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Density lacks gravity
LTL carriers attempt to turn shippers onto density-based pricing.
Considering the role that dimensional pricing actually plays in the less-than-truckload market, it’s hard to understand the hype about a widespread switch to this pricing model.
Not when industry experts estimate that dimensional pricing counts for no more than 2 percent of shipment volume in North America.
Yet the idea that LTL carriers will eventually switch to a density-based method of pricing capacity—versus the entrenched class-rating system—continues to persist. To wit, American Shipper has written about this potential switch twice in the last year.
But as the industry moves further away from a change in pricing at the start of 2015 by integrators UPS and FedEx—they started pricing packages less than three cubic feet by dimension—it seems like a switch to dimensional pricing in the LTL industry might be that dynamic that’s forever on the horizon.
Traditionally, LTL shipments have been rated according to the National Motor Freight Classification system, which takes into account four aspects of a load’s “transportability”: density, handling, stowability and liability. Commodities are grouped into one of 18 classes—from a low of class 50 to a high of class 500.
Some LTL carriers are eyeing a move to dimensional-based, also known as density-based, pricing to focus on better capacity utilization.
For many observers of the LTL space, the issue comes down to motivation. If there’s no major incentive for shippers to move to density-based pricing, then it’s hard to envision a massive migration to that rating format.
“Why spend all this time and energy to come out in a neutral position?” said Brad Gregory, senior vice president of marketing and software alliances at the technology provider and industry association SMC³. “Shippers don’t want to go through all this change unless they see a benefit. Shippers will say to themselves, ‘I’m happy with what I have today.’ There’s a certain amount of risk associated with change, so there has to be a balance there.”
The ones pushing dimensional pricing are largely carriers that see it as a way to better utilize precious capacity and have invested money in technology that can capture dimensions expeditiously.
“The bigger guys who have implemented technology along the way are doing this,” Gregory said. “It’s great to capture that information, but the question is, how do you get the market to move?
“There are many LTL carriers, so competition looks at this differently. A handful thinks it’s a great idea (to move to dimensional pricing), while others may think it’s an opportunity to take customers who don’t want to change and keep them on the class-based system,” he said.
Others agree that the conversation is being driven by large LTL carriers, some of whom can leverage dimensional information on LTL shipments across other modes since many are diversified and have parcel and global forwarding divisions.
“The bigger carriers have these tools, and that’s why they’re driving it,” said Ken Pehanick, president and chief executive officer of SaaS Transportation, a provider of transportation management solutions. “Their infrastructure is already there. But the small regional LTL guy in Southern California has a truck and four guys. There will need to be investment by that guy and the shipper side to make this happen.”
Pehanick does believe the change will occur.
“Eventually we’ll go there,” he said. “We’ve developed in our TMS the ability to calculate the dimensions, the cubic weight. We’re preparing for that, so that whenever somebody is ready for that, we’re ready. The complication is you’ve got to get the data in. Calculating it is easy. There is some additional complexity when you’re combining loads and giving it to the carriers. That goes back to stowability—can it be stacked, is it hazardous, is it foodstuffs?”
And that gets back to whether the NMFC rating system is actually still relevant to LTL shipments.
“NMFC is really dimensional-based pricing, there are just more dimensions to it than just dimensions,” Pehanick said. “What the NMFC has argued is if you go to dimensions, you open yourself to non-regulated rules tariffs in dimensions.
“The argument goes that NMFC is too complex, because it takes into account stowability and the value of the shipment. In international modes, dimensions are standard. But in the U.S., you ask someone to put length, width, and height on their program, they won’t know that. There needs to be a structure put in place to automate the dimensions.”
The chief argument for dimensional pricing is that shippers have not focused on the most efficient way to package LTL shipments, so that space is wasted by extraneous packaging. By moving to dimensional pricing, shippers would be forced to think purely about the dimensions of their load, creating higher density and more efficiency for the carriers.
The question for shippers is whether this big change would result in any savings for them. If density-based pricing is more efficient for carriers, then it should create cost reductions for carriers. But would those cost reductions be passed on to shippers? Would other dynamics, such as a shortage of drivers, cause pricing pressure that would overwhelm whatever savings could be garnered from dimensional pricing?
“It would start the load-planning process sooner—so you’d see better packaging, less corrugated packaging on the highways,” Gregory said. “It would create some capacity and less handling through a system. There are some benefits for the shipper and carrier. But if a carrier is more efficient, then I as a shipper will expect to be rewarded with a better price.”
Some smaller LTL carriers are eyeing a niche market for shippers wanting to use dimensional pricing. The California-based LTL carrier SHIFT Freight, which specializes in moves from California, Nevada and Arizona to the eastern half of the United States, said earlier this year it had processed 25,000 shipments using its dimensional-scanning technology.
SHIFT’s operations were designed around the ability to capture dimensions and leverage that information across other logistics processes and systems. That’s different than introducing the idea of dimension-based pricing into an existing environment.
The carrier provides customers with real-time images and updates on the transit of their goods so that shippers get accurate scans of the freight and detailed pictures of the products. That’s valuable information to shippers as they expand their utilization of decentralized manufacturing or assembly capabilities and increase their usage of third-party logistics companies, SHIFT said.
“Our customers love the information that this technology provides them and it’s really opened up a new forum of collaboration as the industry migrates over to a dimensional-pricing environment,” said Joe Bartone, president of SHIFT.
But those smaller carriers are competing in a market where power has been concentrated significantly at the top, with the top five carriers (FedEx Freight, YRC
Worldwide, Con-way Freight, UPS Freight, and Old Dominion Freight Line) now controlling about 55 percent of the market, according to the investment bank Stifel.
Dave Ross, managing director in the transportation and logistics research group at Stifel, said it has to be the carriers who drive the move to dimensional pricing as shippers will never push for it on their own. If the carriers at the top end of the market make a coordinated and concerted push, they would force smaller carriers to adjust as well or drop out of the market, he said.
But the current reality is that very few shippers are actually using dimensional pricing. A number of LTL carriers contacted by American Shipper confirmed that less than 5 percent of their existing volumes move on dimensional pricing. Stifel estimates the number is likely less than 2 percent.
Gregory said it’s “way less than 2 percent.”
“While there are a lot of stories about carriers implementing dimensioning devices, they’re really using that to categorize it for the class to rate the shipment,” he said. “Most of those have been implemented by larger carriers—the top 10 carriers—and they’ve been primarily implemented at hub terminals. It takes a certain amount of time to do the process. Because of freight flow and velocity, they can’t do every one of them. The challenge becomes you can only run so many loads through those devices.
“You install these things from the ceiling, and that takes capital. Not all carriers are equally motivated here. For longer-haul carriers, cube utilization is extremely important. Shorter haul is more about pickup and delivery, but for longer haul, the primary cost is line-haul costs. And when you’re dealing with traditional margins that are less than 10 percent in a good year, the capex is tough,” Gregory added.
A way to solve that technological constraint is to arm drivers with devices that could capture dimensions, but that’s off in the future as well.
“It has to get down to the pickup and delivery driver-level with some sort of handheld device, where it’s scanned at pickup and the point of delivery,” Gregory said. “Then the potential to dimensionalize every shipment becomes possible. Technology will make that possible at some point.”
Pehanick said another complication is that dimensional pricing, if implemented on a large scale, would essentially mean a move away from standards. While carriers may not love the NMFC system because it doesn’t allow them to maximize space and density within each move, it does provide a standard across all carriers and shippers that the industry has come to understand.
“There are rules management considerations,” he said. “There’s going to be a whole class system for each carrier on this. If it goes toward pure dimensional pricing, and away from class, the only way it can work is if carriers have their own rules for exceptions. Which will make it more difficult to manage from a TMS perspective. You’d have a different class basis for each carrier, and you’d have to figure out what the rules are. It would become more complicated to manage.”
Gregory said SMC³ is in a unique position in the dimensional-pricing debate.
“We’re neutral in the process,” he said. “We’ve built rate bases for dozens of carriers. Our data scientists are working with carriers about how to convert rates, so we’re prepping for a change if and when it should occur. We’re going to support the industry—shippers, LSPs, and technology vendors—so they can implement it in their systems.”
The underlying issue is data, and more specifically, who captures, stores, and manages it.
“On the technology side, all of this information has to be integrated at some point,” Gregory said. “It’s one thing to scan at the point of pickup, but you also have to weigh it. You have to match the information up—the dimensions are this, the weight is this, and now confirm it through the billing system. The class system takes those other variables into account. If you go to density, then you have to go back to shippers with odd packaging and negotiate a different pricing, not to mention the liability portion of the equation.
“You’re also talking about a lot of data, and it has to be stored somewhere. Who owns the data? The shipper? The carrier? The consignee? The LSP that arranged the shipment? There are lots of components here,” he explained.
Gregory said SMC³ is seeing more multinational companies endeavoring to manage their entire system in a coordinated manner, so they can standardize across all their subsidiaries.
“The rest of the world operates in this density-, or cube-based world,” he said. “They think, we want to do it one way, so we’ll migrate to this concept. But that’s a slow process. You’re turning a big ship around when you do that.
“Those TMSs that handle international business, they are already capturing cube components at some level. They’ve not been passing it to the LTL side of the business because there was no need for it,” he added.
SMC³’s web-based RateWareXL rating solution allows carriers to account for density-based pricing, and Gregory said the company has already worked with carriers on building this capability.
“How much work that is from their perspective, I can’t address,” he said. “With RateWareXL, they’d have to be able to pass it to that product, and we’d give the rating information back and they would display it however they need to. We supply the tool, and the TMS provides the integration. We’re the librarian—you ask a question, and we give you an answer.”
The question, again, is the timeframe and motivation there for this conversion to happen. Stifel’s Ross wrote that “the pricing landscape could shift to density-based pricing, as is used in most other modes,” in April in a review of how the LTL landscape has changed in the last decade.
But it seems possible that in another decade, dimensional pricing could still be on the horizon, the looming structural change in the LTL industry that never actually comes.
This article was published in the June 2015 issue of American Shipper.