Freight Rate Changes Are Coming
Believe it or not, there is some logic to the transportation pricing of the millions of tons of products moved every day. In the U.S. for several decades the rates for less than truckload (LTL) shipments have been based on “classes” published in the National Motor Freight Classification. There are 18 of these classes, ranging from Class 50, the lowest rates, to Class 500 which are the highest. In 1983, the Interstate Commerce Commission mandated that these classes should be based on four characteristics — density, stowability, handling, and liability. While not a perfect system, it has enabled shippers to pay standardized rates when dealing with various carriers. It has also been reasonably fair to the carriers in that it has allowed them to set prices that reflect the difficulty and risk, or lack thereof, of loading, moving, and handling freight.
Over the years however, an increasing number of exceptions have been made to these class rates. Carriers routinely discount these classes for no apparent reason other than to secure the freight of a particular shipper or group of shippers. They also have published Freight All Kinds (FAK) rates for shippers who move various classes of freight in one load. Often these shipments would be more expensive if the separate, applicable classes were used.
There are indications that this may be about to change. In April, UPS Freight, the LTL arm of UPS, announced that pricing based on density was being introduced to interested customers. This simplified method of pricing would set rates based strictly on the products’ density, or how much space it takes in a truck. Old Dominion Freight Line adopted such a policy several years ago, and YRC is said to be working on a similar plan. While there has been a considerable amount of discussion about dimensional pricing, it still has not been widely adopted. However, that will change.
Recently, FedEx Ground announced that effective January 1, 2015, density, or dimensional pricing (sometimes referred to as dim weight pricing) would be established on packages of 3 cubic feet or more. This is expected to cover a good portion of the FedEx Ground shipments. And, in keeping with competitive tradition, in mid-June UPS announced a similar rate structure for its ground services. This change will become effective December 29, 2014. Depending on the products a company ships, dim weight pricing could result in significantly higher costs.
While these changes will apply only to parcel shipments, it is just a question of time until this pricing scheme spreads throughout the LTL industry. If this does occur, LTL shippers, a much larger group, will experience similar increases. Since this segment of the industry is much more competitive than the parcel category, there no doubt will be some push back from firms shipping light, bulky products that require a lot of space. (Think lampshades and ping pong balls.) The timing of these broader changes remains a question. If we have a shippers’ market carriers may not be able to move as quickly as they would like. If the economy continues to improve, we will almost certainly experience capacity shortages, and it will be much easier for the carriers to make the change since shippers will have fewer options. By the end of 2016, my guess is that dimensional pricing will be firmly established.
The good news is that shippers have some time to prepare. First of all, this method of pricing is a little more complicated than it sounds. Shippers should educate themselves on how it works and how it will impact their shipments. Firms that move larger boxes that contain a lot of packing material or air should take a hard look at container strengths and sizes. It may be possible to use a smaller, more durable container with less interior protection.
While container costs may increase, freight costs could be lower. This will require more than a quick look at freight costs. If the analysis is done correctly, it will include a review of costs throughout the supply chain.
It is not often that firms have time to make significant changes in shipping methods and patterns before rates are increased. For shippers of ball bearings, the changes will be a non-issue. For many other firms they could be significant game changers.
Clifford F. Lynch is principal of C.F. Lynch & Associates, a provider of logistics management advisory services.He is the author of numerous books and articles on transportation and logistics. He can be reached at firstname.lastname@example.org