A team of researchers from Auburn University is delving into the dynamics of less-than-truckload pricing as LTL trucking companies struggle to raise rates.
The researchers hope the study will lead to better benchmarking tools for truckers, logistics providers and shippers. It’s the first time third-party logistics providers will be included in an LTL pricing study, said Joe Hanna, professor of supply chain management at Auburn. “The last time this study was done, 3PLs were not nearly as instrumental in purchasing of transportation services,” he said.
The study follows the collapse of LTL rates during a downturn that has escalated a price war among the carriers. Revenue at the top 25 LTL carriers shrank 25 percent in 2009 to $25.2 billion, according to SJ Consulting Group estimates.
During last year’s rate wars, LTL pricing was all about the discount, the percentage a shipper could slice off a carrier’s tariff rates. In some cases, that figure was 90 percent, as truckers fought for every pallet.
The survival of YRC Worldwide, which many competitors expected to run out of gas and cash last year, coupled with a first half surge in freight, is reshaping the LTL market. Carriers are reviewing accounts, trying to pare “bad freight” and asking shippers to accept rate hikes.
After last year’s freefall, LTL prices have stabilized, although at “depressed levels,” Longbow Research analyst Lee A. Klaskow said. He reported spot rate improvements and “upward contract repricing” in the low- to mid-single digit range.
To get those increases, however, carriers need to better analyze costs, rethink how they price services and find new ways to work with customers, including third-party logistics providers.
“One thing we want to determine is whether there is the stomach out there within the industry to maybe look at a new pricing mechanism or process,” said Hanna, who heads Auburn’s supply chain management department. “Also, with all the globalization that’s occurring, is there any intestinal fortitude for a broader rate-making process” that includes multiple supply chain partners?
“We think it’s time to update our thinking,” said Danny Slaton, senior vice president of business development at trucking industry association SMC3, the study’s sponsor. “Any carrier that’s still in business today has learned how to cost their business,” but that cost data must be used to determine pricing in a broader framework than the traditional trucker-shipper relationship.
SMC3, a rate bureau in the days of trucking regulation, now provides pricing tools, technology and educational assistance to truckers and shippers. A growing number of logistics providers attend its conferences and events, Slaton said.
The growth of third-party logistics over the last two decades challenged LTL carriers accustomed to a “direct sales model,” Bruce Kennedy, vice president of enterprise strategy at YRC Worldwide, said at last month’s SMC3 summer meeting.
Most carriers, including YRC, considered intermediaries a threat, he said. “We had apathy and even hostility internally in dealing with this segment,” Kennedy said.
That changed after a review found 3PLs accounted for a significant portion of the $5.3 billion company’s freight revenue. YRC, which sold most of its in-house logistics arm last month, is changing its strategy to better align its services with 3PLs.
For shippers, outsourcing transportation and supply chain management is adding new layers of complexity to LTL pricing. Fortune 500 companies “are working on managing price throughout the enterprise,” Slaton said. Those companies turn to logistics providers and brokers to manage costs, and they in turn pressure carriers, sometimes seeking broad pricing deals based on a book of business rather than individual accounts, Slaton said.
Although that kind of deal can mean more business for a carrier, the volume may come at a high cost, said Kenneth M. Manning, president of Transportation Costing Group, a Rockville, Md., provider of costing software. He said LTL carriers are deploying increasingly sophisticated tools to better understand their costs and develop internal benchmarks for pricing.
“Carriers are getting away from average circumstances and average costs and moving toward more specificity,” Manning said. “Rather than asking for a 5 percent increase on 100 percent of a customer’s freight, you can ask for a 50 percent increase on just 10 percent” and use the data to justify the increase, he said.
“You might be able to get a 5 percent increase now because you took a 10 percent decrease last year,” Manning said. “Going beyond that to make sure you have profitability in all your freight is something that requires a lot more sophistication, and I think the carriers are recognizing that and acting accordingly.”
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