July 2004 | Commentary | Viewpoint

Easing Your LTL Carrier's Burden

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Managing transportation costs is more important today than ever before. With the new Hours-of-Service rules, shippers will likely look to LTL carriers to play an increasing role in their supply chains, particularly handling a portion of their previously truckload multi-stop shipments.

These volume shifts will likely lead to LTL capacity issues, and shippers may find themselves in the position of balancing their desire for low rates with their need to remain attractive customers to LTL carriers. The current bidding process shippers use for LTL carrier selection, however, may inadvertently limit their ability to control rates and increase the carriers' administrative burden.

The current LTL carrier base rate tariff structure has changed little from the days of regulation. A tariff is a complex mix of rates tied to thousands of potential origin/destination ZIP code pairs, several weight breaks, and a complicated freight classification system. While most LTL carriers have computer-based rating tools, these are generally only helpful for looking up a small number of rates and do not make carrier-to-carrier comparison easy.

This degree of complexity can be overwhelming for shippers. When selecting LTL carriers, shippers want to compare apples-to-apples prices. This is not easy when the bidding process involves multiple carriers, each giving a discount off their own unique tariff, not to mention varying accessorial charges and terms and conditions.

To address this, shippers are more and more frequently requiring that LTL carriers bid discounts off the same tariff (a "foreign" tariff to the carrier). The benefits to shippers are ease of comparison and lower administrative costs.

Discounting Some Discounts

What makes things easier for the shipper can make things very complicated for the carrier. A carrier's own tariff is generally contoured to reflect its particular network strengths and weaknesses. Bidding based on a foreign tariff often means setting a discount off a tariff contoured to a competitor's network.

An LTL carrier's discount off a foreign tariff is, in reality, an average of the discounts that the carrier would have provided for each individual lane. For instance, if the shipper increases volume in a lane that has a lower net rate than the carrier would have normally charged, then the contract will be less profitable.

When the carrier can't control the base rate levels and is not fully cognizant of all the specific rates in the tariff, the carrier is frequently less aggressive in offering discounts. This is done to minimize risk.

Lower discounts mean higher net rates for shippers. While the differences are frequently small, over the course of a year they can be significant.

Possible Solutions

The problem of LTL tariff complexity has been, and will continue to be, a tough nut to crack. Here are several ways shippers can minimize the burden placed on LTL carriers:

Provide more information to the LTL carriers. Providing more comprehensive shipment information can reduce LTL carrier uncertainty. Actual shipment history, shipment frequency, freight density, and expected changes to the supply chain network all provide the carrier with a better sense of the business it is bidding on.

Understand the trade-offs. The shipper reaps meaningful benefits—including reduced administrative costs and easier carrier comparison—from having carriers bid off a single tariff. Keep in mind, however, that this process can increase carrier costs and uncertainty.

Implement software solutions. Some third-party software applications allow for comparison across LTL carrier tariffs, eliminating the need to use only one tariff. New software solutions may provide increased functionality at lower user costs.

Work with the carriers. A partnership between supply chain partners can be more effective for both participants than an arms-length buyer/supplier relationship. Consider working with your LTL carriers to identify specific ways of improving processes that are adding cost or inefficiency to the transportation equation.

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