This post is going to cover first a look at the less-than-truckload (LTL) industry and how LTL pricing is expected to climb higher as the industry rebounds, an explanation of how General Rate Increases work and their effect on LTL pricing, and then, despite increases in LTL pricing, how, as a shipper, you can employ 7 ways to mitigate your overall LTL costs.
The Rebound of the LTL Industry and the Effect on LTL Pricing
The $35 billion less-than-truckload (LTL) market, benefitting from a rebound in the U.S. industrial and manufacturing sector, is enjoying a renaissance after five lean years. And leading LTL executives say it’s about time.
Chuck Hammel, president of regional LTL Pitt Ohio, labels the current overall LTL pricing market as “good, not great,” adding that “good” is surely a welcome change from what it has been since 2009. “We’re seeing solid tonnage growth from existing customers, and we’re asking for and getting fair increases on LTL pricing rates,” he said. “Capacity is running between balanced and tight.”
LTL carriers enjoy a distinct market concentration advantage over the highly fragmented truckload sector. The top five LTL carriers by revenue (FedEx Freight, YRC regional and long-haul, Con-way, UPS Freight, and Old Dominion Freight Line) have a 55 percent market share. By contrast, the top five carriers in the non-union TL market have less than 5 percent market share of that $300 billion market.
This differentiation is due to the fact that LTL carriers face significant barriers to entry. In order to operate a typical LTL hub-and-spoke network operation, it takes hundreds of millions of capital costs to buy real estate, build terminals, and staff those facilities around the clock. By contrast, TL carriers operate largely point-to-point without much in terms of brick-and-mortar costs.
Statistics provided by SJ Consulting, a research firm that closely tracks the sector, show LTL’s renaissance. As the accompanying chart shows, LTL demand is accelerating and pricing has been gaining momentum over the past four quarters.
In the first quarter of this year, LTL tonnage rose by a robust 4.9 percent year over year. That followed 0.7 percent, 2.9 percent, and 4.8 percent year-over-year increases in tonnage for the second, third, and fourth quarters of 2013.
Not surprisingly, this tonnage surge has resulted in solid LTL revenue gains. In the first quarter of this year, LTL revenue per hundredweight (excluding fuel surcharges) rose 2.5 percent. This followed similar gains of 1.4 percent, 1.4 percent, and 1.5 percent in the second, third, and fourth quarters of last year.
“LTL pricing is fair,” said Satish Jindel, principal of SJ Consulting. “It will vary by which part of country and which lanes, with carriers in the Midwest and Mid-Atlantic seeing good improvements.”
Several factors may be responsible for those geographic gains. The auto industry’s rebound is helping carriers in the upper Midwest keep their trucks filled. The Mid-Atlantic is gaining strength due to pent-up demand after a brutal winter caused first quarter freight levels to drop. And keep in mind that U.S. operations of Toronto-based Vitran Express are basically being closed out and absorbed by Central Transport, causing better results for other U.S. LTL carriers in those regions once served by Vitran’s units.
Most LTL carriers are routinely seeking and getting 3 percent to 4 percent LTL pricing increases on some lanes of contract traffic. Most carriers announced a general rate increase (GRI) in the 5.5 percent range the first of the year, and there is some talk about a second GRI later this year.
But increasingly, carriers are making rate adjustments on a customer-by-customer basis. Those shippers with the best freight characteristics—read more below on how to get better freight characteristics—are getting the best consideration when it comes to mitigating higher LTL costs.
Most LTL fleets are reporting difficulty in adding quality drivers, especially in line-haul operations. In that area, the LTL industry is competing with the larger, mostly non-union, long-haul TL carriers that have been coping with a driver shortage for years.
The bottom line for shippers is to expect pass-through LTL pricing rate increases in the LTL industry to help cover for the higher costs in recruiting and obtaining qualified long-haul drivers.
How do General Rate Increases Work Anyway and What Should I Expect as a Shipper?
General Rate Increases (or GRIs) are the black box of shipping and logistics. The average shipper typically knows very little of the LTL carriers’ annual LTL Pricing rate increases of between 4-6 percent, other than possibly coming across the news in an industry magazine.
Knowledge of GRIs will allow you to avoid ANY surprises on your freight bill. However, just look to point #7 below and you can avoid “gotchas” period.
First, each LTL carrier owns proprietary rates based on class, dims, origin, destination, assessorial charges and more. This may seem like a basic statement, but in reality, most SMB shippers don’t realize rates differ by carrier.
Second, when establishing their annual GRI, an LTL carrier takes its proprietary base rate and figures out how to adjust it based on increasing cost of labor, benefits, equipment, operations, insurance and more. They then model this by a group of factors, including key lanes, weight classes, and weight breaks.
The result is a varied list of percentage increases (and even some decreases). For example, the carrier may increase rates bound for Florida by 20 percent, Class 50 freight by 12 percent, 1000 lb break by 10 percent, and 500 lb break by just 1 percent and so on.
They then take a few sample shipments modeled by lane, weight breaks and class to come away with their annual increase, typically about 4-6 percent. Of course, hard-dollar assessorial charges vary frequently. Inexplicably, this range is roughly 2-4 times the rate of inflation.
With the general mechanics established, here are some secrets behind GRIs:
- Discounts are meaningless. An 80 percent discount is NOT really an 80 percent discount. The average variant between the high and low cost base rate is actually 36 percent. So when an SMB shipper is told they get an “80 percent discount” it’s not really the case. When there’s a rate change, the net change comes right out of shipper’s pocket.
- GRIs impact only 20 Pct of an LTL carrier’s accounts. Remember that LTL carriers depend on 80 percent of their business through contract rates and GRIs have zero direct impact on those contracts. However, the new rates set the stage for future contract negotiations/renegotiations.
- Small shippers take the hit. So, if 80 percent of shippers are under LTL contract, who’s the unfortunate 20 percent most impacted? You guessed it. Small business shippers. They don’t ship the volume to command contract rates, and pricing agreements are not contracts. Any discount received just comes off the higher base rate.
- Lost in translation. In the past, LTL carriers used to send letters, put out press releases, fully communicate their GRI. I’ve noticed the approach has changed recently. Most GRI news is picked up by industry trade media, but outside of that, you really need to dig for it. They never proactively tell the customer, so pay attention to the net change, not the discount. And they know it takes a couple months before customers catch on and want to renegotiate.
You are Not at the Mercy of Changes in LTL Pricing Year to Year! 7 Ways to Mitigate GRIs and Rising LTL Costs
1. Improve Packaging
Proper packaging will minimize freight damage and fit the goods into the minimum space necessary. Using less space on the truck will reduce the freight classification, which in turn will reduce LTL pricing costs. Improved packaging can also reduce freight damage. Additionally, good packaging is easy to load, unload and has good label visibility.
Questions to consider:
- When was the last time, you looked at your packaging?
- Is damaged freight an ongoing problem?
- Do your shipments have a high freight class?
2. Reduce Freight Classification
Freight class is set by the , and generally determined by freight density (the denser, the better). Improved packaging will sometimes lower your freight class which will lower your freight costs.
Another way to lower your cost is to investigate whether your freight could ship under a lower classification. There are lots of nuances to the freight classifications so do some research and or ask your carrier representative or 3PL for help.
Questions to consider:
- Does your shipping team understand the correct freight classes for your freight?
- Does your company ever have freight reclassified by the carrier?
- Does your shipping team understand the connection between freight density and freight class?
3. Select the Right Shipping Mode
Freight mode refers to the various shipping methods, which include: full truck, LTL, small parcel, air freight, and sea freight. Shippers often focus on getting the best price for a given mode without considering the opportunity to use a less expensive mode.
Using the wrong mode will cost your company extra money. For some larger LTL shipments, a dedicated full truck might be a cheaper than LTL. Conversely, some smaller LTL shipments might be shipped cheaper by a small parcel carrier.
Questions to consider:
- Do you have light LTL shipments that could ship via small parcel?
- Does your company use full trucks for 6 pallets or less?
- Has there ever been an analysis of the proper shipping modes at your company?
4. Make Carrier Changes
Carrier changes can have an enormous impact on all the four of the the core bonus Logistics metrics that we mentioned in our manufacturing metrics post here. Every carrier has preferred routes where they will offer better pricing. Conversely, every carrier has areas where they do not want to go and of course they charge more for those moves. Selecting the preferred routes for carriers will also improve on time performance. If freight damage is an ongoing concern, switching carriers sometimes fixes the problem. A good carrier representative will work with clients to improve billing accuracy through clear language in the tariff contract.
Questions to consider:
- Do you know the carriers with the best coverage for the areas where you ship?
- Do your carriers use partner carriers to deliver your shipments? If yes, those shipments cost extra money and are more likely to be damaged.
- Does your company regularly meet with carrier representatives to better understand their service offerings?
5. Switch to Longer Transit Times
Shippers often default to the fastest transit time without considering the extra costs. In general, shorter transit times are more expensive than longer transit times.
Questions to consider:
- Are you paying a premium for a one day transit time for a shipment that is not time sensitive?
- Would you ship earlier and use a carrier with a longer transit time, if it meant a significant cost savings?
- Would your customer accept a later delivery time if you gave them a break on shipping costs?
6. Use a Transportation Management System
Transportation management systems (TMS) can help shippers reduce cost, improve billing accuracy and on time performance, among many other benefits. TMS simplifies the freight buying process for shippers. Typically, TMS will enable a shipper to compare pricing and transit times for multiple carriers (such as in the Thomasholmes Rater). After selecting a carrier, TMS will facilitate easy tracking, reporting and payment. The best transportation management systems are web based and connect shippers directly to the LTL carriers. Having a database of all LTL shipments aids in metric development and reporting. Some transportation management systems have traditionally been expensive, but some 3PLs, like Thomasholmes, offer the software for free with their services. In our next post we will blog about the rise and use of web based TMS.
Questions to consider:
- Do you have freight software to streamline the freight buying process?
- Are freight bills easily accessible online?
- Is shipment tracking and visibility a problem at your company?
- How long does it take to get quotes from 3 carriers? If it is longer than one minute, a TMS might be useful.
7. Hire a Third Party Logistics Provider (3PL)
A good third party logistics provider will improve cost, on-time performance, freight damage, billing accuracy and a whole lot more. The best 3PLs provide free web based software along with logistics experts that will drive continuous improvement.
Depending on the shipper’s needs some 3PLs take over routine freight tasks, which frees up the shipper’s logistics team. Since 3PLs partner with dozens of LTL carriers, they can match a shipper with the best carriers for their situation.
Questions to consider:
- Is your shipping team experienced in carrier negotiations?
- Does your company have the time or the carrier relationships necessary to get the best pricing?
- Would some freight experts and TMS help the freight area run more effectively?
If you are a shipper who is using the mode LTL often and are looking to better effectively manage LTL shipping process and mitigate LTL pricing increases through expert help, please reach out to a Thomasholmes Account Executive by setting up a complimentary Logistics Consultation today.