DC Velocity - January 2015

40 DC VELOCITY JANUARY 2015 www.dcvelocity.com
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Overland Park, Kan., expected to have 38 “dimensioners” installed in facilities operated by YRC Freight, its long-haul unit. Shift Freight, an LTL carrier based in Santa Fe Springs, Calif., has used dimensioners exclusively since its launch in 2013. Carriers like UPS Freight and FedEx Freight, LTL units of highly visible companies that have used dimensioners in their parcel operations for decades, are going that way as well, though neither will force its customers to follow along.

SUN SETS ON CLASS RATES

As the equipment gains popularity, the sun appears to be slowly setting on the old formula used to rate LTL shipments. The National Motor Freight Classification (NMFC) system, developed during the Great Depression by the National Motor Freight Traffic Association, classifies goods based on four elements—density, stowability, handling, and liability—that reflect a shipment’s “transportability.” However, William W. Pugh, general counsel of Dynarates, a consultancy, said the ratings from the system are not derived from the dimensions of the actual shipment.

“Rather, the NMFC class is typically based on the average density of a nonscientific sample of products that may be quite different from the products comprising the shipments, although they are [treated as] the same item,” he said.

For example, two shipments of skateboards may have different densi-ties, may occupy different amounts of space per trailer, and should be priced accordingly, Pugh said. Instead, they are given the same rate because the classification system indicated that they were the same product, he added. Pricing the skateboards based on their dimensions and their fit in a trailer ends this confusion, Pugh said.

For many carriers, dimensioners can’t come soon enough. By relying on metrics that don’t accurately calibrate their cost of carriage with what they should charge, carriers routinely misclassify their freight and underprice their trailer space, experts said. It is commonplace for carriers to use tape measures and rulers to estimate a shipment’s configuration and how it fits in a trailer. They are also in the somewhat discomfiting position of accepting a shipper’s information at face value.

Jett McCandless, chairman of Shift Freight, estimated that carriers leave 7 to 9 percent of revenue on the table due to misclassifications. Satish Jindel, president of consultancy SJ Consulting, reckoned the figure is in the mid- to high-single-digit range.

To complicate matters, once a misclassification is identified, a carrier has to take time to research it and go back to the shipper or intermediary with the correct information. This often leads to upward price adjustments, not to mention time and expense on the shipper’s part for auditing the bills and haggling with the carrier.

ORIGINS OF THE SYSTEM

The truck class rate system was originally patterned after a similar structure already in use by the railroads. NMFC compliance was required by law until the trucking industry was deregulated in 1980. There are 18 pricing classes categorized in numerical order. The lower-numbered classes apply to items like bricks and mortar that have the highest weights per cubic foot and thus qualify for the lowest rates. Higher-numbered classes apply to lighter-weight items like Ping-Pong balls and deer antlers that have low weights per cubic foot and thus are generally charged the highest rates.

Ironically, the system does what it was originally intended to do: establish a rate class based on a shipment’s proper density. McCandless said he found through analyzing his company’s transactions that as long as a shipment was correctly classified, the class rate almost always matched the shipment’s density. McCandless said he didn’t think such a clean correlation was possible until he detected a consistent pattern in his company’s transactions. Shift uses the traditional system to rate its shipments once they’ve been run through the dimensioners.

The problem, according to McCandless and others, lies not in the formula but in the implementation. Never a first-mover in technology, the LTL industry still lacks visibility into what’s coming its way, making it hard to accurately price what it can’t see. Only 30 percent of LTL shipments are today tendered via electronic manifesting, according to Jindel. By contrast, he noted that 95 percent of all parcel shipments hit the carriers via electronic means, a testament to the obsession that UPS and FedEx have with IT-driven precision.

The classification methodology has also failed to keep up with the times. It was not designed to accommodate the changes in modern-day production methods, where goods tend to be lighter and generally cube out in a trailer before they weigh out. Jindel cites the example of footwear, where the classification was changed about four years ago to reflect the increasing use of lighter materials in goods that often ended up swaddled in excess packaging to create bulkier dimensions. It was the first time in 26 years that class rates for the commodity had been updated, he said.

There is also a desire of shippers to maintain the upper hand they’ve held in pricing. Some shippers misclassify shipments by accident or out of ignorance, experts said. Some do it deliberately to obtain lower rates. Some are just more effective negotiators than their carrier counterparts are. It could be a combination of all three. Whatever the case, carriers afraid to lose business have routinely acquiesced to the shipper’s input, giving what Jindel characterized as a “free ride” to shippers for many years.