are no carriers or shippers that are using CBP exclusively. However, Hank is seeing companies use their NMFC pricing system and their CBP systems in parallel. Commmented Lynnette Guess, "when we developed Cube Based Pricing, we saw the need for a transition model whereby a carrier and shipper can map dimensional attributes to existing freight pricing. We developed this transition model to allow the shipper to provide dimensional data and for the carrier to analyze this data. Our thoughts were that this analysis would lead to a pure Cube Based Pricing system that is simple and efficient." This is allowing shippers and carriers to compare their LTL rates under both methodologies to see how and where the rates vary. Hank also mentioned that there is some interest among a group of 3PL’s since they are less comfortable with the intricacies of NMFC pricing and are seeking ways to facilitate their LTL pricing functions.

The reasons for the slow adoption were outlined very clearly in an e mail received from Jim Graham, Director of TBB Logistics. Here is what Jim had to say.

“While the cost of some technology changes would slow down or prevent some from wanting to make the change, the real obstacle is FEAR. Fear both with the shipper and carriers, and the fear comes from the feeling, belief or knowledge they will be harmed by the change. . . . (The fear has come from) . . . . the transformation of goods to be less dense. . . . (This) . . . . has continued to build support by shippers in holding on to the classification process.

Fear one for the shipper

You see this fear every time a product is changed from one class in the NMFC to a density. Shippers have enjoyed the stable class for their product and now they are subject to a higher class because their product is less dense. Shippers know their products have become less dense and therefore would be subject to higher costs if they had to pay on a density only basis. . . . The simple fact is products have become much smaller and lighter, but the NMFC process has been slow to actually move to more density classes. Some of this slow reaction time was the hesitation to upset shippers who already saw the NMFC as nothing but a carrier committee to collectively raise charges. . . .

Fear two for the shipper

Again, going back into history, shippers . . . . would use much more packaging because they recognized their freight was going to be stacked on other freight, . . . . the carrier’s equipment was rarely “air ride” smooth, and with heavier products it needed to be more secure. Also, the ‘outer packaging’ was (designed) to protect the ‘inner-packaging’ and goods. Several things have happened -- As freight became lighter and costs of packaging went up, shippers did not continue to invest in the best packaging. Also, it became popular to have the ‘outer packaging’ advertise the product, so it can go directly from the shipping pallet to the shelf or the customer’s vehicle. This has led directly to the shipper requiring the carrier to (state) ‘do not double stack’ their product. The (SMC3) white paper talks about a pallet of 48 x 40 x 48 being around 54 cubic feet, but in today’s shipping dock you see considerable freight with the ‘do not stack’ cone, the one package on top so the surface is not level, or pallets exceeding 48 inches. With this going on, the shipper is really taking up 48 x 40 x 96 – 108 cubic feet. While there are a few carriers that have rules in place to adjust for this, most shippers have found ways to skirt these rules and are taking up much more space than the actual shipping form. Under a density program they would have to pay for this space in some manner, which would increase their costs.

Fear for the carrier

The transition of the process from the class to the density rating system places the carriers in a position of losing revenue over a considerable amount of time. Shippers who would benefit from the change would make the move quickly, and thus the carrier would see less revenue from these accounts. Those shippers who perceive or know their freight charges would go up would be hesitant to move and would continue to pressure the carrier(s) to rate their shipments under the current class/rate process. Until the field is completely level (all carriers moving to density rating and shippers given little choice), you have carriers working under both systems and not seeing the benefit of shippers sharing equally in paying for the space used.

The move to a density system will take place much quicker and smoother if there is a way for the transformation to . . . . be ‘revenue/expense neutral’ for the carrier and shipper for an 18 to 36 month period, and during this time and at least 24 months after transition, there is equilibrium of demand and supply. Then market forces can begin to adjust to the actual purchase of space for distance. If either side has the upper hand, then movement will be very difficult.”

7 Steps to Density Based Pricing

In the SMC3 white paper referenced above, 7 items are listed as requirements to bring about the change that so many shippers are carriers are seeking. They include:

1. A Change Management Process to bring about a methodical, gradual change.
2. A Consensus among Shippers and Carriers that this will result in greater efficiency over the long term.
3. A Standardized Methodology with Clear Rules to ensure Uniformity.
4. Revenue Parity that does not unduly Reward or Punish Shippers, Carriers or Third Parties.
5. A Shipment Handling Methodology to account for Over-dimensional or Hazardous Products.
6. Automated Business Processes that account for Density and Cube across the Supply Chain.
7. Enabling Technologies (e.g. forklift scales) that simplify and speed the implementation process.

The Canadian Experience

While this all sounds good, domestic LTL freight in Canada and some cross-border freight has for years been rated using a density based pricing methodology. What can we learn from the Canadian experience? To answer this question I spoke with Laura Tizzard of L.T. Traffic Services. This is what she had to say.

“Although there was less application of a classification system, there once were commodity-based tariffs in place (in Canada) to cover all products and shipping lanes domestically. The only “rate quotes” that existed were simple agreements as to the amount of discount a customer might qualify for. . . . Carriers were forced to work on a level playing field and the competition between carriers was based more on service and value added products than on rate structures.

Now, there is no standard tariff being applied. There are only rate quotes specifically named for a shipper with rates negotiated between the shipper and carrier. . . . Many carriers are now attempting to develop their rates based on a “cost plus” structure. For TL carriers it is a fairly simple process of establishing pickup, handling, linehaul, and delivery costs per load. However for LTL carriers the process becomes much more complicated and difficult to measure. Each measure of those cost categories is dependent upon how many different shippers contribute to the load and how many different products are involved. The make-up of every load is different, the structure difficult to predict and dependent on customer delivery deadlines. If carriers had the time and space available to hold freight and plan their loads for greatest profit and efficiency that would be nice, but the reality is that consignees no longer carry large inventories and shipper products are sent as needed. Carriers have to move the freight when they receive it in order to meet the delivery requirements to satisfy consumer needs.

Canadian LTL carriers now need to measure the space occupied by each shipment in order to distribute the costs throughout the load and measure the profitability of each component. To that end they are using DBP and CBP price structures. Although some shippers may not see cubing reflected in their invoicing, they are in fact paying based on the density of their product.

While the 7 items suggested by SMC3 would be ideal and something to strive for, the reality of achieving that standard and consensus among shippers and carriers has not been reflected in the Canadian trucking industry. After deregulation, pricing became a free-for-all largely dependent on what the other guy was offering. Shippers went along with the new pricing because they witnessed the competition and received lower rates. At the time, shippers felt they were finally getting a deal but now find it difficult to measure themselves against their competition. They truly have no way of knowing if they are getting the ‘best’ deal or whether their competitor has achieved something they have not. Perhaps now is the time to bring back a standard that shippers can measure themselves against.

However, whether the ‘tariff’ is based on class, commodity description, or density factors is not the real issue. All of those methods simply give the product a category or name. The real issue is what rates or prices are connected to those product categories. As long as shippers insist on discounts and want a better rate than their competitors, and as long as carriers are willing to comply and give never-ending discounts, then the tariff (whatever it is based on) will at some point become irrelevant.”

The Long and Winding Road

Clearly, the road to Cube and Density Based Pricing will be long and winding. These are significant hurdles to overcome. While the move to these types of pricing systems is inevitable, it will take time and a major collaborative effort between shippers, carriers and the companies designing these tools to make the move a reality. The other challenge, in light of the highly competitive nature of the U.S. economy and the culture of freight rate discounting, will be to see whether one or more of these tariffs can at least serve as basic LTL rate benchmarking tools over time.

In this difficult year, many shippers are seeking ways to save money on freight costs. To achieve this goal, manufacturers and distributors are conducting RFP’s in record numbers, closing plants, reducing inventory levels, changing modes and consolidating shipments to move heavier weights on specific days of the week. Since many companies move shipments of 200 pounds or less, they face the dilemma of whether to move their freight as LTL or parcel shipments. Shippers that do not perform a complete analysis of their freight rates and shipping options run the risk of spending considerably more on freight than is necessary.

Here are some issues to consider in order to make an informed choice.

Service Levels and Shipment Weights

Before thinking about rate levels, one issue to determine is whether your freight needs to be shipped as parcel shipments on a daily basis or consolidated and moved at heavier weight levels on designated days. Are you able to combine a group of parcel shipments and ship them to distribution centres where they can be deconsolidated and delivered as individual parcel shipments?

As part of this assessment, it is important to revisit delivery requirements. Do you have to supply your clients with 8:00 AM or 10:00 AM deliveries or would a next day or second day LTL service be satisfactory?

Examine the Full Set of Rates

Freight rate comparisons need to include line haul rates, fuel surcharges and accessorial charges. There are a myriad of accessorial charges that come into play when shipping parcels. Some carriers assess single shipment charges. As a result, moving multiple LTL shipments at one time can save you money. The various rate elements need to be compared in a methodical way. Failing to include the full range of additional costs in your evaluation can lead to an incorrect assessment.

Benchmark your Rates

Various benchmarking services are available to assess if your company is paying market or above market rates. In view of competitive world we live in, it is important to perform this evaluation.

RFP’s

The world of freight has changed significantly in 2009. Lower volumes have made carriers more rate competitive than in prior years. If your company has not conducted an RFP on their LTL/small parcel shipments in the last 12 months, it may be missing out on an opportunity to reduce costs.

Rate Analysis

Just looking at the rates alone can sometimes be deceiving. If possible, construct a model that allows you to take three months (or more) of freight and rate these shipments under the various scenarios that you may be considering. This may provide you with a truer picture of the total relative costs of shipping via each mode.

Carrier Selection

Some carriers provide both LTL and parcel services in the United States (e.g. UPS, FedEx) and/or Canada (e.g. ATS, Purolator) while others do not. Can you leverage your total volumes with a smaller set of carriers? Is your company in a position to use one or two carriers to handle all of your volume? Would this result in your company being unduly dependent or vulnerable?

Does your short list of carriers employ the latest technologies to process and move their freight? Manual processes result in additional costs. These costs will be passed on to your company and may degrade the level of service your customers are receiving. It is important to perform a certain level of due diligence on your carriers to ensure your company is not paying a premium for outmoded processes.

As part of your carrier evaluation, find out if they need “top freight” on the major shipping lanes where your freight moves. If your company’s cartons can be top loaded in those hard to fill spaces and provide additional revenues for the carrier, you may be able to negotiate particularly favourable pricing.

Additional Cost Reductions from Carrier Incentive Programs

Some carriers, particularly the parcel carriers, provide incentives to encourage shippers to move all of their volumes through one network. This raises some important issues. Are you able to control the application of your routing guides in each facility? Are your colleagues in your various plants likely to use your recommended carrier (s) or select their carrier of choice? Is your cost savings projection based on a certain level of carrier compliance that you are not able to control?

Payment Terms

Some small parcel carriers expect payment in seven days. If you are thinking of converting to an LTL provider, you should be able to negotiate a further discount for quick payment.

Keep these considerations in mind as you make your assessment of how to allocate your freight between LTL and parcel.

The eManifest program is the third phase of the Advance Commercial Information (ACI) program. This program is designed to facilitate the movement of goods across the U.S. – Canada border by facilitating the pre-arrival shipment information process. ACT Phases 1 and 2 established and implemented the requirements for air and marine transportation. Phase 3, eManifest, expands the original program to include cargo, conveyance, secondary and importer admissibility data for all modes of transport including highway and rail by 2014.

For over the road shipping, the eManifest is a declaration by the carrier that tells Customs who the driver is, the truck he is driving, the trailer he is pulling and the cargo that is in the trailer. It is sent to Customs electronically prior to the arrival of the truck at the border.

This major Government of Canada initiative is all about risk management. By using an automated risk assessment system to screen all commercial shipment information in advance of the goods arriving in Canada, eManifest will allow for:

• The improved detection of shipments that pose a high or unknown risk prior to their arrival in Canada
• Low risk shipments to have facilitated entry into Canada

According to Debbie Smyth of the Canada Border Services Agency (CBSA), users will have a 12 month implementation window to adopt eManifest, followed by a six month period of informed compliance. The CBSA will encourage users to adopt eManifest early. At the recent Driving for Profit Seminar in Hamilton, Debbie highlighted the benefits of being an early adopter. They include:

• More opportunities to access CBSA support
• More opportunities and time to fine-tune processes and correct problems

Highway carriers can begin eManifest transmissions in the Spring 2010 while rail carriers will follow in the Fall 2010. It is important to note that there can be penalties for incorrect transmissions. If this process is not done, a carrier could be subject to a penalty from Customs for up to $5000.00.

In her presentation, Debbie identified those data elements that are required in advance and those items that are either exemptions (e.g. emergency response vehicles) or exceptions (e.g. mail and low value courier shipments). Highway carriers will be required to submit conveyance, cargo, secondary and importer admissibility data one hour prior to the arrival at the border for the CBSA to risk assess and determine if the goods are admissible into Canada.

To facilitate the process, CBSA is developing a web portal that is “user friendly,” free of charge, secure and widely accessible. An automated notification system will confirm receipt of information, or detail detected errors that must be amended before arrival at the border.

Shipments identified as being high risk or unknown risk in terms of national security or public safety will be examined at the first point of arrival (FPOA). If required advance information has been determined by the CBSA for admissibility purposes and is determined to be low risk, importers and customs brokers may request release at either the FPOA or inland. If importer admissibility data has not been submitted prior to arrival, the shipment will be risk assessed. If the carrier and driver are members of trusted trader programs (CSA/FAST, bonded PIP, bonded C-TPAT and CDRP), the shipment can move to a CBSA-approved warehouse.

The key issue for shippers and carriers is the expense and time of trucks sitting at the border waiting for clearance. The main reason for trucks being held at the border would be a result of improper customs documentation, no eManifest filed or the eManifest filed improperly. According to Linda Thoms of LMT Border Assistance, “improper documentation originates with the shipper. Customs requires certain information in order to release the goods. (i. e. importer, exporter, # of pieces, country of origin, value etc.) If any information is missing on the documents, the broker cannot process the entry and the driver is held up at Customs until the problem is resolved. If the eManifest is filed improperly, this could hold up the shipment as well. The customs broker can hold up the processing of the paperwork for any of these different reasons. If the Customs Broker encounters problems with paperwork, it usually sits in a pile until the driver calls. They rarely contact the Customer to get the problem resolved; they leave it up to the trucking company or dispatchers to get the problem corrected.”

Linda indicated that this is where her company can help. Drivers can fax their documents to her. She reviews the documents to ensure that they have all the information required for the Customs Brokers. She forwards them to the Broker and follows up (to obtain their entry number) before the driver reaches the border. She will also file the eManifests to US Customs. “When the truck is ready to cross the border, I contact the driver, give him his entry number and tell him he is ready to go.”

The Bureau of Labor Statistics reports that 16.8% of Americans are unemployed or underemployed, including those who have stopped looking. While the current recession is reportedly coming to an end, unemployment is expected to continue to rise for several more months. This has been a particularly difficult time for many segments of our society.

In the current issue of Maclean’s magazine, it is reported that “this summer, average unemployment for students aged 15 to 24 hit nearly 20 per cent – the second highest rate since 1977, when Statistics Canada first began collecting comparable data. And many of those who managed to obtain entry-level positions before the crash have since been shown the door: this June, the year-over-year increase in the number of youths receiving Employment Insurance reached a staggering 108 per cent. . . .

Boomers are not without their own plight. . . Fear . . . is prompting many older workers to hold on to their jobs longer or return for another kick at the can. . . . Those who are laid off . . . are typically out of work for longer (last year in the U.S. those aged 45 and over spent 22 weeks looking for a job after being laid off; younger workers spent 16 weeks)and upon their return to work, are often forced to take significant cuts in their salaries and standard of living . . . .”

Since recessions seem to occur every six or seven years, what are some of the lessons we all can learn from this past year? According to Dr. Bruce Arnstzen, Senior Research Director at the MIT Center for Transportation and Logistics, there are a number of discernable trends that we should all be aware of. This blog focuses on some of the key themes that he highlighted during a recent Logistics Management webinar. They suggest that there are steps that many of us should take now, as logisticians and transportation professionals, to recession-proof our jobs and careers down the road. They are:

1. Never Stop Networking

While stock prices tend to rise quickly as a recession comes to an end, employment typically takes years to recover. In fact, people will continue to lose their jobs over the next 4 to 6 months. Many people who lost their jobs during the recession did not have a strong network to help them find new employment.

Lesson learned: It is never too late to start networking and it is incredibly important to maintain your networking efforts 52 weeks a year. This suggestion is supported by Allison Graham of Elevate Seminars + Strategic Development, one of Canada’s leading authorities on networking. She makes this point in her book on networking and in her public appearances. Identify your target markets and set in motion a plan to meet people who can help you achieve your business and personal goals. Become internet savvy and ensure your networking efforts encompass a combination of web based and face-to-face initiatives. Networking is not an activity that you “turn on” when you are suddenly out of work and “turn off” when you find employment.

2. Many companies removed fixed costs during the recession and are not looking at adding them back in.

Lesson learned: For those folks seeking to re-enter the workforce, offer to work on contractual or part time basis. This will provide you with cash flow, allow you to prove what you can do for a prospective employer and provide you with an opportunity to determine if the job and company are a fit for you and your skill set. The work experience will broaden your portfolio of skills. It may position you to obtain a full time job down the road.

3. Many companies had not trained their workforce to perform a variety of tasks, thereby reducing their value and creating an inflexible work team.

Lesson learned: Those individuals with limited skill sets are very vulnerable in a recession. Invest in cross-training your workforce so they are able to perform a broader variety of tasks. To strengthen your position down the road, invest in your own training on an ongoing basis. For transportation and logistics professionals in Canada, it is never too late to take a CITT course or P. Log. Join some leading associations in your industry and attend educational events. To raise the bar even further, there are programs such as the Master’s Certificate in Supply Chain Management available at York University’s Schulich School of Business.

4. Poor or inadequate communication with customers and suppliers made the recession much worse since this resulted in excess or unsalable products and parts.

Lesson learned: After the recession, some products (e.g. large homes, SUV’s) are expected to drop in demand while new products (e.g. smaller homes, small commuter cars, wireless reading devices) gain wider acceptance. Increase your networking efforts with your customers and suppliers. Place yourself at the leading edge of what is going on, thereby making you and your company more responsive to their needs and requirements. “Knowledge is Power.” Stay connected to the forces shaping your market. Make sure that your products and services are in line with your customers’ ever evolving needs.

Lessons Learned from this Recession

Invest in yourself and in your employees. Invest time and energy in your education, training and in networking. Create a plan that will make you and your company more recession proof. Set monthly and weekly professional development and networking goals and follow through on these goals with concrete action plans.