The class/rates system is old. It was developed by the railroads in the mid eighteen hundreds - well before it was adopted by the motor carriers (in 1935). Consequently, the basic design and architecture of this system does not, and could not, reflect the profound advancements in technology, business practices, and regulatory law that have completely changed the transportation world over the last several decades. Over roughly that same time period, the class/rates system has become obsolete and the LTL motor carriers have lost much of their market while their profitability has fallen below that of many other industries.
The diminished profitability of LTL carriers is due, at least in part, to the obsolescence of the industry’s pricing system. Rather than determining freight charges directly from real data on the characteristics of the actual movement and the products shipped, the class/rates system resorts to what is essentially a “one size fits all“ approach, sacrificing accuracy in an attempt to gain uniformity and simplicity. The procedure begins by consulting the National Motor Freight Classification (NMFC) to ascertain which of 18 classes (50 to 500) is applicable to the involved shipment. These 18 classes cover all of the millions of general commodities moving in commerce so that each class purports to represent many thousands of completely different products most of which have little or no similarity to each other or to the involved shipment.
The determination of freight charges is based primarily on the each carrier’s tariff rate for the indicated class, in combination with the shipment weight and distance (zip code to zip code both 3 and 5 digit). Regardless of the sophistication of the costing models or algorism that are used in developing the freight charges, the output is only as valid and representative of the movement as the input data (i.e. the NMFC class and carrier and rate). Garbage in, garbage out. Consequently, freight rates produced by the class/rates system are, at best, very loosely correlated with the carrier’s actual cost in moving the shipment - which is why the freight charges produced are not reasonable unless discounted by up to 80% or 90% -- sometimes even more. To add to the confusion, class/rates are subject to arcane tariff rules and complex exceptions.
No wonder shippers, carriers, 3PL’s and others have expressed increasing frustration and dissatisfaction with this antiquated system. The STB’s landmark (2007) decision in Ex Parte No. 656, culminated 30 years of ICC and STB investigations into the development and use of these class/rates. The decision withdrew antitrust immunity from the class/rates system finding it to be obsolete, inadequate, subject to bias, and otherwise not in the public interest. Carriers and shippers were strongly urged to develop new and innovative pricing methodologies under this STB 656 decision.
In order to keep up with their technology driven competition, and to facilitate more accurate, profitable and efficient operations, LTL Carriers should adopt the business practices of the 21st century, including “Real Time” pricing. LTL pricing should be based on real data on actual shipments and movements taking into account weekly, daily or even hourly variations in the critical factors that impact on the cost of handling and transporting freight. Some of these factors include: lane balance, floods, hurricanes, higher than normal volumes, equipment concentrations, variations in commodity
and packaging characteristics, pallet sizes, weight, dimensions, release value, delivery time, variable insurance, fuel cost, payment terms and many others.
In the post regulation era, pricing need not be viewed as a "zero-sum game." Carriers have a new incentive to cooperate more closely with their customers, by adopting a pricing scheme that works to the benefit of both, and by implementing new rules and technology, including dynamic pricing adjustments.
Bill Pugh and Hank Mullen can be reached at www.dynarates.com.
The diminished profitability of LTL carriers is due, at least in part, to the obsolescence of the industry’s pricing system. Rather than determining freight charges directly from real data on the characteristics of the actual movement and the products shipped, the class/rates system resorts to what is essentially a “one size fits all“ approach, sacrificing accuracy in an attempt to gain uniformity and simplicity. The procedure begins by consulting the National Motor Freight Classification (NMFC) to ascertain which of 18 classes (50 to 500) is applicable to the involved shipment. These 18 classes cover all of the millions of general commodities moving in commerce so that each class purports to represent many thousands of completely different products most of which have little or no similarity to each other or to the involved shipment.
The determination of freight charges is based primarily on the each carrier’s tariff rate for the indicated class, in combination with the shipment weight and distance (zip code to zip code both 3 and 5 digit). Regardless of the sophistication of the costing models or algorism that are used in developing the freight charges, the output is only as valid and representative of the movement as the input data (i.e. the NMFC class and carrier and rate). Garbage in, garbage out. Consequently, freight rates produced by the class/rates system are, at best, very loosely correlated with the carrier’s actual cost in moving the shipment - which is why the freight charges produced are not reasonable unless discounted by up to 80% or 90% -- sometimes even more. To add to the confusion, class/rates are subject to arcane tariff rules and complex exceptions.
No wonder shippers, carriers, 3PL’s and others have expressed increasing frustration and dissatisfaction with this antiquated system. The STB’s landmark (2007) decision in Ex Parte No. 656, culminated 30 years of ICC and STB investigations into the development and use of these class/rates. The decision withdrew antitrust immunity from the class/rates system finding it to be obsolete, inadequate, subject to bias, and otherwise not in the public interest. Carriers and shippers were strongly urged to develop new and innovative pricing methodologies under this STB 656 decision.
In order to keep up with their technology driven competition, and to facilitate more accurate, profitable and efficient operations, LTL Carriers should adopt the business practices of the 21st century, including “Real Time” pricing. LTL pricing should be based on real data on actual shipments and movements taking into account weekly, daily or even hourly variations in the critical factors that impact on the cost of handling and transporting freight. Some of these factors include: lane balance, floods, hurricanes, higher than normal volumes, equipment concentrations, variations in commodity
and packaging characteristics, pallet sizes, weight, dimensions, release value, delivery time, variable insurance, fuel cost, payment terms and many others.
In the post regulation era, pricing need not be viewed as a "zero-sum game." Carriers have a new incentive to cooperate more closely with their customers, by adopting a pricing scheme that works to the benefit of both, and by implementing new rules and technology, including dynamic pricing adjustments.
Bill Pugh and Hank Mullen can be reached at www.dynarates.com.
