April 18, 2014

UPS Freight making move to density-based pricing, chief says

Holmes said initiative being introduced to "interested" shippers.

By DC Velocity Staff

UPS Freight, the less-than-truckload (LTL) unit of UPS Inc., has rolled out a pricing program based on the density of a customer shipment rather than the traditional formula where rates are determined by the characteristics of commodity classes, or "classification."

Jack Holmes, president of UPS Freight, told the NASSTRAC annual conference in Orlando this week that the new pricing is being introduced to "shippers who are demonstrating interest" in it. He acknowledged that "some people are scared off by it," preferring to stick with the pricing program they know.

Holmes said that all carriers are looking at migrating to a density-based pricing program. "It's coming, but I can't say when it would be the norm," he said.

The program, which UPS Freight has been refining for several years, would substitute the classification model with a simplified model where rates would be set depending on tiers of a shipment's density. A high-density shipment like ball bearings, which is both heavy and small, would generate a low rate per hundredweight because it occupies less space in a truck. By contrast, a product like lampshades, which are light but outsized, would be assessed a higher rate because they take up more relative space in the vehicle.

Traditionally, rate classes have been defined by the National Motor Freight Traffic Association (NMFTA) and made available through the National Motor Freight Classification (NMFC). There are 18 freight classes, with products classified by weight, length, and height; density; ease of handling; value; and liability. Generally, the lower the NMFC class number, the lower the freight charge.

Freight classes are designed to help shippers get standardized pricing for their shipments when working with different carriers, warehouses, and brokers. Over the decades, however, carriers have encountered problems with shipments assigned a status known as "freight all kinds" (FAK), an all-inclusive freight class given by carriers to customers that ship commodities with varying classes. Carriers frequently assign a low FAK class to a variety of shipments that would justify a higher number. Often, shipments must be reclassified and reweighed, a time-consuming process that, though necessary, could generate ill will between shippers and carriers.

Moving to density-based pricing would streamline the pricing mechanism, end the guesswork of FAK pricing, proffer a more equitable rate structure, and take the NMCF out of the picture, advocates have said. In addition, critics of the classification structure say it creates no incentive for shippers to adopt good pricing practices and has been a headwind for carriers to earn their cost of capital.

Several years ago, William J. Logue, president of FedEx Freight, the LTL unit of FedEx Corp., said the move to density-based pricing would be a "game-changer" for LTL if adopted. At this point, it is believed that adoption by UPS Freight and FedEx Freight, units of arguably the country's two most visible transportation brands, would influence other LTL carriers to follow suit. FedEx Freight did not respond to a request for comment.

Density-based pricing has been used for years in the parcel business, where both FedEx and UPS have their roots.

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