Demand for more capacity has never been higher in the shipping industry. E-commerce is pushing parcel and full truckload carriers to their breaking points, and LTL shipping is poised to reduce the impact and costs. Unfortunately, US LTL carriers suffer from a psychosis, a deficit rating standard. They’re actively losing money by focusing on giving shippers a better rate, and while this may be great for shippers, it carries a severe, long-term outlook. Shippers need to understand US LTL carriers’ deficit rates and what they mean for the future.
Why US LTL Carriers Are Losing Money
US LTL carriers’ deficit ratings are a multi-pronged problem. The problem is caused by weight bands that recognized economies of scale. It is a simple principle in business; customers that are moving more product and using more of the carrier services get a better rate. Unfortunately, the pressure to offer better rates has been exacerbated to the point to where US LTL carriers are “fudging” actual rates to give shippers a better deal.
As explained by Satish Jindel of JOC.com, this problem derives from the much larger weight bands in LTL shipments then partial or full truckload. Pricing bands within LTL include:
- Those ranging from 100 to 500 pounds.
- 501 to 1000 pounds.
- 1001 pounds to 2000 pounds.
- 5001 to 10,000 pounds.
Carriers do have the same hundredweight for all shipments within each weight band. However, LTL carriers rate the shipment and its actual rate by rounding up the weight to the higher hundredweight rate allowing the carrier to prevent problems in errantly billing more for a lighter shipment versus a heavier shipment, At this point, the carrier compares the two weights and rates, charging for the lowest amount.
[WHITE PAPER] The State of & Pricing Outlook of the Less than Truckload Shipping Market
Misconceptions About Customer Service and Deficit Ratings
The significant misconceptions surrounding customer service and deficit ratings is that it is necessary. LTL carriers have enjoyed freedom from the capacity crunch and less stress than full truckload carriers, but full truckload, which is supposed to make exceptions for freight between 5001 and 10,000 pounds, is starting to turn away this class of shipments. Unfortunately, this will lead to more shippers using LTL to tap into available capacity, and, when paired with deficit ratings, the outlook is severe. The LTL industry will continue giving away services under this model. As a result, LTL freight rates will increase to keep up, resulting in an added burden to shippers. Although a deficit rating may save money in the short-run, it will have a much more significant impact as more truckload carriers turn away freight.
How to Help Reduce the Deficit Rating for Carriers and Impact on Shippers
There are a few things shippers can do to reduce the impact from deficit ratings, starting with increasing the average package size. Essentially, increasing the average shipment size to include more products and individual packages will ensure the LTL carrier rates the packages appropriately. Also, avoid great package weights that barely go above the beginning of a new weight band. For example, get as close as possible to 500, but do not go over. This will minimize stress on LTL carriers, so rates are more likely to stay lower.
Track your invoices. Invoice tracking, auditing, and payment firms will see less work as the LTL industry moves away from deficit ratings. Although that will be bad for outside entities, it offers a much higher opportunity for carriers and shippers to keep freight spend and the costs of shipping products under control. This will be the godsend to give carriers better profit margins, which can be used to reinvest in technology and reduce freight rates.
Plan for Changes in LTL Pricing Ahead
LTL pricing models are evolving, and US LTL carriers must abandon their antiquated deficit rating models. In addition to making more money on lower weight shipments, LTL carriers can reduce the amount of work necessary to rating a shipment. Think about it; current practices require double the work in determining the rate for the shipment. If LTL carriers can eliminate this double work, it could reduce labor costs for workers determining freight rates by half. Actual savings may not be that high, but shippers will play a significant role in LTL carriers that decide to create smaller weight bands to abandon deficit rating practices. Even though encouraging carriers to rethink freight charges can have a short-term increase in shipping freight spend, the long-term benefits outweigh the short-term costs.