Spend Matters welcomes this guest post from Tim Quinn, director of procurement for Freightquote.
Last summer, United Parcel Service Inc. and FedEx Corp. announced they would begin basing their small package and parcel pricing on density. As word spread, speculation increased as to the implications for the freight industry.
With LTL capacity continuing to get tighter, it only makes sense that carriers want to charge a freight price that corresponds to the amount of space taken in the truck. However, the class-based freight system has been such a part of the industry that many shippers will be reluctant to adopt any proposed change. Let’s look at the other conversation pieces surrounding a change.
- Carrier liability is still up for negotiation. While carrier liability will likely be a negotiated item at contract time, the intent of density-based pricing is to limit carrier liability. However, carriers may offer further liability coverage for an additional cost.
- Transportation management systems are not fully ready to support pricing. TMS systems are thriving and gaining more traction within the industry. Most of the rating technology that supports the LTL industry would have to be enhanced to support a pricing model based on density.
- Large shippers feel that new pricing methodology equals an increase in rates. Shippers remain skeptical of new pricing formats and view it as a rate increase in disguise. Many industries and associations fight hard for their products to receive a beneficial freight class. They may be hesitant to adopt other pricing methods.
- Accurate dimensions may be problematic to obtain at the time of booking. The LTL business continues to be very transactional and shipments can be set up by intermediaries that may not actually see the freight and could be unfamiliar with the packaging. This issue likely exists even today since dimensions are needed for accurate classification in many instances, but would be more prevalent with this change. We would have to go through a transition dealing with accuracy and availability of dimensions.
- Carrier technology and systems may not be able to support density-based pricing. In talking with carriers, one can find a wide array of responses when questioning their readiness for density-based pricing. While I am sure most carriers will be able to support it if it is mandated, the market is full of smaller carriers that would have to make a significant investment in operations to participate.
- Dimensional scale technology is not fully adopted. Innovation continues to improve the technology available in the freight industry. One piece of technology gaining market share is the dimensional scale that carriers use to confirm weight and create inspection certificates. While Mettler-Toledo International Inc. has led the way in this space, many large carriers have installed the “dimensionalizers” in their facilities, but it is by no means widespread in the industry. Technology providers like Freightsnap are beginning to gain share within the carrier space.
While scales and dimensional measuring equipment are not necessarily critical to the success of density-based pricing, it would help foster the move to another pricing format. Density-based pricing will also require buy-in from both shippers and carriers before it can become a reality. A large customer who pays all of their own freight adopting density pricing could result in more carriers, third-party logistics providers and transportation management systems moving off the fence and onto working to support the pricing change.
It is no doubt that UPS and FedEx are big players in the LTL world. However, it will take adoption by more carriers and shippers for density-based pricing to become a widespread initiative.