It sounds perfectly logical: A truck shipment should be priced based on the amount of space it occupies aboard a vehicle. But in the less-than-truckload (LTL) and ground parcel businesses, logic has been turned on its head for decades. For nearly 80 years, LTL pricing has been set by a mechanism that rated goods by their weight rather than their dimensions. The model penalized heavier, low-cube shipments and rewarded high-cube goods that rode along paying less than their fair share based on space occupied.
Dimensional pricing is slowly superseding weight-based pricing. But old habits die hard, and the legacy model still remains in place. The ground is shifting, however. By year's end, YRC Worldwide Inc., which has worked under the old pricing model since the mid-1930s, will have installed 38 machines at some of its YRC Freight terminals that will measure a shipment's dimensions and price it accordingly. UPS Freight, UPS Inc.'s LTL unit, is making cube-based pricing available to customers who want it. In the ground parcel world, UPS and FedEx will, as of late this year or early next, shift to dimensional pricing for parcels measuring less than three cubic feet, which accounts for a good chunk of the carriers' business-to-consumer (B2C) traffic mix.
For Hank Mullen, who runs Dynarates, an Atlanta-based freight pricing consultancy, it's high time for dimensional pricing. Mullen, who has spent more than 40 years in the business, recently offered his views to Senior Editor Mark B. Solomon on why the great pricing migration can be good news for all concerned.
Q: In 1897, the Interstate Commerce Commission wrote that the "space occupied by merchandise" should be the main factor in determining a product's classification. Why has it taken 117 years for the trucking industry to go along?
A: In 1897, railroads moved most of the nation's freight. Their competitors were horse-drawn wagons. By 1936, when the first classification proposal was filed, LTL carriers were moving a lot more goods. Keep in mind that from 1948 to 1980, carrier rate bureaus set rates with immunity from federal antitrust laws. This gave bureaus and truckers enormous power over ratemaking. Trucking deregulation in 1980 allowed carriers to provide service and offer rates without seeking prior authority. However, antitrust immunity was not officially eliminated until 2007. Sometimes, it's scary to move away from the devil you know.
Q: Does that explain the truckers' reluctance to go in whole-hog?
A: Few companies want to be first. For decades, carriers have been rating freight bills using a specific set of criteria. [Transportation management software] providers and freight bill auditing companies have large-scale investments—think billions of dollars—in supporting the carriers' traditional model. To change would appear to be expensive, confusing, and costly. A "new anything" is scary. Though it's hard to imagine how the approach of "make it smaller and you pay less" would be scary.
The challenge will be to make the change to density or space-occupied pricing using the existing systems. The solution lies in cloud computing. Simply access a cloud-based system to obtain landed cost based on "space occupied." The only information required is the height of the shipment in inches.
Q: Do you see a time when density-based pricing will become mandatory within the LTL segment? And do you see a place for the classification system in the industry's future?
A: No pricing system can be mandatory unless motor carrier transportation is reregulated. However, density- or space-based pricing will be the norm. It is just too efficient on cost and auditing. The game changer will be the carrier's ability to know in advance what size equipment or space is needed. As for the future of the traditional classification system, it started with over 5,500 carriers. It is now less than 700. The system is controlled by the carriers. All it will take is for a few of the top 10 carriers to offer a more efficient rating system and the classification model is dead.
Q: Some have said that carrier misclassifications have been tantamount to back-door rate cuts for shippers. What impact will an industrywide move to density-based pricing have on LTL rates?
A: It is all based on size. I see the carriers finally using their space more efficiently and knowing in advance what capacity is needed for cube to fill the equipment. Dimensional pricing will create a system whereby carriers can more effectively schedule their labor, which accounts for about 60 percent of their cost. If the information is in an order entry system that the carrier can access days or weeks in advance, the greater the chance for efficiencies for carrier and shipper.
Q: Shippers are accustomed to the old structure, especially as many have used it to their advantage. Do you see pushback on the part of the shipping community to this? Will there be some operational adjustments that shippers will need to make?
A: Adjustments have been going on for years. Ask the apparel, footwear, and PC industries about what has happened to their classifications. All their pricing is now density-based with at least a 50-percent rate increase. A lot of this migration can be classified as "unknown." That is why we need educated and knowledgeable people and systems to overcome this fear.
Q: By early next year, FedEx and UPS will have shifted to dimensional-based pricing for U.S. ground packages measuring less than three cubic feet. These represent a large portion of the B2C shipments that are the fastest-growing segment of their product mix. Are the carriers gouging their shippers, or is there a legitimate basis for the shift?
A: This is legitimate pricing. The carriers have space to sell or rent. Shippers do not pay attention to the amount of space they use. If the shipper knows that a reduction of space can mean a lower cost, then we have a win-win.
Q: Do shippers stand to benefit from the migration to dimensional-based pricing?
A: In 2007, the Surface Transportation Board, which replaced the ICC after its sunset, finally killed antitrust immunity for collective ratemaking. At the time, it wrote that "to the extent our decision facilitates the entry of competitors ... that might devise different ways of determining the transportation characteristics of commodities, we believe it will increase the variety of pricing options available to both carriers and shippers." I think the board summarized the argument quite effectively.