Study Finds Broad Support For Changes in LTL Pricing
This story appears in the Aug. 22 print edition of Transport Topics.
A study of pricing practices by less-than-truckload carriers has found broad-based support for changes among carriers, shippers and logistics companies in the way rates are set, but no consensus on what those changes should be or how to implement them.
The study was conducted by Auburn University professors Joe Hanna and C. Clifford Defee and published by SMC3, an Atlanta-based organization that sells software used by hundreds of carriers, shippers and logistics companies to develop freight rates.
“I think Auburn’s report opens an essential dialogue that we need to start now to stay ahead of evolving supply chain demands and assure the industry’s ongoing success,” said Jack Middleton, president of SMC3.
Many of the nation’s leading LTL carriers recently have announced plans to raise rates (8-15, p. 6), and SMC3 said it will raise the benchmark rate it publishes for roughly 300 freight carriers by 6.95% on Sept. 19.
Middleton said industry consolidation, the emergence of third-party logistics companies, reduced profit margins and intense competition among freight carriers, and a dramatically different supply chain have created a business environment that is far different than what existed prior to 1980, when motor-carrier rates were collectively set and tightly regulated by the now defunct Interstate Commerce Commission.
Middleton said SMC3 commissioned the Auburn study “to take the pulse of LTL pricing” and to understand attitudes surrounding current pricing practices and “the need for change leadership.”
Researchers interviewed 28 industry leaders from 25 companies, including eight LTL carriers, nine shippers and eight logistics firms, and conducted a follow-up survey of 161 industry practitioners to determine current practices and explore possible alternatives.
“Most study participants believed the current LTL pricing system is outdated and in need of an overhaul,” the study authors concluded.
“However, there was no consensus as to what the new system should look like or who should lead the change to the new system.”
Many survey participants said they expect that some form of density- or cube-based pricing, in which the price for transportation services is determined by the weight and space used by the items being shipped, will be adopted by LTL carriers.
Under the current pricing system used by most LTL carriers, commodities are grouped into one of 18 classes — from a low of class 50 to a high of class 500 — based on four transportation characteristics: density, stowability, handling and liability. Rates then are applied equally to all commodities in each class.
National Motor Freight Classification standards are developed and administered by the National Motor Freight Traffic Association, a membership organization made up of freight carriers and packaging experts.
The classification system, despite its inherent complexity, is well entrenched and supported by most shippers and logistics companies, said Danny Slaton, executive vice president and head of business development for SMC3.
While nearly half of the carriers surveyed said they were dissatisfied with the current pricing system, two-thirds of logistics companies and 75% of the shipper respondents said they were satisfied.
“They’ve learned to deal with it,” Slaton said. “They’ve adjusted to it. To move to something else would require a steep learning curve and changes in information-technology systems dealing with pricing. So any changes are evolutionary in nature.”
To simplify the freight classification process, many carriers offer rates for “freight all kinds.”
In the SMC3 survey, a majority of shipper and logistics company respondents said they use single or tiered FAK rate structures, while only 33% of carriers indicated a preference for FAK pricing.
Freight shippers and carriers often use base rates as a basis for negotiating discounts.
“Many respondents indicated that base rates need to be re-indexed, since they do not accurately reflect current prices,” the study stated.
Others, however, are opposed to change and want to keep the current system in place.
“Mistrust seems to outweigh the general interest expressed by study participants that pricing method change is needed,” the study said. “Ultimately an industry leader must emerge for pricing change to be accomplished.”