The new tool, CzarLite XL, is based on the idea of “re-indexed” LTL rates (SMC³ already offers a widely use rating tool called CzarLite), by recalibrating rates to more effectively match market prices.
The product’s benchmarking capability is because on an SMC³ analysis of 116.8 million freight bills from 33 of the largest LTL carriers, encompassing more than 34 million unique five-digit ZIP code combinations. The data was compiled during all of 2013 to account for seasonality and freight-cycle shifts, the company said.
Over the next 16 months, using the SMC³’s existing library of carrier rates, the bills were rerated at the current market level.
“Discounts were not considered in these rerates,” the company said in a white paper about re-index LTL rates. “Traffic lanes and economic regions were then isolated based on ZIP codes. The rerated traffic for those areas was then summarized and smoothed by the use of mathematical formulas that mapped the graphical line of market rates that best fit the underlying traffic flow data, creating a market model.”
The idea behind a neutral rate benchmark springs from the LTL industry’s inherent rate complexity. Over time, a system has evolved based on the National Motor Freight Classification codes for the type of good being moved. While concerns remain that the NMFC system is the best to properly rate LTL freight, the real complexity, SMC³ argues, has evolved through LTL carriers’ discounting structures, which can sometimes account for as much as 85 percent of a published base rate.
In essence, that means the base rates are artificially inflated and not representative of the true market rate for that move. Adding further complexity, SMC³ said that discount structures often span multiple decimal points that can’t be fully captured by some transportation management systems.
More philosophically, CzarLite XL is designed to allow shippers to base rate negotiations from a neutral starting point, rather than the carrier’s published rates.
“Carriers provide rates based on their individual transportation networks, publishing rates that balance their headhaul and backhaul lanes and account for terminal locations and operational characteristics,” SMC³ said. “By using only these rates, shippers are reading a story of the LTL market from the carriers’ perspective. SMC³ research shows that the vast majority of an LTL carrier’s customers use non-carrier price lists as a base upon which to measure and negotiate better rates.”
CzarLite XL is not necessarily a tool to help shippers and 3PLs reduce rates, but one to help those parties reduce complexity by removing fuzzy discounting structures that evolve over time.
SMC³ also noted the rate benchmark is relevant in a market where some have called for a move to density-based LTL rating as a wholesale change to that format is not imminent.
“Density and classification rating will likely co-exist for the foreseeable future, so LTL stakeholders should embrace both approaches,” SMC³ said.