CUBE-BASED PRICING vs. TRADITIONAL LTL-BASED PRICING: TIME FOR A CHANGE?
by Johnny Dollar
SUPPLY CHAIN LEADERSHIP CHALLENGE
Did you know that the USA is the only country on the face of the earth that still uses the NMFC system for LTL pricing?
A question that has been gnawing at me for some time now is, "Has the LTL carrier industry been taking the shipping community for a ride for decades now?" The name on the truck door says it all; we must be "......"
You and I know that one of the weakest areas of understanding in the shipping community is not just how LTL pricing works, but rather the economic reality of how the pricing works versus the actual expense incurred by the carrier.
Let’s take a basic economic view of what goes into an LTL carrier’s charges.
1. They have to cover their fixed operating expenses:
⦁ Tractor
⦁ Trailer
⦁ Terminal
2. They have to cover their variable operating expenses:
⦁ Driver salary
⦁ Driver benefits
⦁ Insurance
⦁ Terminal operating expenses
⦁ Other
Put it all together, and you come up with a cost per running mile for each tractor/trailer unit that generates revenue for the carrier.
Add it all together, factor in a reasonable profit, divide it by the number of revenue-generating units, and you have the income per unit required to cover all costs and generate a profit.
Now, take this per-unit revenue requirement, divide it by the expected number of miles to be driven by this unit annually, and viola! We have a rate-per-running-mile-based charge which can be quoted, negotiated, and justified with an individual shipper that both parties can understand and relate to! Crazy idea, huh?
Profit is a theory that can be achieved by various machinations of the company’s financial statement. Let us assume for the sake of this argument that the carrier will be attempting to generate this profit the old fashioned way—by covering all his costs and generating a profit margin from the price charged on a per-mile basis.
If I have a unit with a 53-foot dry van, I have available capacity of +/- 3,900 cubic feet, or +/- 45,000 lbs, or 26 standard 40"x48" pallets single stacked, or 52 standard pallets double-stacked. Personally, I don’t give a flying rat’s ass what the commodity is (perhaps I’d make exceptions for hazmat or odoriferous products), but for the vast majority of the products that people want to ship, I should be able to price out my capacity, factoring in my 10% profit margin.
Now, regardless of how the capacity is utilized from trip to trip, I should be able to price consistently over time using weight, cube, or skid count, and generate revenue for this unit.
Ok, factor in a terminal, the staff and overhead required to run it, and the system and systems support to effectively track, trace, and invoice, and I have now added a significant layer of cost into my equation. This needs to be whacked out and refined down to a cost per mile, unit, trip, or whatever basis and added into my per-unit revenue cost. Now, it’s getting expensive.
However, it probably won’t be nearly as expensive as if I were to ship using the current NMFC classification system, add in my base tariff (the basis of which is a mystery carefully guarded by the carrier in spite of what they tell you it’s supposed to cover or include), and then toss in the mind-boggling incremental revenue-generating rules tariff (a true goldmine), and hey, have I got a deal for you.
The NMFC freight classification system is a holdover (yeah, really old-time stuff) from the railroad (like in the late 1800s) tariff days: theoretically, the higher the value of the goods, the higher the rate charged to ship it. They (the boys) did not want the shipper making significant profits from high dollar-value items and paying only a pedestrian freight rate. Part of the carrier’s incentive for handling the high dollar-value freight was that they wanted to share in the economic prosperity being generated by such commodities or merchandise. Only in the USA (today) could such a convoluted system come about. Which, by the way, is still the case today—we are the only country on the face of the earth that still uses the NMFC system!
So how the hell does the rest of the world ship LTL? Or do they ship LTL?
Yep, they ship based on weight and cube.
What a unique idea!
Don’t you think it’s about time shippers took a serious look at their LTL shipping requirements vs. what they are paying to see if there might be a more economical way to handle these shipments and achieve their desired objectives?
Time for a change? It's up to you, Mr. Shipper. What are you gonna do?
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