Market Overview

In A Seller's Market For LTL, Shippers And 3PLs Need To Play Nice With Carriers

In A Seller's Market For LTL, Shippers And 3PLs Need To Play Nice With Carriers

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Recent shipping trends reflect a slowdown in user demand across the air, rail, maritime and truckload modes of transport. Those trends seem to have passed by the $42 billion per year less-than-truckload (LTL) segment. Carriers have been in control of the market for two years, demand remains solid, and pricing is disciplined and rational. There is little to indicate that these trends will reverse any time soon.

The pace of rate increases coming out of the 2014-2015 U.S. industrial recession – the last time carriers were on the pricing defensive – has been well above prevailing inflation rates. More importantly, shippers have found it difficult to beat back the increases through a strategy of negotiated discounts. Carriers have also become more aggressive in imposing accessorial charges – fees tacked on to the line-haul charges ostensibly to compensate the carriers for services beyond basic transportation. Detention charges are commonplace, and shippers of so-called over-length goods, which cannot be stacked properly to optimize the trailer cube, are being charged for "phantom" space, or capacity they didn't use but which other shippers couldn't use, either. Accessorials like these were often waived in years past when shippers held the upper hand.

Market conditions have allowed LTL carriers to reject large numbers of tenders deemed unprofitable, giving them the luxury of cherry-picking shipments that promise good margins at an acceptable cost, according to Doug Sartain, Vice President of LTL Services at Redwood Logistics, a Chicago-based third-party logistics provider (3PL).

An added benefit – and one that may have the most sustainable impact – is the proliferation of high-tech measuring tools that allow carriers to precisely assess a shipment's dimensions and set rates based on the space the freight occupies aboard a trailer instead of on the shipment's weight. Dimensioning equipment has helped sharpen the carriers' cost calculations and enables them to charge prices that better align with their cost to serve. It has also reduced the number of post-delivery claims, charge-backs and price disputes because carriers now have hard data to back up their position.

Before dimensioners, shippers could submit rough estimates of their products' dimensions and not get called on it. That's because carriers were forced to measure shipments by hand, a task which often led to inaccuracies because of the large amount of freight crossing a carrier's docks each day. This lack of precision would often result in shippers receiving a default, catch-all rate known as "freight all kinds," or "FAK," which often didn't reflect the carrier's cost of hauling the goods. For years, carriers would routinely underprice FAK shipments because they couldn't properly price them. This left shippers in the proverbial driver's seat.

Those days are gone. Using dimensioners and other sophisticated strategies, carriers are drilling down their costs "to the cubic or linear foot," said Redwood's Sartain. Shippers, for their part, are more aware of the carriers' strides in managing their costs, said Sartain, who works with shippers in his capacity at the 3PL.

A prevailing opinion is that dimensioners will end the 85-year practice of pricing LTL shipments through a formula which assigns a classification to each commodity or product type based on various shipment metrics. (There are 11 classes, with class 60 being the least expensive and class 400 the most expensive. The assigned number determines the LTL tariffs, which in turn sets a carrier's rates.) Don Newell, one of the country's foremost experts on LTL costs and pricing and a disciple of the class rate structure, says class rates will still be around for a long time. Dimensioners, he said, will ensure that a shipment's characteristics are "not out of whack" with the freight's assigned classification.

Dimensioners are not a ubiquitous feature in the LTL world. But they are getting there. Some carriers are able to run up to half of their shipments through dimensioners. That is considered the high end. The frequency of dimensioning correlates with the carrier's size, needs and resources, with the use of the equipment more common among larger carriers. Some dimensioners have drive-through capabilities, meaning loads can be measured while they are mobile.

While the benefits to carriers are obvious, shippers also stand to gain from dimensioners and other information technology improvements, according to Newell. They can focus on a transaction's final price and spend less time haggling over discounts, he said. Technology can end the need to resize or re-weigh freight, as well as the delays, costs and relationship rancor that stems from them. It also provides incentives shippers to raise the density of their palletized shipments, which will enable a trailer to cube out more efficiently and, by extension, reduce their costs as well as carriers' costs. Many shippers are too strapped to keep up with the dynamics of these changing trends, but 3PLs and other service providers have stepped up to fill these needs.

The term "shipper of choice" has been used quite often in the past 18 months to describe what shippers need to do to achieve capacity assurance. But nowhere is it more relevant than in LTL. The top 10 LTL carriers control the vast majority of market share. LTL networks are complex, labor-intensive and prone to loss and damage because, unlike truckload freight that moves in a linear fashion from point A to B, LTL equipment and goods are not linear and can change hands multiple times on one journey.

According to Sartain, shippers must be cognizant both of the unique challenges of managing an LTL network, and of all the other cost pressures that are universal to truckers. LTL carriers, too, must cope with a shortage of qualified drivers and higher costs for terminals, vehicles, fuel, insurance and regulatory compliance. Most of the rate increases from 2010 through 2014, which followed arguably the worst period in the industry's long history, were aimed at simply covering the carriers' costs and re-investing in their businesses in order to survive.

Shipper-carrier conversations must not center on rates, but on how effectively shippers can help their carrier partners lower their costs, Sartain said. Shippers, he advocated, should approach carriers with a proposal to help lower their costs, and, through that, avoid any rate increases. A persuasive argument reinforced by concrete steps will go far in convincing carriers that it won't be necessary to raise rates, Sartain said. It will also build goodwill and help make that shipper a "shipper of choice."

Image sourced from Pixabay

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Posted-In: 3PL Freight Freightwaves Logistics LTLNews Markets General