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November 24, 2014 4:00 AM, EST

Finally, Density-Based Pricing for LTL Industry?

This Opinion piece appears in the Nov. 24 print edition of Transport Topics. Click here to subscribe today.

By Jerry Stoll,

Transportation & Logistics Market Manager,the Americas, Mettler Toledo

For years, transportation and logistics industry experts have been speculating on when less-than-truckload companies would begin the transition from using the historical National Motor Freight Classification — only used within the U.S. LTL industry — to a more global pricing methodology, commonly known as density-based pricing.

Industry experts have long debated the merits of using density-based pricing in the LTL industry, and recently several LTL carriers have integrated technology in their operations to support this effort.

There are clearly two sides to this topic: those who support the change to density-based pricing and those who continue to believe that the NMFC system must stay intact.

NMFC supporters say that NMFC-based pricing is a better pricing methodology because the classification guidelines have been around for more than 70 years. With roots dating to the 1930s, it has long been the industry standard. They argue the cost to change is too great and not worth the return on investment. Most importantly, they say, changing would burden the shippers too greatly and might put carriers at risk of permanently losing business.

The supporters of moving to density-based pricing say that changing to this methodology is the best way to globalize pricing for LTL carriers as well as shippers of LTL freight.

Density and dimensional weight is a global best practice everywhere except in the U.S. LTL industry. Density-based pricing supporters also argue that this methodology is simpler and more straightforward for shippers to use and understand. They also say that carriers would benefit because they would have more visibility of their pricing and billing to assist in managing their operating profits.

At this point in the evolution, the main barrier for change is capturing this information and being able to audit it without interrupting or impeding operational throughput.

As anyone who has been in an LTL terminal knows, freight does not sit on the docks long, which makes it difficult to convince carriers to integrate new processes that could potentially slow down operations.

Today, LTL carriers can get away with utilizing dimensioning technology to capture 30% to 50% of their freight, which includes almost 100% of the freight where density plays a key factor in the classification. If moving to density-based pricing, this percentage would have to increase to nearly 100% to properly manage pricing and billing. In a density-based pricing model, any freight that ships without being weighed and dimensioned to calculate density is at risk of being billed incorrectly, resulting in revenue leakage to the carrier.

A real-world example of this is in the parcel-shipping industry. The major parcel carriers have been charging based on dimensional weight — a similar concept to density-based pricing — for several years. Just recently, they announced the switch to 100% dimensional-weight pricing beginning in 2015.

The delay for the transition to the new pricing structure is in response to throughput needs, the high speeds at which these parcels must move throughout a facility and the other barriers mentioned earlier, such as cost to change and shipper’s impact.

The good news for LTL carriers is that technology is excelling at a monumental speed to support this industry.

Pallet-dimensioning technology was first introduced almost a decade ago, and only now have the majority of the carriers implemented it. Now, several years after pallet-dimensioning was introduced to LTL carriers, the overall concept is generally accepted. Enhancements and improvements to this technology will be the pivotal points to finally transition the industry to density-based pricing.

As technology improves, industry stakeholders will benefit from faster processing times to get the information into their billing systems. Mobile solutions will emerge to capture this critical data at other points in the process, such as at the time of pickup. The holy grail of dimensioning technology — dynamic dimensioning — requires the freight information can be captured while moving, creating a real-time solution.

All signs indicate that 2015 will be a year of major change for the LTL industry. Density-based pricing will be mainstream. With major carriers — including UPS Inc., FedEx Corp. and YRC Worldwide — announcing their shift to density-based pricing, it is only a matter of time before one of these carriers, or any carrier, transitions all of their freight to density-based pricing.

It will only take one or two bold LTL carriers — probably a carrier with global reach — to make the transition, and then the entire industry will see the benefits and additional carriers will quickly follow suit.

At that point, shippers will have to have an open mind and be well-educated in this transition and its impact on them, while the technology companies will need to continue to innovate to support this major paradigm shift.

Stoll, who joined Mettler Toledo in 2006, has spent more than 10 years in the logistics industry, focused on marketing and strategic planning.