For a number of years, the less-than-truckload (LTL) industry has relied heavily on so-called class rates— predetermined tariffs for groups of commodities with similar shipping characteristics—as the basis for its pricing. Of course, at the same time, carriers have made plenty of exceptions to these rates. For instance, truckers have routinely discounted these class rates for no apparent reason other than to secure a particular shipper's business. They've also established Freight All Kinds (FAK) rates for shippers who move items from various classes in one load, often at more favorable terms than if the separate class rates were applied.
But now, after nearly 80 years, the era of class rates may be coming to an end. There are indications the old LTL ratemaking model could soon be eclipsed by a system under which shipments are priced based on cube. Known as dimensional, or "dim weight," pricing, this new, simplified method would set rates based solely on the product's density, or how much space it occupies in a truck.
The revolution has already begun in the parcel sector. In May, FedEx Ground announced that effective Jan. 5, 2015, it will shift to dimensional pricing on packages of three cubic feet or more. In keeping with competitive tradition, in mid-June, UPS announced it would adopt a similar rate structure for its ground services. This change takes effect Dec. 29, 2014. Depending on the products a company ships, dim weight pricing could result in significantly higher costs.
I think this is a bigger deal than many realize. Although these changes will apply only to parcel shipments, I believe it is just a matter of time until this pricing scheme spreads throughout the LTL industry. In fact, it appears the shift is already under way. Last spring, UPS Freight, the less-than-truckload arm of UPS, began making pricing based on density available to interested customers as an alternative to class rates. Other carriers have been working on similar plans.
Since the LTL segment is much more competitive than the parcel category, there no doubt will be some pushback from companies that stand to be hit the hardest—those shipping light, bulky products that occupy a disproportionate amount of space aboard a delivery vehicle (think lampshades or Ping-Pong balls). As for the timing of these broader changes, a lot will depend on who controls the market. If shippers have the upper hand, carriers might find it tough to push the changes through quickly. But if the economy picks up steam and capacity shortages develop, carriers will likely be able to move swiftly. My guess is that by the end of 2016, dimensional pricing will be firmly established.
The good news is that shippers have some time to prepare. They'll need that time because this method of pricing is a little more complicated than it sounds. Shippers should educate themselves on how it works and more importantly, how it will affect their shipments. This will require more than a quick look at freight rates; the analysis should include a review of costs throughout the supply chain. For instance, companies that move larger boxes that contain a lot of packing material should take a hard look at container strengths and sizes. It may be possible to use a smaller, more durable container with less interior protection. While that might mean higher container costs, the difference could be more than offset by lower freight costs.
It's not often that companies have time to make significant alterations to their shipping methods and patterns before rates go up. In this case, there is a rare opportunity to review the impact of a new pricing structure before it goes into effect. For shippers of ball bearings, the changes will be a nonissue. For many other companies, they could be significant game changers.
