For nearly eight decades, less-than-truckload (LTL) carriers have been giving away their trailer space. Not all of it, obviously. But enough to make a difference in their revenues and profits, and enough to have provided shippers with backdoor rate cuts that have kept on giving since Franklin D. Roosevelt was president.
Change doesn't happen overnight in the hidebound LTL trade. But change is in the air, and it's being driven by so-called dimensionializing, or dimensioning, machines that precisely calculate the amount of space a shipment will occupy in a trailer. The machines allow the carrier to price its capacity based on the amount of space a shipment takes up, and not rely on a 78-year-old commodity classification formula that, over time, has robbed carriers of billions of dollars of legitimate revenue, often due to the carriers' own missteps.
The machines measure a shipment's dimensions—arrived at by multiplying length, width, and height—and provide proof of their calculations. A high-end "static" machine designed to measure stationary objects sells in the low to mid-$80,000s. The payoff can be rapid—30 to 60 days, depending on how a carrier uses the machine and how it calculates return on investment (ROI), according to Jerry Stoll, market manager-Americas, transportation and logistics for Columbus, Ohio-based equipment maker Mettler-Toledo International Inc. Stoll said he's seen strong demand from carriers looking to put new shippers who may never have been exposed to the classification-based rating system on space-occupied pricing right away.
Clark Skeen, president of CubiScan, a Farmington, Utah-based manufacturer of dimensioning systems, declined to give ROI data mainly because his customers are loath to give them. "I've been told that if they divulged details of the machines' value, they'd fear we'd have to raise our prices on them," he joked.
Old Dominion Freight Line Inc., a Thomasville, N.C.-based carrier, has used dimensioning equipment since 2009. By year's end, YRC Worldwide Inc., based in Overland Park, Kan., will have installed 38 "dimensioners" in facilities operated by YRC Freight, its long-haul unit. Shift Freight, an LTL carrier based in Santa Fe Springs, Calif., has used dimensioners exclusively since its launch in 2013. Carriers like UPS Freight and FedEx Freight, LTL units of highly visible companies that have used dimensioners in their parcel operations for decades, are going that way as well, though neither will force their customers to follow along.
SUN SETS ON CLASS RATES
As the equipment gains popularity, the sun appears to be slowly setting on the old formula used to rate LTL shipments. The National Motor Freight Classification (NMFC) system, developed during the Great Depression by the National Motor Freight Traffic Association, classifies goods based on four elements—density, stowability, handling, and liability—that reflect a shipment's "transportability." However, William W. Pugh, general counsel of Dynarates, a consultancy, said the ratings from the system are not derived from the dimensions of the actual shipment. "Rather, the NMFC class is typically based on the average density of a nonscientific sample of products that may be quite different from the products comprising the shipments, although they are covered by the same item," he said.
For example, two shipments of skateboards may have different densities, may occupy differing amounts of space per trailer, and should be priced accordingly, Pugh said. Instead, they are given the same rate because the classification system indicated that they are the same product, he added. Pricing the skateboards based on their dimensions and their fit in a trailer ends this confusion, Pugh said.
For many carriers, dimensioners can't come soon enough. By relying on metrics that don't accurately calibrate their cost of carriage with what they should charge, carriers routinely misclassify their freight and underprice their trailer space, experts said. It is commonplace for carriers to use tape measures and rulers to estimate a shipment's configuration and how it fits in a trailer. They are also in the somewhat discomfiting position of accepting a shipper's information at face value.
Jett McCandless, chairman of Shift Freight, estimated that carriers leave 7 to 9 percent of revenue on the table due to misclassifications. Satish Jindel, president of consultancy SJ Consulting, reckoned the figure is in the mid- to high-single-digit range.
To complicate matters, once a misclassification is identified, a carrier has to take time to research it and go back to the shipper or intermediary with the correct information. This often leads to upward price adjustments, not to mention time and expense on the shipper's part for auditing the bills and haggling with the carrier.
ORIGINS OF THE SYSTEM
The truck class rate system was patterned after a similar structure already used by the railroads. NMFC compliance was required by law until the trucking industry was deregulated in 1980. There are 18 pricing classes categorized in numerical order. The lower-numbered classes apply to items like bricks and mortar that have the highest weight range per cubic foot and thus qualify for the lowest rates. Higher-numbered classes apply to lighter-weight items like Ping-Pong balls and deer antlers that have low weight ranges per cubic foot and are generally charged the highest rates.
Ironically, the system does what it was originally intended to do: establish a rate class based on a shipment's proper density. McCandless said that as long as a shipment is correctly classified, the class rate almost always correlates with the shipment's density. McCandless thought the scenario of widespread misclassifications unimaginable until he detected an obvious pattern in his company's transactions. Shift uses the traditional system to rate its shipments once they've been run through the dimensioners.
The problem, according to McCandless and others, lies not in the formula but in the implementation. Never a first-mover in technology, the LTL industry still lacks the visibility into what's coming its way, making it hard to accurately price what it can't see. Only 30 percent of LTL shipments are today tendered via electronic manifesting, according to Jindel. By contrast, he noted that 95 percent of all parcel shipments hit the carriers via electronic means, a testament to the obsession that UPS and FedEx have with IT-driven precision.
The classification methodology has also failed to keep up with the times. It was not designed to accommodate the changes in modern-day production methods, where goods tend to be lighter and generally cube out in a trailer before they weigh out. Jindel cites the example of footwear, where the classification was changed about four years ago to reflect the increasing use of lighter materials swaddled in excess packaging to create bulkier dimensions. It was the first time in 26 years that class rates for the commodity had been updated, he said.
There is also a desire of shippers to maintain the upper hand they've held in pricing. Some shippers misclassify shipments by accident or out of ignorance, experts said. Some do it deliberately to obtain lower rates. Some are just more effective negotiators than their carrier counterparts are. It could be a combination of all three. Whatever the case, carriers afraid to lose business have routinely acquiesced to the shipper's input, giving what Jindel characterized as a "free ride" to shippers for many years.
Because carriers lack the means to precisely measure a shipment's dimensions, they often resort to "Freight All Kinds" (FAK) rates, pricing that applies to a hodgepodge of items classified at different levels. About half of all LTL shipments are classified as FAK, according to Jindel. Though rates based on FAK classifications sometimes reflect accurate freight charges, often they do not. The industry would experience a mid-single-digit improvement in operating revenue if all FAK shipments were replaced with a class rating for each shipment, Jindel said.
SHIPPER PUSHBACK
Unsurprisingly, carriers are encountering shipper resistance to changing the status quo. Though Old Dominion has pushed dimensional pricing for five years, it has had few shipper bites, according to Chip Overbey, senior vice president, strategic planning. Most of the support instead comes from Old Dominion's third-party partners, which account for about 25 to 30 percent of its customer base, Overbey said. Those customers tender such large volumes that they don't want to be bothered with the intricacies of the class rate structure, Overbey said.
Todd Polen, Old Dominion's vice president of pricing and costing, said the carrier tries to show shippers that moving from class to dimensional rates would eliminate arduous negotiations over commodity classes, end freight payment disputes, and preclude the need to constantly update classification criteria. "The simplicity is the sell," Polen said. "You can't promise freight savings."
Yet the pledge of back-end efficiencies has so far failed to persuade shippers who don't want to allocate resources to change their legacy systems, according to Overbey. Old Dominion has offered to use its own dimensionalizing machines to measure the freight. However, many customers are loath to relinquish such a level of control to a vendor, no matter how trusted, Overbey said.
C. Thomas Barnes, who was recently hired to run the fledgling LTL business of broker Coyote Logistics LLC, said dimensioners will not go mainstream, and shippers will not be forced to use them, until 70 to 80 percent of the largest LTL carriers by revenue roll them out. The industry is far from that threshold, he said. Two or three are truly prepared, while several others are in testing but are not active with a formal process and IT platform to support the equipment, Barnes said.
In addition, carriers will need to understand how they can use these tools to rationalize their own costs, which will, in turn, put them in a better position to discuss pricing options with shippers, Barnes said. That, too, will take time, he said.
Jindel of SJ said the days of shippers strong-arming their carriers in rate negotiations have disappeared as capacity tightens, demand strengthens, and carriers maintain the pricing discipline they've shown for the past three or so years. As dimensioners gain traction, shippers will find themselves paying more and sacrificing service to keep the status quo, or they will work to improve the density of their shipments, according to Jindel. The latter approach has much potential as LTL shippers have never paid a great deal of attention to optimizing the physical characteristics of their freight, he said.
Pugh of Dynarates said the space-occupied model will open up new avenues of shipper-carrier collaboration. They could more effectively coordinate pickup and delivery times to minimize carrier costs, and fill excess capacity at locations where the equipment is located, he said. Shippers could streamline their packaging methods to occupy less space on a trailer and receive rate reductions as a result, he added.
Sophisticated shippers will acknowledge that the move away from the class system is "inevitable" and that they will welcome a shift from the "mystery and needless complexity" inherent in it, according to Pugh. Those shippers reluctant to embrace change will likely be the ones who lack the clout to prevent it, he added.
Overbey of Old Dominion said the carrier is confident the classification system will eventually disappear as shippers recognize the benefits of a dimension-based model. But the legacy systems will be around for a while, and it may take action by a very prominent shipper to meaningfully move the needle, he added.
