The U.S. less-than-truckload (LTL) industry has made little headway converting to a density-based pricing model from the traditional rate-setting formula based on commodity classifications because current Transportation Management Systems (TMS) may not be able to rate cubic dimensions of palletized shipments, according to a top carrier pricing executive.
Todd Polen, vice president of pricing for Old Dominion Freight Line Inc., said in an e-mail last week that Old Dominion has made density based pricing available for about eight years, but has had little luck persuading customers to use it. "Cube based pricing, in terms of shipments or revenue, is negligible at this time," he said.
The reason, according to Polen, is that present day TMS' may not have the capabilities to price based on a shipment's cubic dimensions as tendered to the carrier, to incorporate differing mileage tables, and to implement dimensional pricing schemes where shipments are priced differently if they fall outside of a "DIM factor" which sets rates based on specific dimensional calculations.
Part of the issue stems from the fact that the legacy TMS' were originally designed to produce rates derived from the decades-old system of "class rates," and then incorporating a carrier discount, according to Polen.
Though there are likely TMS systems with cube rating functionality, they usually can only support pricing at the carton level because most shippers have cube characteristics loaded in their systems in that manner, Polen said. Dozens of loose cartons will cube out differently when stacked on a pallet--depending how well they cover the footprint of the pallet--thus making the actual density less than the sum of the carton cube loaded in the computer, he said.
As a result, neither LTL carriers nor shippers have the immediate clarity they need to properly perform cube based pricing of palletized shipments in real time, Polen said.
Carriers like Old Dominion are paid by audit firms electronically, so when the rate shown on the carrier invoice does not match the rate set up in the customer's TMS system, it is kicked out for "manual review," Polen said. This can result in delays in timely payment, he added.
Old Dominion believes density based pricing is the simplest and most accurate way for carriers to rate their shipments in accordance with their true costs, according to Polen. He said cube based pricing at the pallet level would eventually become a reality as TMS functionality improves, carriers do a better job of updating cube and weight in real time to customers' legacy systems, and as the cost for capturing cubic dimensions in real time from a handheld device comes down.
Thomasville, N.C.-based Old Dominion's pricing acumen is well known, and it has been a key part of its stellar outperformance over the past decade, a period of extreme turmoil for an industry that, ironically, often suffered at the hands of pricing recklessness.
In a statement, Monica Wooden, CEO and Co-Founder of MercuryGate International Inc., a TMS provider based in Cary, N.C., said its systems have "supported cubic capacity for years." As LTL carriers adopted density based rates, MercuryGate modified its rating structures and contracts in its TMS engine to allow for the alternative form of pricing, Wooden said.
LTL carriers have been looking to move towards density based pricing as they grapple with more bulky traffic that occupy a disproportionate amount of trailer space, and distort their pricing schemes. In late June, ArcBest Corp., which operates LTL carrier ABF Freight, said it will roll out density-based pricing on Aug. 1 as an alternative to the commodity classification system.
Fort Smith, Ark.-based ArcBest said it would apply minimum charges based on a shipment's cubic dimensions if the traditional class-based pricing does not produce higher charges than when the freight is cubed out. The unit will continue to offer rates through the traditional class system.
