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Guest Post: How Density Based Pricing May Change LTL

LTL shipment

Before discussing density based pricing, it is important that one has an understanding of LTL shipment costs and the role of density.

LTL carriers break their direct shipment costs down into pickup, origin dock, line haul, intermediate dock (break bulk), destination dock, delivery, and administrative cost.

Pickup and delivery costs are influenced by time and are further broken down into stem time, variable running time, and stop time at the customer’s facility.

Origin and destination dock costs are influenced by the time it takes to move the shipments across the dock and the number of times it takes to handle the shipments.

Intermediate dock costs are the same as origin and destination dock but are influenced by the number of intermediate dock handlings.

Line haul costs are influenced by density, network and market imbalances, and the number of intermediate handlings.

How important is line haul cost relative to P&D and Dock? The answer is: it varies. For a regional carrier, the largest portion of the carrier’s shipment costs is P&D and Dock because the length of haul is relatively short. Freight density and load factor are important, but not critical. On the other hand, a nationwide carrier with much longer average length of haul, must maximize cube utilization and ensure that freight density is accurate.

The problem facing the LTL carrier is how to equitably allocate line haul costs among the vast commodities that must be comingled in a trailer and then, of course, price accordingly. A trailer has two capacities, weight and cube. The one unit of measurement that accounts for weight and cube capacity is density, in pounds per cubic foot.

Determining the density of products is a challenge for LTL carriers. Parcel carriers have weight and girth restrictions so, to some extent, the freight all looks the same. Truckload carriers only have to consider how one shipment occupies their vehicles. LTL carriers must handle the rest of the freight and try to ascertain the loaded density of each shipment. The term loaded density is important. The accumulated density of individual packages may not equal the density once it is tendered to a carrier on a pallet. When the carrier calculates density, he must take the most extreme points of the palletized shipment and use that measurement in calculating cube to create artificial flat, square surfaces. Density based pricing would not eliminate the need for Weight and Research (W&R). It would still be necessary for W&R Inspectors to check loaded cube and weight.

The Classification was developed as a simplified index to assist the carrier in assessing the transportation characteristics of commodities. The National Motor Freight Classification was adopted from the rails in 1936. Originally, railroads comingled shipments and called it LCL, less than car load. They were confronted with the same issues as LTL—how to equitably allocate line hauls costs over comingled shipments. In an effort to simplify the process, they reduced the vast number of commodities into 18 classifications. Now, trucking handles comingled freight as LTL.

In creating classifications, the Commodity Classification Standards Board(CCSB), an autonomous board under the National Motor Traffic Association( NMFTA), may only consider four characteristics: density, liability, stowability, and ease or difficulty of handling. Density is the primary characteristic unless one of the other three characteristics is dominant. A density based pricing structure would require tariff rules that would address liability, stowability, and handling difficulties.

It is important to note that the CCSB is forbidden by law to consider economic factors in determining classifications. It is also an important point that the classification is not a pricing tool. Carriers establish prices using the classification as a standard and those prices vary widely from carrier to carrier. Freight All Kinds(FAK) classifications are pricing tools.

Given the proliferation of computers, if the industry was faced today with the problem of how to allocate line haul costs over comingled freight, would the classification be created as we now know it? Probably not, but it is now so ingrained in shipper’s systems that the cost of change would be significant.

The CCSB issues a public docket three times a year to address proposed changes in the classification. Occasionally, the CCSB must consider a change that will result in a density based classification due to the wide range of densities observed in their research of the involved commodity. It is often the case that shippers’ object to the creation of density based classes because the cost to add cube or density to every SKU in their system would be too costly and they see no benefits. In fact, it is likely that their prices would increase with the loss of FAKs, so the benefit would go to the carriers. Estes has had a density based tariff since 2001. We have very few customers that have elected to use the tariff and as a result, we have not adjusted our systems to accommodate a large number of shipments with density based pricing.

Will the industry change to wide spread acceptance of density based pricing, perhaps someday, but probably not in the near future. While it might make more sense considering the global economy and the U.S. is the only country to use a classification, the LTL industry has not exhibited the price leadership necessary to force reluctant customers to absorb the cost of change and LTL margins are too thin to offer an incentive.