Less-than-truckload (LTL) transportation is generally perceived as complex compared to its truckload cousin. But the mode is not overly complicated provided users have all the relevant data at their fingertips. Moreover, once shippers master LTL they often discover untapped potential for substantial cost savings.
In this first post in a series on LTL, we set the scene with a look at how these shipments are priced.
What are the Challenges Associated with LTL?
LTL’s reputation for complexity persists for a number of reasons:
- There are more factors to consider when executing these moves, such as cargo weight, pallet count, and freight classification.
- Benchmarking the mode can be challenging because it is not easy to make direct comparisons with the operations of other shippers.
- There is a tendency to accept LTL for what it is, and not take the time to gain a deeper understanding of its cost drivers. As we have pointed out many times in this blog, freight networks are in a constant state of flux and shippers need to keep abreast of shifting patterns of supply and demand. The LTL mode is no exception in this sense.
Standard Calculations of LTL Pricing
For the benefit of those folks who do not have a firm grasp of LTL pricing practices, let’s delve into a standard calculation. Please bear with us if you are familiar with this arithmetic.
Traditionally, LTL shipments are rated according to tariffs. Carriers normally publish tariffs – also known as rate bases – on an annual basis. A tariff is a rate matrix that defines hundred weight (CWT) rates for all classes and weights for all zip code combinations.
When rating an LTL shipment, the origin and destination zip codes as well as the weight and classification of each product being shipped are needed. Classifications, or classes, are published by the NMFC (the National Motor Freight Classification is a standard that provides a comparison of commodities moving in interstate, intrastate and foreign commerce).
The NMFC issues an item number for each commodity. This number is assigned for the purpose of applying class along with governing rules and regulations. There are 18 different classes, ranging from class 50 to class 500. Classes are based on product density, liability, handling, packaging, value, and stowability. Lower classes are less expensive, representing very dense and/or low-risk freight. A high class indicates lighter freight that typically takes up more space. The higher the class of the freight, the higher the rate charged.
Let’s walk through an example, using the tariff below to determine a sample rating of a shipment.
Origin Zip = 55344
Destination Zip = 90210
Class = 100
Weight = 2100 lbs or 21 CWT
Tariff rate for class 100, 2100 lbs = 81.86
21 x 81.86 = $1719.06 (the full freight rate without discounts)
LTL Tariff Rating Example
From: 55344 To: 90210
LTL Variables for Tariffs
Rates for the same lane can vary from tariff to tariff. For example, the tariff published by a regional carrier may reflect better rates on short haul lanes than long haul. Likewise, a national carrier’s tariff may reflect better rates on long haul lanes than short haul. C. H. Robinson often uses the Czar Lite® tariff because it is a neutral nationwide rate base that does not favor either long or short haul lanes.
LTL carriers offer discounts off of tariffs. These discounts are negotiable, and often correlate directly with the amount of freight volume/revenue tendered to the carrier. In addition to discounts, minimums are also negotiable. Minimums represent the absolute lowest amount charged per shipment.
The calculation set out above is a basic representation; when determining a line haul rate other factors such as shipping FAK (Freight All Kinds), deficit weight rating, and lane specific strategies, can add layers of complexity.
Common Obstacles for Determining LTL Prices
Please note that it is very important to capture the actual class when computing an LTL price. Often shippers are given an FAK cargo designation on invoices, a blanket classification that obscures the actual classes –there may be multiple types of goods involved – and introduces inaccuracies that can have a significant impact on price. The shipper has no way of knowing which specific classes of cargo are being shipped if everything is lumped under the FAK designation.
In our experience the most common obstacle to performing accurate LTL analyses, running procurement exercises, or introducing new carriers, is missing or incomplete data – particularly the data elements that are critical to tariff calculations (such as figuring out the actual freight class). If these data elements are captured correctly, you will avoid having to make flawed assumptions and streamline LTL pricing exercises.
Fixing the problem is relatively straightforward: adjust your freight management system to make sure that all necessary data is being captured. If needed, include such a requirement in agreements with service providers.
Pricing LTL shipments is not rocket science, nor is it as complex as is often assumed in the industry. The same can be said for many other aspects of LTL transportation, such as tendering loads and using the mode to improve network efficiency. Preparing properly for RFPs and reducing costs through order and load consolidation are among addressed in the next post in this series: LTL Avenues to More Efficient Networks.