ArcBest Corp. said today that it will roll out density-based pricing for less-than-truckload (LTL) traffic on Aug. 1 as an alternative to the commodity classification system that for more than 80 years has been used to set prices for LTL transportation services.
In a sign that Fort Smith, Ark.-based ArcBest is serious about migrating customers to the density-based pricing scheme, the company said it will apply minimum charges based on a shipment's cubic dimensions if the traditional class-based pricing does not produce higher charges than when the freight is cubed out. However, the company, whose LTL unit is known as ABF Freight, will continue to offer rates through the traditional system, which determines LTL hauling charges based on classifications assigned to specific commodities.
The move by ArcBest, which generates around two-thirds of its revenue from asset-based services that include LTL, comes as all LTL carriers grapple with the growth in volumes of bulkier shipments that occupy a disproportionate amount of trailer space. "The logistics industry continues to change rapidly. We believe this initiative is the natural step for us to take now to ensure that the value we provide is appropriately reflected in the compensation we receive for our shipping and logistics services," said ArcBest Chairman, President and CEO Judy R. McReynolds in a statement.
Established in 1936, classifications were the required formula for rating LTL shipments until motor carrier deregulation in 1980. The system has remained the common model for setting prices. However, critics contend that rates generated from the class system are inherently unfair because they do not reflect the actual dimensions of the shipment. For example, two shipments of skateboards may have different densities and occupy different amounts of space per trailer. Yet they are given the same rate under the classification system because it shows they are the same product. Pricing the skateboards based on their dimensions and their fit in a trailer ends this confusion, supporters of density-based pricing have said.
The proliferation of sophisticated IT equipment that captures a shipment's true dimensions will allow carriers to fairly price their services based on proper trailer utilization, carrier executives have said. It would also curtail, if not eliminate, battles with shippers over mis-classifications, which require the carrier to return to the shipper for more money because the shipment was improperly classified and priced, carriers say.
Carrier executives and analysts have estimated that shipments can be underpriced by as much as 7 to 9 percent by not uniformly relying on density-based pricing. Beyond the savings for carriers, which would vary depending on the transaction, is the simplicity of displaying a shipment's precise dimensions on a computer screen, rather than using tape measures and rulers to gauge the dimensions, carrier executives say.
In a statement, FedEx Freight, the LTL unit of Memphis-based FedEx Corp. and the largest LTL carrier, said in a statement that "density-based pricing offers a more simplified alternative to the outdated classification-based system." The FedEx unit, which began using this approach in earnest about five or six years ago, said that "it will benefit the industry as a whole to move to a more simplified pricing structure that more accurately prices based upon shipment size, versus the classification system."
ArcBest said it would install measuring equipment known as "dimensioners" in most of its distribution centers by Aug. 1. The company said it has dimensional data on more than 90 percent of the freight shipped in its asset-based network. Customers can submit the shipment's dimensions, or ArcBest will use its equipment to measure the shipment and calculate the charges for them, the company said.
Many shippers still resist changing to density-based pricing, perhaps because they sense they get the long end of the rate stick with imprecise classifications from their carriers. There has been more traction from third-party logistics (3PL) providers because they tender large volumes and don't want to be bothered dealing with the classification process.