LTL pricing and costing have always been enigmatic activities. Freight comes in a variety of shapes and sizes. The freight mix is always changing. An 87-year-old system determines rates by assigning a numeric classification–from 50 to 500–to all LTL shipments. There are 18 product categories to sort through.
In an effort to simplify matters, the LTL gods devised a classification known as freight all types decades ago (FAK). The FAK rate was calculated by taking the weighted average of numerous shipments with varied classes.
The concept behind developing a single generic rate was to spare a shipper the time and expense 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 establish if it complied with the proper particular class. FAK became the path of least resistance for shippers who, in the years following motor carrier deregulation in 1980, lost many of their own traffic departments and a lot of LTL pricing knowledge.
FAK also permitted shippers to get off easy in many circumstances because freight offered under the classification would frequently justify a higher price based on the exact class it would have otherwise fallen under.
However, it became obvious over time that the remedy was growing worse than the disease. Because of their reliance on FAK rates, carriers have left hundreds of millions of dollars on the table due to sloppy costing methods. Even though a few minutes with a tape measure could have provided reasonably correct computations, shippers were never incentivized to deliver accurate dimensions prior to tender.
Because of the lack of transparency, FAKs has become a breeding ground for mistrust, with the claim that a plain vanilla rate is utilized when a carrier cannot check the shipper’s information or the shipper is not confident in the correctness of a carrier’s rates. Shippers were especially wary of frequent carrier reweighs and reclassifications, which almost always resulted in higher freight bills long after the items had been tendered.
The use of FAK was symptomatic of a trust and accountability problem that has plagued LTL for 100 years. “If a carrier wishes to cheat, they may do so.” “If a shipper wants to cheat, they can cheat,” said Don Newell, an LTL expert with 46 years of experience in the sector.
Cat-and-mouse
FAK is a “cat-and-mouse” game in which each party tries to deceive the other, according to C. Thomas Barnes, chief revenue officer of transportation technology platform MyCarrier and a longtime LTL executive. Rather than aiming for the clarity that comes with physically measuring a shipment’s dimensions to arrive at a fair rate, FAK advocates create a “cloud of confusion” that costs the LTL industry hundreds of millions of dollars in rate undercharges, overcharges, reweighs, and reclassification costs, among other annoyances, according to Barnes.
Much has changed, fortunately for the carrier community. Carriers still provide FAKs upon request, albeit they are rarely utilized. Carriers have become more disciplined in their cost analysis and pricing, and they are focused on the total revenue generated rather than the mechanisms used to get there, according to Scooter Sayers, an LTL consultant, and a longtime executive at ABF Freight System Inc., ArcBest Corp.’s LTL carrier unit (NASDAQ: ARCB).
According to Sayers, savvy carriers will factor the risk of taking marginally lucrative FAK freight into their overall pricing. This is especially true when a carrier evaluates a bid from a new shipper, he adds.
Third-party logistics providers, which handle more LTL freight than ever before, are increasingly requiring customers to submit cargo measurements on the BOL prior to tender. The intermediary will then collaborate with the carrier to ensure the accuracy of the documentation.
Barnes stated that MyCarrier, which is not a 3PL, has always asked its customers, who are primarily small to medium shippers, to supply dimensions with each BOL.
Dimensioners coming to the rescue?
The emergence of dimensioning machines that come extremely near to recording a shipment’s exact measurements is perhaps the most significant development. The machines give accurate, irrefutable data that enables carriers to price freight correctly and with little pushback from shippers.
Parcel Tools, an Australian company, wants to take the dimensioning paradigm a step further. CubeTape is a low-cost mobile tape-measure gadget and software package produced by the company. The devices, according to Tony Bauer, the inventor of Parcel Tools, are being sold to shippers so that they can simply submit the dimensions of their freight before a driver arrives.
The end result of all of this is that the carrier is fairly reimbursed for the space occupied aboard its trailer, and there is no argument over the rates. “If you want the best carrier price, abolish FAKs and give the carriers the chance to earn a profit on each shipment,” Sayers advised. “Don’t make them accept the bad [freight] with the good because it means danger.”
FAK persists, if only because it permits shippers and carriers to keep within their comfort zones. According to Newell, an advocate for the classification system, FAKs are still important because the classifications are still utilized and businesses are hesitant to migrate to something new.
“People are afraid of what they don’t know,” Barnes of MyCarrier added.
According to Newell, FAKs and the classification framework that supports them will finally vanish. However, its demise will take longer than expected, according to him. “Too many shippers remain stuck in the 1990s, or they are too proud of the FAKs they battled so hard for that they are unwilling to give them back,” Sayers says.
