Case Study:  Penalized for Innovation by NMFC Density-Based Pricing?

by Mike Starling

Situation:  National Manufacturer and Distributor of Auto and Truck radiators is currently experiencing increased freight expense due to LTL carrier reclassification of their new lightweight radiators. The manufacturer improved the service life of the previously all-metal radiators by substituting metal parts with plastic and other synthetic materials.

Question:  So why are LTL carriers penalizing the manufacturer for design and quality improvements to the product that externally has not changed appreciably in size, packaging, or value? This is most likely due to the NMFC density-based pricing guidelines published by the Commodity Classification Standards Board of the National Motor Freight Traffic Association. The CCSB is used by the LTL carrier industry to determine the freight classification of products/commodities shipped.

In 1983, the Interstate Commerce Commission (ICC) established and prescribed four transportability characteristics to be used in determining applicable freight rate. These characteristics are:  1) density, 2) stowability, 3) handling, and 4) liability. The ICC’s successor agency, the Surface Transportation Board (STB), mandated the use transportability characteristics to justify pricing.

While the ICC no longer exists and the STB no longer regulates the classification process, most LTL carriers still persist in justifying their pricing based on analyzing commodities shipped on the basis of these characteristics. The NMFTA website touts the desirability of this process stating, “…The NMFC provides both carriers and shippers with a standard by which to begin negotiations.”

Note the key words “to begin negotiations.” From a shipper’s perspective, this would seem to make sense, as the shipper is looking for the most cost-effective transport service that meets his current requirements. The LTL carriers, on the other hand, tend to take the position that there isn’t much to negotiate other than to obtain agreement on the NMFC freight classification of the product to be shipped.

The carrier looks to assuage the shipper’s concerns about accepting the NFMC freight class the carrier insists on by offering a discount off their tariff pricing – for the freight class being specified. While this practice seems to be typical of how it’s done today, this does not address the basic issue of allowing the shipper to “negotiate” a fair price for the shipment of his product. The only “negotiations” in today’s LTL marketplace amount to “haggling” over the amount of the discount off the tariff rate. What a fair freight rate might be never actually gets addressed, much less discussed in shipper-LTL carrier “negotiations.”

At issue here are two opposing forces:

⦁    The LTL carrier’s desire to maximize income revenue

⦁    The Shippers desire to pay a fair price for services rendered

The LTL carrier understands what the operating expense is for the tractor, trailer, driver, insurance, etc. It is reasonable to assume that the carrier budgets “X” dollars per unit for operating expense and targets a reasonable (?) markup. The goal is to earn sufficient income from the unit to ensure the company generates positive cash flow to sustain and grow the business.

The disconnect comes when the LTL carrier invokes their freight class-based tariff, which provides a progressively increasing scale of tiered rates based on NMFC freight classifications. At what freight class does the carrier establish their actual income target to insure they cover operating expense and generate positive cash flow? This seems to unnecessarily complicate the issue for the carrier, and the shipper is totally oblivious to this objective when they “negotiate” the LTL carrier freight rate agreement.

So let’s “analyze” this from a “transportability characteristics” from the carrier’s point of view.

⦁    Density – #/cuft – equates to NMFC Freight Class ____.

⦁    Stowability – nice square pallet load – good bottom freight

⦁    Handling – straight forward single skid load – easy to handle

⦁    Liability – minimum risk, even if damage occurs – no added insurance expense for carrier

Now the NMFC provides two freight class classification tables to “help” get the product into the “right” freight class bucket.

⦁    Density – pounds per cubic foot

⦁    Value – value per cubic foot

The freight classifications are established by the CCSB based on their ongoing survey of freight moving in today’s marketplace. Whoopee! The basic flaw here is that these freight classification tables are considered “law” by the carrier community, and seldom, if ever, challenged by the shipping community.

The USA is the only country in the world that still uses this antiquated method of freight classification in establishing freight rates. The rest of the world uses cube- based pricing (i.e.; you pay for the space you use on the truck) regardless of the density or value of the product shipped. The problem for the manufacturer in this case study is their continued use of LTL carriers who insist on using NMFC freight classification to establish freight rates for the new and improved radiators.

Alternatives:  What are the alternatives for the manufacturer here?

⦁    Use their shipping volume to mitigate the rate increases being forced on them.

⦁    Consolidate their shipping volume with fewer carriers to mitigate the rate increases being forced on them.

⦁    Ship with truckload carrier exclusive use in key volume lanes to obtain more favorable “rate per pound” freight rates.

⦁    Petition the CCSB challenging current methodology LTL carriers use to classify the new and improved lighter weight radiators.

⦁    Find and utilize carriers willing to negotiate cube-based pricing that would provide a “fair” rate for the new and improved products shipped.

Solution:  The radiator manufacturer elected to engage an experienced outside supply chain coach to pursue several of the “non-LTL carrier” alternatives mentioned above with a goal of reducing current freight expense and improving delivery service throughout their North American distribution network. In addition, they achieved significant operating cash flow improvement freeing up working capital previously tied up in operating freight expense.

Bottom Line:  Everything is negotiable. Common sense is the best guideline in seeking and finding alternatives that provide mutual benefit to both carrier and shipper alike. Utilizing an experienced outside resource can provide a ROI quickly and far outweighs the expense of taking such an approach. He who hesitates negatively impacts his company’s operating cash flow.

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