LTL costing and pricing have always been arcane exercises. Freight comes in all shapes and sizes. The mix of freight constantly changes. Rates have been determined by an 87-year-old system that assigns a numeric classification–from 50 to 500–to all LTL shipments. There are 18 product classifications to wade through.
In an attempt to simplify matters, the LTL gods decades ago came up with a classification known as freight all kinds (FAK). An FAK rate was arrived at by calculating the weighted average of multiple shipments that had different classifications.
The idea behind building one generic rate was to save a shipper the hassle of itemizing each item on a bill of lading (BOL), while sparing the carrier the time and expense of weighing and measuring each shipment to determine if it comported with the appropriate class. FAK became the path of least resistance for shippers, many of which lost their internal traffic departments, and a lot of LTL pricing knowledge, in the years following motor carrier deregulation in 1980.
In many cases, FAK also allowed shippers to get off easy because freight tendered under the classification would often justify a higher price based on the specific class it would have otherwise fallen under.
Over the decades, however, it became clear that the cure was becoming worse than the disease. The reliance on FAK rates resulted in carriers leaving hundreds of millions of dollars on the table through undisciplined costing practices. Shippers were never incentivized to provide accurate dimensions prior to tender, even though a few minutes with a tape measure could have produced reasonably precise calculations.
The lack of transparency has made FAKs a breeding ground for mistrust, the argument being that a plain vanilla rate is used when a carrier can’t verify the shipper’s information or the shipper isn’t confident in the accuracy of a carrier’s rates. Shippers were also suspicious of frequent carrier reweighs and reclassifications, which invariably led to higher freight bills long after the goods were tendered.
The use of FAK was symptomatic of a trust problem, and the lack of accountability, that has plagued LTL for 100 years. “If a carrier wants to cheat, they can cheat. If a shipper wants to cheat, they can cheat,” said Don Newell, an LTL consultant who has worked in the industry for 46 years.
Cat-and-mouse
C. Thomas Barnes, chief revenue officer of transportation technology platform MyCarrier and a longtime LTL executive, said FAK is a “cat-and-mouse” game in which each side maneuvers to deceive the other. Rather than strive toward the clarity that comes with physically measuring a shipment’s dimensions to arrive at a fair rate, FAK proponents create a “cloud of confusion” that unnecessarily costs the LTL industry hundreds of millions of dollars in rate undercharges, overcharges, reweigh and reclassification costs, among a myriad of aggravations, Barnes said.
Fortunately for the carrier community at least, much has changed. Carriers still offer FAKs upon request, though it’s not used very often anymore. Carriers have become more disciplined in their cost analysis and pricing, and they are focused more on total revenue generated than the mechanisms used to get there, said Scooter Sayers, an LTL consultant and a former executive at ABF Freight System Inc., the LTL carrier unit of ArcBest Corp. (NASDAQ: ARCB).
Savvy carriers will price the risk of accepting marginally profitable FAK freight into their overall rates, Sayers said. This is especially true when a carrier reviews a bid from an unfamiliar shipper, he added.
Third-party logistics providers, which handle more LTL freight than ever before, increasingly insist that their customers submit shipment dimensions on the BOL prior to tender. The intermediary will then work with the carrier to verify the documentation for accuracy.
Barnes said MyCarrier, which is not a 3PL, has always required its customers, mostly small to midsize shippers, to provide dimensions with every BOL.
Dimensioners to the rescue?
Perhaps the most important development is the proliferation of dimensioning machines that come very close to capturing a shipment’s exact dimensions. The machines provide accurate, indisputable information that allows carriers to price freight properly and with infrequent pushback from shippers.
An Australian firm, Parcel Tools, looks to take the dimensioning model one step further. It has developed a relatively inexpensive mobile tape-measure device and software package called CubeTape. Tony Bauer, Parcel Tools’ founder, said the devices, which are expected to hit the U.S. this summer, are being marketed to shippers so they can easily upload their freight’s dimensions before a driver arrives.
The ultimate outcome of all this is for the carrier to be fairly compensated for the space occupied aboard its trailer, and for there to be no dispute over the rates. “If you want to get the best carrier pricing, eliminate FAKs and give the carriers the ability to make a profit” on each shipment, Sayers said. “Don’t force them to take the bad [freight] with the good, as that means risk.”
Yet FAK endures, if for no other reason than it allows shippers and carriers to stay within their comfort zones. Newell, who is an advocate for the classification system, said FAKs still matter because the classifications are still being used and businesses are reluctant to transition to something new.
Added Barnes of MyCarrier, “People are scared of what they don’t know.”
Newell said that FAKs, and the classification regime that nourishes it, will eventually disappear. However, its demise will take longer than people expect, he said. According to Sayers, “too many shippers are stuck in the 1990s, or they are too proud of the FAKs they fought so hard for that they are not willing to give them back.”
The FREIGHTWAVES TOP 500 For-Hire Carriers list includes ArcBest (No. 26).