LTL Pricing: Rate Bureau to Rating Bureau?
LTL rate structures have started to morph from static, classification-based rate tables that have been in place since the 1930s through to the dimensional pricing experiments of the past few years. I say “through” because dimensional pricing is not an end, but a step toward dynamic pricing models that enable collaboration in real time for smart, connected shippers and carriers.
Dimensional pricing prioritizes the capacity utilization of the equipment while averaging many of the other factors in operating costs. The future pricing models will have many key variables change as conditions change in real time. Ideally, shippers and carriers will plan, execute, and settle transactions on-line direct from system to system.
Today’s transportation management systems (TMS) seem to be holding shippers and carriers back. Most are built assuming simple pricing tables that are periodically updated. However, future pricing models will be more dynamic and require a new generation of systems.
Rather than have both shippers and carriers build new systems, it would make sense to choose either one or the other to be the system of
record or go with a third party.
Of course, this requires intermediaries serving shippers and carriers to offer new expert services. In fact, I’m going to suggest that the best folks to perform such a service might be the former rate bureaus—now motor carrier conferences.
Lets look at the legacy conferences. Two types of subscription-based carrier member organizations have managed the classification, rate making, and publishing process for decades. The Commodity Classification Standards Board (CCSB) assigns national standard classes based upon several product characteristics. These classes are then the basis for differentiating pricing scales published by the rate conferences.
The regional rate bureaus, or conferences, have the knowledge of relative values for weights, distances, and other factors for their carrier members, and they create and publish scales of rates that can be used as base rates for contracts.
Today, carriers wanting to disconnect from static rate tables with huge discounts are trying new rate models. In fact, dimensional freight is an attempt to set up a replacement system weighted toward one product characteristic. However, there are two problems.
First, the rate tables are not dynamic enough to reflect individual carrier operating parameters through time—for example, varying by day of week or hour of day. Second, shipper and carrier TMS are often too simple to handle complex rate models. And if they could, how do you maintain a complex rate model for multiple partners?
Technology has enabled simple rate making processes in air and TL to be replaced with dynamic complex rate contracting processes for more than a decade. The static rate tables of yesterday in LTL will become more like the airline booking systems of today where transactions are booked system to system and rates are collected and presented by integrators.
A future joint shipper carrier conference could enable technical discussions of cost of operations, driver productivity, equipment technology, packaging and other variables as the conferences do now for carriers only. Such an organization could also consider costs that are the result of shipper policies, infrastructure, and procurement practices—and would help shippers to justify investing in carrier friendly processes and systems.
A number of factors indicate that it is time to revolutionize rate making: there are third parties providing connectivity for real time rate quotes and transaction data storage; TMS products are advancing to enable 3PLs to manage multiple shipper-carrier transactions, and Web services are offering direct connectivity between shipper and carrier rate tables.
The missing ingredient in these TMS efforts is “neutrality.” Neutrality would enable the application of processes and technology to collaborative contract efforts without the barrier of technology costs—and without the biases that shippers may bring to procurement efforts.
As customers of the LTL industry, shippers should push for more transparent and shipper-friendly tools and services. The development of rating bureaus from existing carrier conferences would accelerate the revolution in smart, collaborative rate making.
