30 Jul Is LTL Space-Based Rating Here to Stay?
The small parcel shipping industry has been using dimensional (DIM) pricing for several years, with all three of the largest carriers making the switch by 2015. The LTL industry is now catching on to this method of pricing, with some LTL carriers leveraging DIM pricing to help keep their operating costs more in line with revenue.
DIM pricing is not about creating an unfair advantage for carriers over their shipper partners, although most providers do see great benefits from this method through improved utilization of trailers. While it’s true that carriers will greatly benefit if space-based pricing sticks for LTL shipments, this model can be a way for shippers to save money and improve the service they get, too. To do so, however, takes a complete understanding on the part of shippers of the pricing methodology.
This is easier said than done, because it can get very complicated to calculate the space a shipment will require on a trailer and the appropriate rate.
How we got to where we are today
The current NFMC LTL classification system, which dates back to 1935, is outdated. The variety of products being shipped has grown since that time. A lot has changed about how freight is shipped in that time as well. For instance, shippers that use efficient packaging to reduce space still pay the same as for a package that has a much larger volume.
Instead of paying for only the weight of the product being shipped via LTL, it’s logical that shippers should be also be paying for the amount of space they use, because this is another cost factor. The opportunity for DIM-based pricing to become more readily used in the industry makes sense in a lot of ways.
Why is it so difficult?
A large reason DIM pricing has not already been broadly adopted is because of shippers who do not have the means to measure and calculate their rates based on a shipment’s dimensions. Most are set up to rate based on weight and class. To make DIM pricing the norm, shippers need to make significant changes in how they operate.
The effort will not be as great for shippers whose products and pallet sizes remain consistent. They will not need to make such drastic changes in their operation. But for those that regularly send oddly shaped LTL shipments, the changes to their shipping process could be significant. When every shipment and pallet construction can be different, estimating costs every time becomes difficult and time-consuming.
DIM calculations can become problematic because one size does not fit all — literally. One LTL carrier’s optimal configuration and DIM calculation is not the same as another’s. For a given shipper, a cheaper way to ship may not always mean fewer pallets. For another, it may. Sometimes, the DIM rate can be less than the one based on weight and class. Due to so many variables coming into play for a single shipment, there is not a single DIM calculation that would work for every shipper. These variables make an already difficult decision on how to ship that much more complex.
Understanding the different pricing models in freight management is necessary to reduce freight spend. If DIM pricing is implemented by a carrier partner, shippers should work with the carrier to establish the best way to operate its LTL program in order to find opportunities for savings.