T h e P a t h t o D e n s i t y - B a s e d P r i c i n g :
C o n n e c t i n g D o m e s t i c L T L P r i c i n g
t o t h e G l o b a l S u p p l y C h a i n
Overview
right
Market drivers Affecting
ltl Pricing
1
the Challenges of
Classification
3
the Promise of
density-Based Pricing
4
Barriers to Change
5
seven Key Considerations
for Industry Adoption
of a density Pricing
Model
6
Historical Approach
7
A roadmap for Change 8
solving the density
Pricing dilema
9
Information sources
9
O v e r v i e w
Over the past two decades, globalization of the supply chain, industry consolidation and competition in the freight trans-portation marketplace have brought sweeping changes to the less-than-truckload (LTL) industry. LTL carriers and shippers have worked together to form new, win-win pricing scenarios during a time when the cost of doing business is on a steady incline.
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. For all its complexity, the system remains intact. However, an increasing number of industry leaders are begin-ning to question the classification system’s validity and portability in today’s global economy. A holdover from the railroad era of the early 20th century, the classification-based pricing system is confusing to the non-expert, costly to imple-ment, 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 indus-try’s ability to compete against air freight and parcel carriers. The United States is the only country using a freight classifi-cation-based pricing system for LTL shipments; the rest of the world uses density measurements to drive transportation pric-ing. Shouldn’t the U.S. LTL industry adopt the global standard? 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.
Yet there is growing consensus that may enable the LTL indus-try to take incremental steps toward density-based pricing. Technology has evolved to the point where it could support the change more effectively, and industry experts are making logi-cal connections between density-based pricing and the global supply chain.
This white paper will examine the challenges of class rates, discuss the arguments for adoption of a density-based system, and propose a roadmap to a new pricing paradigm for the LTL industry.
a n S M C3 W h I t e P a P e R , S e P t e M B e R 2 0 0 8
P a g e 1
M a r k e t d r i v e r s A f f e c t i n g
l t l P r i c i n g
Until recently, a shift from LTL’s classifica-tion-based pricing system to a new pricing fundamental appeared both futile and of no value. However, with the combined effects of globalization, deregulation, competitive and economic pressures bearing down heav-ily on the LTL industry, the prospects for pricing change seem to have shifted from the improbable to the possible.
The impacts of globalization and a world economy have rippled through the transpor-tation sector, dramatically altering shipping and distribution patterns and blurring the lines between transportation modes. As more manufacturing moves abroad, more finished goods are transported from ports across the country. For shippers, transit time and cost become more important variables than the mode by which a shipment gets to its final destination.
To compete effectively, the LTL industry must adapt to global business standards and streamline its business processes. Perhaps nowhere is more valid than in the area of pricing.
Pricing for international oceanic and air freight has long been based on cube and weight calculations. The rest of the
devel-oped world, including Canada, Mexico and European countries, uses density measure-ments 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.
In a global economy, the classification-based system is an anomaly. It’s unclear whether class rates can persist in a world where price segmentation by transportation mode is becoming a thing of the past. The classi-fication-based system is challenging enough to use in pricing domestic transportation, but it becomes even more so when dealing with imported goods that require additional conversions to align with global density and metric standards.
To be sure, rating a shipment by density involves a learning curve and proper rules for administration, but these requirements pale in comparison to the specific and detailed training required by the classifica-tion. Rating under the classification requires a high degree of expertise for accurate appli-cation, while the rules for measuring density can be codified.
As LTL carriers become multinational by partnering with or even purchasing
transpor-a n S M C3 W h I t e P a P e R , S e P t e M B e R 2 0 0 8
c o n t i n u e d , n e x t p a g e Figure 1: U.S. Imported Goods by Month
0 20 40 60 80 100 120 140 160 180 200 Jan.Feb.Mar . Apr.MayJune Jul y Aug.Sept . Oct . Nov . Dec . Jan.Feb.Mar . Apr.MayJune Jul y Aug.Sept . Oct . Nov . Dec . Jan.Feb.
2006
2007
2008
BI LL IO N S O F D O LL AR SU.S. IMPORTED GOODS BY MONTH
A s g l o b a l t r a d e g r o w s t h e n e e d f o r a s i m p l i f i e d p r i c i n g s o l u t i o n b e c o m e s m o r e p e r v a s i v e i n t h e t r a n s p o r t a t i o n m a r k e t p l a c e . Source: U.S. Census Bureau - Trade with World (Seasonally Adjusted)
tation companies overseas, the pressure to move to a dimensional-based pricing system can only grow. Global parcel carriers such as FedEx, UPS and DHL already utilize dimen-sional weight-based pricing for their air express services. And recently, these carriers began moving to dimensional weight mea-surements for oversized parcels shipped via ground transportation (as they continue their expansion into the LTL market). Industry observers predict that the impact of this shift will eventually be felt throughout domestic shipping, driving changes in both LTL
opera-tions and freight classification standards.1
“As the economy becomes more global and customers become more familiar with shipping internationally, they will become accustomed to providing density or cube information anyway, and you may begin to see a density-based structure [in the United States],” said Paul Dugent, vice president of pricing and traffic, Estes Express Lines, a
Richmond, Va.-based LTL carrier.2
Those who ship freight would be best served by a pricing system that provides a door-to-door cost, no matter if those doors are in Beijing, Copenhagen or Chicago. Even in point-to-port-to-point shipping scenarios, simplified shipment rating would enable shippers to more effectively compare carrier
rate offers and forecast shipping-related costs according to their unique products and packaging.
At this point, however, shippers have not shown a strong propensity toward chang-ing the system, and their support would be needed for a successful transition to a densi-ty-based system. For a shipper, transitioning inevitably affects their information technol-ogy structures, which are difficult to alter. Indeed, “shippers have already said that [a density-based rating structure] would be too complicated for them to deal with. Every customer would have to provide density and detailed information to rate each shipment and that would become a huge strain on
shipper (computer systems),” said Dugent.3
But over time, international shippers and freight brokers may begin to recognize that moving to a common density standard for both domestic and international shipments would simplify their operations and enable them to standardize on a common platform. Today’s RFID and bar-coding technologies promote information transfer through simple scans – this information transfer could include ship-ment density for automated rating.
“Carriers don’t want to antagonize their ship-pers. However, if you had two big carriers
P a g e 2
C OMP AR IS ON OF R E VE NUE S P E R C W T
TO R E V E NUE S IN P C F 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 DE NS ITY IN PCF R E V E NUE - P C F R E V E NUE - C W T 0 100 200 300 400 500 600 700 800 900 R EV EN U E IN D O LL AR SFigure 2: Comparison of Revenues per CWT to Revenues in PCF Figure 2 plots the
revenues derived for like shipments under class (CWT) and density (PCF) pricing methods. In a test comparing the two methods, 468,000 freight bills were rated using SMC³ PCF pricing and the NMFTA den-sity groupings for CWT pricing. There were some slight variations between the revenues gen-erated by the two methods; the overall average difference between the PCF and CWT pricing was approximately 2.5 percent. The results of the test show that there is a formula-based methodology that produces a pre-dictable transition to a global LTL pric-ing structure.
switch to density, then the others would probably follow,” predicted Ken Manning, president and co-founder of Rockville, Md.-based Transportation Costing Group, Inc. “The first carriers would already have taken the hit, and others would follow because a lot of carriers feel like the reality of the
situ-ation requires density-based shipping.”4
In the face of the economic downturn, that reality is becoming starker. “Sooner or later, a large carrier is going to move toward densi-ty because taking volume into account is one of the best ways to achieve revenue recovery as fuel and overhead costs continue to rise,” noted a marketing expert with a well-known
provider of dimensioning systems.5
In the meantime, longer-term trends could be setting more favorable conditions to gradual-ly move toward density pricing. Deregulation of the trucking industry, set into motion in the 1980s, focused on gradually removing many impediments to an unfettered market. Those market forces, once unleashed, led to sweeping changes in the competitive land-scape and contributed to massive industry consolidation during the past two decades.
t h e C h a l l e n g e s o f
C l a s s i f i c a t i o n
But is a classification system that has driven LTL pricing for decades really that difficult or onerous? To grasp why some industry leaders are pressing for change to a density-based system, it’s first important to briefly review how the current classification system works.
The National Motor Freight Classification (NMFC) is developed and maintained by the Commodity Classification Standards Board (CCSB), an autonomous classification-making board comprised of full time
employ-ees of the National Motor Freight Traffic Association (NMFTA). The NMFC provides a uniform standard by which carriers and ship-pers rate the transportation characteristics of items to be shipped and negotiate pricing.
Originally designed to provide a simplified table of classes for the LTL industry, the NMFC has evolved into a complex system of detailed commodity names and correspond-ing classifications. Currently the NMFC encompasses more than 10,000 different product codes and classifications.
“There are many users who simply lack any concept of how classes come about and how NMFC provisions are to be applied,” says
Joel Ringer, Chairman, CCSB.6
As a result of the complexity, a whole indus-try of attorneys, consultants, freight auditors and settlement houses has grown up around the NMFC to support and ensure billing accuracy and legal compliance with the sys-tem. In their own effort to simplify the rating and documentation of shipments, many ship-pers utilize an “FAK” or “Freight All Kinds” scenario, which enables them to assign one class to a single shipment containing various commodities.
For carriers, FAK commodity structures are particularly problematical. For example, an LTL carrier would like to fairly allocate line-haul costs to all the disparate prod-ucts shipped in a 53-ft. trailer, which has a cube-carrying capacity of 3,000 cubic ft and 46,000 lbs. However, because FAK struc-tures average items together, it essentially removes the proper relationship between price and density. In order to maximize their equipment utilization, carriers then have to perform detailed density studies on their docks. Unfortunately, the results are only valid for a short period of time because of ongoing changes in seasonal freight mix, product configurations and packaging. Each NMFC commodity is grouped into one of 18 classes – from a low of class 50 to a high of class 500 – based on an assessment of four characteristics: density, stowability, handling and liability. However, accord-ing to longstandaccord-ing industry conventions, density is the most important transportation
“ A s t h e e c o n o m y b e c o m e s m o r e g l o b a l a n d c u s -t o m e r s b e c o m e m o r e f a m i l i a r w i t h s h i p p i n g i n t e r n a t i o n a l l y , t h e y w i l l b e c o m e a c c u s t o m e d t o p r o v i d i n g d e n -s i t y o r c u b e i n f o r m a t i o n . . . ” – Paul dugent, vice
pres-ident of pricing and traffic, estes express lines, a richmond, Va.-based ltl carrier.
a n S M C3 W h I t e P a P e R , S e P t e M B e R 2 0 0 8
c o n t i n u e d , n e x t p a g e
characteristic in a shipment’s line haul. It can also be argued that combining traditional classification factors with updated density factors results in nonsensical classification structures and the need for more information in determining a particular class.
By definition, freight classification assumes that it matters what commodity is being shipped. But a prominent industry consul-tant argues: “Does it really matter what is
in the box, if the density is known?”7 Under
this system, “a simple product like paper is classified in as many ways as it is sold.” It’s an interesting question that goes to the roots of the classification system.
To illustrate the contradictions and inconsis-tencies of the classification system, consider the class for televisions:
In one example, all televisions measuring 40 inches diagonally or greater are grouped into Sub1 Class 200, while those under 40 inches are listed in Sub 2 Class 125. Thus a 37-inch flat-panel LCD HDTV with a value of $1,699.99 weighing 52 pounds and a density of 8.2 PCF (pounds per cubic foot) would be included in the same class (125) as a 21-inch television with a value of $169.00 weighing 45 pounds and having a density of 9.4 PCF. An example of a Class 200 Sub1 television would be a 40-inch high resolution LCD television with a value of $1,999.00 and weighing 73 pounds with a density of 7.7 PCF, versus a 50-inch widescreen HDTV plasma television with a value of $1,840.00 weighing 90 lbs. and having a density of 30 PCF.
From these examples it can be noted that one of the televisions under 40 inches diagonally is ten times more valuable than other class 125 TV, while one of the Class 200 televi-sions is nearly three times more dense than the other TV. In one case the carrier’s liabil-ity is ten times as great and in the other case the TV takes one-third of the space of the other TV.
The current class assignment groups similar items, like TVs – in effect averaging them together no matter what their actual individ-ual density. This creates cross-subsidization within each group, where some shipments cost more than they should while others cost less. Both the shipper and carrier are impacted by this anomaly; the shipper isn’t necessarily paying a rate based upon the actual product being shipped and the carrier isn’t able to optimize their load.
Furthermore, when multiple factors are rolled up under a single classification, it creates a complex pricing equation that is difficult to decipher and compare against other transportation modes. And, if a mis-classification occurs, inaccurate pricing will oftentimes be the result. This in turn can create a trail of quality loss and administra-tive cost, negaadministra-tively impacting the bottom lines of all parties involved.
t h e P r o m i s e o f d e n s i t y -
B a s e d P r i c i n g
Under a density-based system, dimensional weight measurements combine the physical volume and the weight of a shipment to deter-mine 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.
In the LTL world, cubic capacity utiliza-tion and distance are two of the most
significant constraints on carriers. Generally, carriers fill a trailer’s finite cubic capac-ity before they reach the regulated weight limit. However, LTL carriers primarily sell the weight of a product and the distance it moves. In contrast, pricing in the truckload (TL) sector is based on mileage, subject to weight and size limitations. Therefore, those who ship TL are unlikely to benefit from a move to density-based pricing for selected segments of their business.
U n d e r a d e n s i t y - b a s e d s y s t e m , d i m e n s i o n a l w e i g h t m e a s u r e m e n t s c o m b i n e t h e p h y s i c a l v o l u m e a n d t h e w e i g h t o f a s h i p m e n t t o d e t e r m i n e s h i p -p i n g c o s t s . P a g e 4
Those who favor moving to density-based rates argue that carriers should price services based on the space utilization and weight of the commodity shipped times the distance. Proponents contend that this would put pricing in alignment with the actual cost of moving a shipment.
“It’s all about optimizing loads,” said Bill Matthews, long-time industry analyst with Ortec, an Atlanta-based logistics planning firm. According to Matthews, manufacturers know their dimensions, density and stack-ability, which are the three key factors in load optimization. An optimally loaded LTL trailer can provide between an 8 and 12 per-cent space gain, meaning that on average the need for every tenth truck is eliminated. This equates to more sales per vehicle and fewer
vehicles on the road.8
For shippers, significant savings can come into play when modifications are made to product assembly and packaging. Helping their core carriers optimize their loads through stackability and lowered cube is a worthwhile return on investment. Furthermore, new “green” initiatives, while being good for PR and the environment, can
also save on fuel costs.9
For carriers, a pricing system that factors the weight and dimensions of a shipment could provide a better reflection of actual costs. It would also enable better operational planning and equipment utilization, while streamlining paperwork and eliminating complex excep-tions, conversions and FAK anomalies. When coupled with load optimization soft-ware, density pricing formats allow the astute carrier to formalize their system oper-ations in real time. This efficiency can be shared through pricing, because there is less cost in handling the shipper’s business. But, Matthews warns, “this can only be possible if goods are defined by dimensional qualities.” Supporters also argue that a density-based system would enable LTL carriers to offer additional pricing options and concessions
for prompt payment, off-peak shipping, and other custom-er-designated options, such as the ability to choose a spe-cific delivery date/time for an individual shipment. Density rates can be used as pallet rates by defining the maxi-mum dimensions of a “pallet” and the associated weight. For example, a pallet that measures 48” X 40” X 48” is equal to 53.3 cubic feet. If the total weight is 1,000 lbs then the density is 18.75 PCF; if the total weight is 2,000 pounds the density equals 37.5 PCF, and so on. Pallet pricing can also be quoted on an average weight basis with a discount, or discounted and just the “net” rate per pallet quoted.
B a r r i e r s t o C h a n g e
In recent years, a growing number of LTL industry leaders have argued that the clas-sification system has become something of a relic of the regulated 20th century and should be replaced with a new pricing structure designed to meet the needs and competitive challenges of the 21st century. While recognizing the inherent obstacles to change, some industry analysts worry more about the consequences of failing to modern-ize the LTL pricing model.
Against the backdrop of carrier consolida-tion, eroding profit margins, globalization and increasing competition from parcel-express carriers, some pundits have come to see the classification system as a continual drag on the LTL industry’s bottom line. “Unless the LTL industry reforms its pric-ing system,” warns consultant Satish Jindel, “it risks losing more profitable shipments to
other segments of inter-city trucking.”10
A u t o m a t i n g t h e c o l l e c t i o n o f d i m e n s i o n s , w e i g h t a n d i d e n -t i f i c a -t i o n o f a l l p a l l e t i z e d g o o d s p r o v i d e s r e l i a b l e d a t a f o r i n v o i c -i n g a n d -i n c r e a s e s c a p a c i t y w i t h f e w e r r e s o u r c e s . M e t t l e r - T o l e d o ’ s C a r g o s c a n d i m e n -s i o n i n g , w e i g h i n g a n d s c a n n i n g ( D W S ) s o l u t i o n s o f f e r a w a y o f i m p l e m e n t i n g a u t o m a t i c v o l u m e m e a s u r e m e n t s a n d d a t a c a p t u r e i n p a l l e t a p p l i c a t i o n s . ( S e e p h o t o . ) a n S M C3 W h I t e P a P e R , S e P t e M B e R 2 0 0 8 P a g e 5 c o n t i n u e d , n e x t p a g e
s e v e n K e y C o n s i d e r a t i o n s f o r
I n d u s t r y A d o p t i o n o f a d e n s i t y
P r i c i n g M o d e l
1. Change Management Process – The LTL industry won’t just
need technology. To make the leap to density, it will also require a change management process that enables the industry to make a gradual transition to density-based pricing.
2. Industry Consensus - Shippers are key to the process. As
globalization continues, shippers may increasingly realize that standardizing on a common rate platform for both domestic and international shipments will streamline busi-ness processes for greater efficiency over the long run. Furthermore, some carriers may pioneer density pricing in niche markets, taking incremental steps toward adopting density-based pricing.
3. standardized Methodology – What is density? Does it
include packaging or not? The industry will need to establish clear definitions and parameters to drive measurements. It will also need a standardized methodology and rules-based engine to ensure uniform pricing.
4. Revenue Parity – The industry can embrace a revenue-
equivalent methodology that doesn’t unduly benefit one party over another. That way, everyone – shipper, carrier and third party vendor – benefits equally from a streamlined process.
5. shipment Handling Characteristics – Rather than
incor-porating shipment handling characteristics into a complex, classification-based pricing equation, carriers can simply adjust baseline pricing to account for variables such as high-value commodities or oversized or hazardous materials.
6. automated Business Processes – Moving to density will
require modifications in key business processes across the supply chain.
7. enabling technologies – The LTL industry will need to invest
in measurement technologies such as forklift scales and laser-driven pallet dimensioning systems. Web services can help simplify and speed the process of implementing new pricing methodologies.
However, as a fixture of the LTL industry for decades, the classification-based system is too entrenched to be so swiftly abandoned by those who see competitive or ideological advantage in a movement toward a density-based pricing system. There is work to be done; planning, effort, fore-sight and a systemic realignment of the industry’s thought processes are all required.
Inertia and legacy systems are some of the most obvious hurdles. As the pricing model for more than 70 years, freight classification-based pricing is a long-established business practice. Multiple stakeholders – including carriers, shippers and third-party logistics vendors – have vested inter-ests and long histories of using classification-based pricing. As an overseer of classification develop-ment for the CCSB noted, “The National Motor Freight Classification has its critics, but it remains viable after more than 70 years because it works well for carriers and shippers alike by providing a
rational basis for motor carrier pricing.”11
The U.S. LTL classification system takes liability into account by building the fragility, liability and value of the freight into the pricing equa-tion and compensating somewhat for the liability risk. However, some contend that U.S. regulations governing carrier liability may be an impedi-ment to moving to density. Under the Carmack Amendment, carriers are liable for the full value of the shipment in case of loss or damage; how-ever, Carmack also enables the carrier to adjust their own liability by giving the shipper liability options. This practice provides a venue for the carrier and shipper to agree on a declared value, or the maximum or minimum level of liability. This agreement could be stipulated on the bill of lading, and the charges added or the discount adjusted to reflect the shipper’s needs and the car-rier’s requirements. Although carriers can and do limit their liability through a contract, agreement or rules provision, they often fail to state liabil-ity limitations on the freight bill that the shipper signs, making it more difficult for the contracts to hold up in court. This difficulty is increased when presented to a judge and jury that may not understand transportation law. In contrast, carriers in Canada and Mexico – which both use density
G i v e n h o w m a n y o p e r a t i o n a l a r e a s a n d s t a k e h o l d -e r s w o u l d b -e i m p a c t e d , i m p l e -m e n t i n g a n e w p r i c i n g m o d e l w o u l d c e r t a i n l y b e a c h a l l e n g e . H o w e v e r , i t w o u l d a l s o p r o -v i d e b o t h t h e c a r r i e r a n d s h i p -p e r w i t h n e w o p p o r t u n i t i e s t o m o r e c l o s e l y m a t c h t h e t r a n s -p o r t a t i o n s e r v i c e t o t h e s h i p p e r ’ s n e e d s . a n S M C3 W h I t e P a P e R , S e P t e M B e R 2 0 0 8 c o n t i n u e d , n e x t p a g e P a g e 7
pricing – are automatically liable only for a released rate based upon a certain value per pound instead of the full value of the ship-ment, thus simplifying the liability claim
process in those countries.12
Perhaps one of the biggest obstacles may be the ability to manage the information that a density pricing scheme would require. Over the years, the classification-based pric-ing system has become deeply embedded in everything from business processes and information technology systems down to the way that commodities themselves are priced. Given how many operational areas and stake-holders would be impacted, implementing a new pricing model would certainly be a chal-lenge. However, it would also provide both the carrier and shipper with new opportuni-ties to more closely match the transportation service to the shipper’s needs.
To allow them to successfully incorporate density-based rates into their enterprise, carriers, shippers and third parties such as freight bill payment and logistics vendors would need to have the appropriate infor-mation technology infrastructure in place, from the loading dock to the front office. However, until recently, technologies didn’t exist or had not evolved to the point where they could support the flexibility needed to change from a classification to a density-based model.
In summary, the move to a new pricing model is possible, but there are historical, technological and financial barriers which must be addressed. Consider the impact of changing the pricing model on each of the estimated 175 million LTL shipments per year in the United States. Certainly, it would require rigorous costing techniques that would enable each of those transactions to be priced and calculated in a fundamentally different way. And shippers would need to be able to provide density information while carriers would need a way to verify and man-age that information.
H i s t o r i c a l A p p r o a c h
For more than 70 years, classification-based pricing has served as the standard for the LTL industry in the United States. The roots of the pricing system can be traced directly to the railroad industry’s Uniform Freight Classification (UFC) system in the 1930s. Since the beginning, density has been a factor in the LTL pricing system. To some degree, carriers and third party vendors are already selling trailer floor space as a kind of proxy for density. The class-based system has been refined to include shipper-friendly approaches such as pallet pricing, which has gained limited acceptance by carriers, ship-pers and freight brokers.
As discussion of density-based pricing has increased in the past several years, the NMFTA has introduced more logical group-ings of commodities according to density. Unfortunately, these new groupings have only further complicated the classification by providing density-based subcategories within the traditional class structure.
For example, items of varying density which had historically been considered “toys” have been reclassified to more closely match their true individual density. Yet when the NMFTA decided to move lighting fixtures from the limited density rating to a full den-sity rating to account for wide variations in density, shippers objected. Despite the oppo-sition from shippers, the modification was ultimately implemented. But this case may sig-nal that shippers would be resistant to a wider effort to move to density rating structures. Indeed, as industry observers have pointed out, “the class rate system has survived since there has been no viable option or acceptable
industry standard.”13 At least, that has been
true up to this point.
LTL industry leaders have also explored the possibility of moving to a dimensional or den-sity-based pricing system. A few carriers have successfully moved to density-based pricing
on import/export traffic, where density infor-mation is readily available due to the freight’s international character. While these efforts have been successful in international shipping they have yet to gain traction in the domestic freight arena, again due to shipper resistance. Success may have eluded these earlier initia-tives, but key lessons have been learned. If the effort to migrate to a density-based pric-ing model is to succeed this time around, the freight transportation industry will require more widespread support for the initia-tive, a logical migration path, new business processes and the necessary technology infrastructure required to measure, price, pay and store density information.
A r o a d m a p f o r C h a n g e
It is not enough just to launch new density tariffs; those already exist in various forms today. Carriers need a comprehensive way to implement density pricing from the point of negotiation to the shipping dock to billing. Until now, all of the supporting technol-ogy components needed to measure, price, pay and store density rates virtually didn’t exist. Fortunately, a host of innovative tech-nologies – including operational, pricing, freight payment and shipment optimization, weight and dimensional measurement sys-tems – have evolved to such an extent that it is possible to envision the migration from a class-based to a density-based rate system. For parcel carriers – who have already made the transition to density pricing – the move was far simpler because package size restric-tions enable them to automatically measure and weigh shipments as they move along a conveyor belt. It is an altogether different matter when dealing with large, irregularly shaped LTL shipments, which obviously would not move along a conveyor belt. Technologies for enabling the density mea-surement of large, irregular shaped objects
will need to be implemented on a wide scale, but the industry has a long way to go to adopt these systems.
RFID and bar-coding technologies are read-ily available in the marketplace, but these systems would need to be adapted to store additional information to allow for simple and repetitive collection of density measure-ment data. Cube weight or density would need to be included in all SKUs, requiring shippers
to make modifications to legacy systems.14
Some LTL companies are beginning to invest in forklift scales that function as an onboard auditing system. Vendors are also seeing growing interest in laser-driven pallet dimensioning and weighing systems, whose measurement accuracy can be guaranteed to
within three-quarters of an inch.15 A few
car-riers such as Estes Express Lines are testing laser dimensioning systems at their
termi-nals.16 These technologies will be critical
to any potential move to a density pricing structure.
The rest of the world is enjoying the speed, efficiency and cost savings of density rating. In Europe, density measurement is the stan-dard for carrier pricing, and these automated technologies – pallet dimensioning systems and cargo stands – are being rapidly adopted for use in a pallet shipment world. Besides supporting a move to density-based pricing, dimensioning automation can help stream-line carrier operations, increase capacity with fewer resources and provide more reli-able data for invoicing.
“Automated dimensioning will continue to migrate from the carriers back through the supply chain,” predicts one product strate-gist with a large, global shipper of precision instruments. “Today you see increased focus on parcels and packages, but soon, you’ll see more focus on palletized goods. They have the same size and weight issues as individual
packages.”17 P a g e 8 B e s i d e s s u p p o r t -i n g a m o v e t o d e n s i t y -b a s e d p r i c i n g , d i m e n s i o n i n g a u t o m a t i o n c a n h e l p s t r e a m l i n e c a r r i e r o p e r a -t i o n s , i n c r e a s e c a p a c i t y w i t h f e w e r r e s o u r c e s a n d p r o v i d e m o r e r e l i a b l e d a t a f o r i n v o i c i n g .
W e a r e c o n -c e n t r a t i n g o n s t r e n g t h e n i n g o u r o p e r a t i n g m a r g i n s , w h i c h , o f c o u r s e , w i l l a l l o w u s t o f u r -t h e r i n v e s -t i n o u r b u s i n e s s , a n S M C3 W h I t e P a P e R , M a y 2 0 0 8 P a g e 3
s o l v i n g t h e d e n s i t y P r i c i n g
d i l e m m a
Clearly, pricing methodology is at the heart of the discussion – and critical to moving density pricing from the obscure realm to practical reality.
Through Web services and services-oriented architectures (SOA), a new density pricing meth-odology can be rolled out to carriers, shippers and third party vendors more easily and quickly than in the past. Today, it is entirely possible to imple-ment a Web service for density pricing and have it up and running in a matter of hours – a vast improvement over the long upgrade and integra-tion cycles of the past.
CzarLite® Density from SMC3 was developed
using a formula to convert class-based (CWT) revenue levels to density (PCF) revenue. In a test comparing the two pricing methods, nearly
500,000 freight bills were rated using the SMC3
formula and the NMFTA’s density guidelines. The overall pricing difference, from highest to low-est, between the PCF rates and CWT rates was approximately 2.5 percent (See Figure 2). This conversion process allows carriers, shippers and 3PLs to transition to density, cube, linear foot and other similar pricing formulas with confidence that the new revenues will perform and compare to class-rate pricing in a consistent and predict-able manner.
CzarLite Density employs industry-standard Web services that will enable core systems such as transportation, warehouse and rating engines to call out to an external rules-based density pric-ing process and retrieve the same density rate, the same way, every time. By producing a consistent result each time, it virtually eliminates the pos-sibility for pricing confusion, missed billings and claims processing.
Most importantly, CzarLite Density enables LTL carriers, shippers and third party vendors to make a smooth, seamless and orderly transition from the freight classification system to density-based pricing, enabling true door-to-door pricing visibil-ity and a win-win cost relationship between the involved parties.
a n S M C3 W h I t e P a P e R , S e P t e M B e R 2 0 0 8
I n f o r m a t i o n s o u r c e s
1. Boyd, John d. and Paul Page, “Changing the shape of Pricing,” Journal of Commerce, October 9, 2006
2 dugent, Paul. Personal Interview. Jan. 15, 2008
3 Page, Paul, “deregulating trucking, Again,” traffic World, May 14, 2007
4 Manning, Ken. Personal Interview. dec. 13, 2007 5 sMC³ Customer Interview. dec. 21, 2007
6 ringer, Joel, “the establishment and Interpretation of nMFC Provisions,” nMFtA: Classification Matters, Oct. 2006 7 Jindel, satish, “ltl Pricing Hurts Industry: Complex
rating, classification system breeds mistrust among shippers, erodes profit margins for carriers,” traffic World, Jan. 11, 1999
8 Matthews, Bill. Personal Interview. March 6, 2008 9 Goodwill, dan, “Cube Based Pricing – the scoop on the
new ltl Pricing system,” http://blogdg.ctl.ca/2007/10/cube_ based_pricing_the_scoop_o_1.html, Oct. 1, 2007
10 Jindel, satish, “ltl Pricing Hurts Industry…,” traffic World, Jan. 11, 1999
11 ringer, Joel, “Classification Key to simplified Pricing (letter to the editor),” traffic World, nov. 13, 2006
12 Manning, Ken. Personal Interview. dec. 13, 2007 13 Goodwill, dan, “Cube Based Pricing – the scoop on the
new ltl Pricing system,” http://blogdg.ctl.ca/2007/10/cube_ based_pricing_the_scoop_o_1.html, Oct. 1, 2007
14 dugent, Paul. Personal Interview. Jan. 15, 2008 15 sMC³ Customer Interview. dec. 21, 2007 16 dugent, Paul. Personal Interview. Jan. 15, 2008
17 Weimer, George, “the Weight of Measures,” dC Velocity, dec. 2006
Copyright © 2008 Southern Motor Carriers Rate Conference, Inc. SMC3 and CzarLite are registered trademarks, Other brand and product names are the property of their respective owners. Pi# 11553-L
fax 770.486.7649 www.smc3.com [email protected]
