3PLs urged to reduce liability limits on LTL shipments

A new whitepaper from CarrierDirect says 3PLs can become strategic partners of LTL carriers in tight capacity environment by reducing a major pain point for carriers.    Third party logistics services providers should consider lowering carrier limits of liability to secure capacity and better rates from less-than-truckload carriers, the transportation and logistics consultancy CarrierDirect said in a whitepaper issued this week.
   “The secret to stronger relationships is hidden in ideas such as lowering carriers’ limits of liability, moving to density-based pricing or embracing rate optimization through dynamic pricing,” the whitepaper said. “Examples of the current liability system breaking down are plentiful because of the inflated limits provided in a blanket-type structure.”
   As an example, the white paper paints this hypothetical: a 2,000-pound shipment of cotton balls moves from Chicago to Southern California using the National Motor Freight Classification code. With each 0.41-pound bag valued at roughly $4, the total value of the shipment would be $19,512.
   If the LTL carrier ABF, which publishes liability of $25 per pound at that NMFC class, picked up that freight, the shipment would be covered for up to $50,000 if it’s damaged or lost, which is $30,487 over the actual value of the freight.
   Further, the whitepapers then assumes that ABF has published a 76 percent discount on its rate with a 25 percent fuel surcharge, bringing the total transportation cost to $850.38.
   “Since ABF is publically traded, we know that ABF’s 2014 (fiscal year operating ratio) was 97.4, meaning that the profit on this shipment is $22.11,” the paper said. “If ABF loses one 2,000-pound shipment of cotton balls, they need to move 883 shipments to break even, which is 1 shipment per day for 3.5 years, or $750,462 in revenue in order to break even on the $19,512 claim.
   “No shipment that has ever moved, or will move, is exempt from the possibility of damage or loss” added CarrierDirect. “The bottom line is that liability is something that’s great in theory, but not in practice. For LTL carriers, it’s also a big – if not the biggest – pain point they have, and is a notorious sticking point in any contract between a 3PL and carrier.”
   The paper said 3PLs can stand out from the pack with LTL carriers as a strategic partner by suggesting that limits of liability be lowered to $1 per pound across the board.
   “Doing so, however, is not a quick play to get better pricing,” the paper said. “The public markets demand a better (return on invested capital) from motor carriers, which leads industry experts to anticipate a 4 to 6 percent increase in LTL rates over the next year (any skeptics need to simply look at the number of publicly traded LTL carriers operating with margins that investors find acceptable). This rings true regardless of how limits of liability factor into that equation.”