As FedEx, UPS switch to dimensional pricing, are shippers’ transportation management systems ready?
Whenever FedEx and UPS make a strategic decision, the shipping world is bound to take notice.
Such was the case earlier in 2014 when first FedEx, and then UPS, announced they would be moving to dimensional pricing for parcel shipments at the start of 2015.
The move was a long-time coming as the two biggest integrators sought to get a more accurate revenue return on their years of expenditure in technology. What the decision boiled down to is this: space is the most valuable commodity on a truck, and FedEx and UPS want to be paid more accurately for the space a shipper takes.
But the change in pricing has led to a number of big questions:
- Do existing transportation management systems adequately account for the change in pricing structure on parcel shipments?
- Will dimensional pricing bleed significantly into the less-than-truckload market?
- And how will shippers cope with these changes?
None of the questions have broad, general answers. In speaking to a number of TMS providers and technology-oriented third-party logistics providers, it’s clear that some systems will allow shippers to seamlessly navigate the change in pricing. For others, the answer isn’t so clear.
As to whether the LTL market will move toward dimensional pricing, most feel that change is coming, but not in the short term.
And perhaps most importantly, are shippers ready for the change (both in the short term for parcel and the long term on the LTL side)? That depends on how well they know how rates vary in class versus dimension.
TMS Ready? There was much discussion this past September at the annual Council of Supply Chain Management Professionals’ annual conference about whether TMS providers were up to the task of meeting the pricing change that was being foisted on their customers.
When it comes to the ability of transportation management systems to account for a change in pricing structure, one key element is how well that system handles pricing in multiples transportation modes.
A TMS designed primarily to manage parcel or domestic truck activity is, in general, less likely to be ready to capture dimensional pricing. Conversely, a TMS designed to plan and execute across international and domestic modes is more likely to have dimension pricing capability.
“This change with FedEx and UPS rate structures is a non-event for Oracle,” said Derek Gittoes, vice president of Oracle’s value chain execution product strategy. “Oracle Transportation Management has supported dimensional rating for many years since it is commonplace with air freight. In addition, OTM already supports multiple versions of rates with effective/expiration dates. This means customers can prepare and test their new rates in advance and OTM will start to use them as soon as the effective date kicks in.”
Other TMS providers that spoke to American Shipper on the subject had similar views—when the system is accustomed to handling one mode in dimensional terms, it’s easier for that system to transition parcel (or even LTL) rating from class to dimensional rates.
“It’s really dependent on the infrastructure around TMSs built around the class system,” said Greg West, vice president of North American LTL services for C.H. Robinson. “They’re starting to look at density, but a lot of them don’t have that capability. Shippers have to vet their current systems.”
West said C.H. Robinson has the benefit of an entrenched international business and the experience of rating shipments dimensionally. However, he noted a key schism between how international shippers handle rating on international legs versus parcel and LTL.
“For us as an international provider it makes sense, because when you look at other modes, it’s all density-based today,” he said. “Every global shipper knows their [dimensions], but on the LTL side, they don’t necessarily have that understanding.”
LTL Next? Which begs the next question, will dimensional pricing ever become predominant in the LTL market?
It certainly depends on who you ask.
“While we understand the logic behind offering density-based pricing for LTL shipments, it’s uncertain how the general shipping public will receive it,” said Kevin Housley, manager of LTL pricing for the 3PL Transplace. “The current trend of the NMFC (National Motor Freight Classification) is moving more and more to a density-based class application, but a full density-driven rate tariff is another story.
National Motor Freight Classification
LTL class-based pricing has largely been determined by the National Motor Freight Classification. According to the National Motor Freight Traffic Association, NMFC is a standard that provides a comparison of commodities moving in interstate, intrastate and foreign commerce. Commodities are grouped into one of 18 classes—from a low of class 50 to a high of class 500—based on an evaluation of four transportation characteristics: density, handling, stowability and liability. Together, these characteristics establish a commodity’s “transportability.”
Source: National Motor Freight Traffic Association
“Shippers are used to the traditional method of pricing (class/discounts/rate base), and it may prove difficult to change their mindset in the near term. This is especially true for shippers of lightweight, bulky freight, who would likely end up paying more to move their goods. Currently, there is not a true non-biased, density-based rate available, and those that exist are carrier-centric and favor the marketing strategy of that particular carrier.”
Housley said Transplace has no immediate plans to offer density-based LTL rating.
“We plan to monitor the situation and see what market demand materializes,” he said. “So far, we have seen no demand from the shipping community and expect widespread adoption of density-based LTL rating to be quite a ways off.”
West agreed that any shift in LTL pricing is probably three to five years away, but said that change is likely.
“It’s certainly one of the areas we’re keeping an eye on,” he said. “That’s one of the big questions: would possibly some of this move to the LTL space? I do think it has the potential to impact LTL. FedEx and UPS are such big drivers of automation in this industry, and the other modes are already there today, so it seems to make a lot of sense for the future.”
Indeed, while FedEx and UPS don’t have the same clout in the LTL market as they do in the parcel market, they are still major players through their FedEx Freight and UPS Freight divisions, respectively.
There is speculation that the move toward dimensional pricing on the parcel side is a way for the two integrators to eventually shift to that pricing model for their LTL business. And other major LTL carriers, like YRC Freight, Con-way Freight, and Old Dominion Freight Line, have invested in technology and apps to empower dimensional pricing (http://www.americanshipper.com/Main/ASD/YRC_releases_LTL_dimensional_quoting_app_58140.aspx).
“FedEx and UPS have had [the technological infrastructure to capture shipment dimensions] for a while, because they use them in their package business,” said David Ross, managing director of the global transportation and logistics group for the investment bank Stifel. “Old Dominion, Saia, and YRC have been investing most among the public carriers so far. UPS Freight and FedEx Freight could make the switch easiest, in our view. In fact, UPS Freight is offering density-based rates to all [interested] customers by year-end.”
The question of LTL moving toward dimension-based pricing, however, is not a new one.
“We’ve had density-based LTL rating in our system since 2006,” said Shannon Vaillancourt, president of the shipping and logistics management software provider Ratelinx. “In 2006, we had a customer that was a national retail shipping company and they wanted to expand their offering beyond small parcel shipping. Their challenge was how do they handle classifying LTL shipments for customers that are walking in off the street with something to ship? So what we did is set up density-based pricing that they could use and we hooked them up with Roadway at the time. All the shipper had to do was measure the freight and weigh it.
“Ever since 2006, every new customer has asked us, ‘why does your system have the dimensions for an LTL shipment and can they be removed from the screen?’ How funny that we are now turning the dimensions back on,” Vaillancourt added.
Managing Change. For shippers, the immediate concern is how the shift in pricing affects their parcel shipments for packages larger than three-cubic feet.
The dilemma for many shippers using that mode is whether they have the capability (internally or through their logistics partners) to determine how or if the pricing change will have a major impact on their freight spend.
It’s not just about whether a dimension-based price would be higher than a class-based price (though some estimate rates would go up 5 to 25 percent overall under a dimensional structure). It’s about whether the shipper has the tools to even know how to calculate it.
“For smaller shippers, think about whether the packaging is optimized,” West said. “‘Am I shipping products with wasted space?’ That’s universal throughout modes, and it involves simple things like getting dimensions on the bill of lading. Are your systems prepared for that? Even cataloging it behind the scenes. All those things help you with LTL negotiations, whether you’re talking about class or density.”
West said the cost equation can’t be generalized across shippers—some will benefit, others won’t from a shift to density-based pricing.
“With NMFC-based rates, for sure certain things subsidize others,” he said. “The idea of density-based pricing is a much more equitable way of distributing those costs. It’s really about getting access to space and the fairness of how that space pays.”
The bigger roadblock is stasis.
“As a whole, pricing would be stable,” West explained. “It’s a situation where you might know it’s a bad system, but it’s the system I know. There’s a huge amount of stability. Where the discomfort is, if I go to this new model, how do I even know whether a rate is good or not. There are a lot of analytics that go into this, to having a deep understanding of density, and optimizing around that.”
Ross agreed—a switch to dimensional pricing wouldn’t exclusively benefit carriers to the detriment of shippers.
“Both carriers and shippers should benefit, as density-based pricing would better allow carriers to match expenses with revenue,” he said. “Some shippers would see higher rates and some would see lower. And some carriers will price better than others off of a new rate base. The old NMFC system is archaic and when it’s scrapped, it will be at least 20 years overdue.”
Also confusing the issue is that the line between parcel and LTL can be blurry based on the perception that FedEx and UPS control both markets, West said.
“Our shippers today are coming to us with some confusion about the impact on LTL. They see the decisions FedEx and UPS make as being across the board,” he said. “So that’s opened up the discussion about density-based pricing. I would tell you today that the carriers have density-based pricing available to shippers, but shippers are reticent to go to that level. For FedEx and UPS, this has been about whether this is the time to go forward and get some traction. But the bigger thing about density-based pricing is that shippers have a hard time getting a class on rating, much less the dimensions of their products.”
Vaillancourt, meanwhile, said the LTL market has already shifted somewhat, with some carriers and shippers using a blend of class and dimensions to arrive at a rate.
“What I’ve seen the carriers do is to use the density to determine the freight class,” he said. “Then the usual class rating will apply. I think it’s a fairly safe first step that the carriers are taking which will allow the shipper to get used to taking the dimensions of a shipment while the carrier upgrades its internal rating and billing systems. For this reason, I think the shippers that are pretty good at classifying their freight or have an FAK (freight-all-kinds) in place won’t be impacted. This will really impact the shippers that have been receiving a bunch of re-classes.
“Also, don’t forget that YRC rolled out their density-based pricing and I believe that Con-way is aligning their freight classes with density as well,” Vaillancourt said.
The drive to move to dimension pricing in parcel is clear. As West put it, carriers are getting paid to sell space on their trucks. Maximizing that space is paramount, especially if the driver shortage currently afflicting the U.S. domestic transportation markets worsens.
But he noted FedEx and UPS likely already have a leg up in that ability to capture the value of space, even as LTL carriers have spent a significant amount of money on improving technology to understand that equation. West specifically pointed to so-called “dimensionalizers” that some carriers have implemented at docks to capture the size of shipments.
He said the dimensionalizers are actually a “productivity drag.”
“It’s been very beneficial for the carriers from the standpoint of better understanding their space, but it’s not the strongest technology,” West added.
Conversely, UPS and FedEx have built their businesses primarily around parcel on highly advanced scanning systems that capture this information in seconds. The LTL carriers are moving in that direction, but they’re not there yet.
“While it’s been talked about for well over a decade, we think we’re getting closer to a shift,” Ross said. “Not next year, but possibly in the next three.”
- Vet your transportation management system to ensure that it can capture dimensional pricing for parcel shipments (and proactively for LTL shipments).
- LTL shippers should discuss with their carriers about whether it makes sense to switch to a dimensional-based pricing structure. If a change is coming, better to be ahead of the curve.
- Strive to have a keen understanding of packaging optimization—more efficiency can produce lower costs and make you a more attractive shipper (particularly important in a tight capacity trucking market).
This article was published in the December 2014 issue of American Shipper.