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Time for a New Class of Rating

8/7/13 4:57 AM | Thought Leadership Time for a New Class of Rating

Time for a New Class of Rating

“I want to know the real, total cost of my shipments before I make them.” Over the years, we have talked to a lot of shippers and logistics companies who are in the “rating gap.”

What is the Gap?

Here is a diagram of where and why the rating gap exists. This “Gap” has been very difficult to bridge because complex rating is so difficult that only a powerful TMS can deliver solid “total costs” estimates.

Time for a new rate class blog 3gtms

To get correct cost or upcharged sell rates, you can start with basic rating, but you’ll have to know a lot more. Items that have to be taken into account include some of the basic pricing parameters such as:

  • Type of freight cost – rate base, pallet, mileage, cube, area, flat rate, etc.
  • Client routing requirements
  • Geographic limitations
  • Direct or Interline Service
  • Accessorial charges
  • Client Requested Accessorial charges (i.e. Liftgate, Residential Delivery)
  • Automatically Added Accessorial Charges (i.e. Fuel Surcharge, High Cost Delivery Areas)

Here are common reasons why customers need the real total costs:

  • Properly accrue their shipment costs for accounting reasons (i.e. reporting or Sarbanes-Oxley compliance).
  • Provide their customers with accurate shipping choices in the sales process.
  • Manage markups to their customers
  • Offering free freight or a program and want to make sure they are not going to lose money on the freight
  • Providing vendors with a simple web portal to determine correct mode and carrier

One of the causes of this “rating gap” is that many current TMS vendors have no incentive to build such a solution since companies knowingly overspend to buy a TMS in order to get just the rating.  Also, TMS vendors are not really incented to decouple their rating engine and contract management system from the TMS.  It is not easy to do, and, bluntly, it may show weaknesses in the rating system, itself.

The major issue is that LTL shipments are really hard to correctly rate.  Too many shippers are relying on base rates (i.e. YRC 2013) to get a good approximation.  This rarely yields anything close and the difference between expectation (based on base rate) and total charges is usually 20% – 200% off.

It’s so difficult that a whole industry exists to audit the freight bills sent from your carriers as so many are significantly different from the expected charges.

Should I Care About the Gap?

Yes, a valid question because complex issues take time to consider.

But, here are two examples of what happens inside the Gap, beyond the base rate:

2000 lbs., Atlanta to New York City, 3 pallets:
Base rate: $ 375.96
Real cost: $ 740.26
2000 lbs., Atlanta to New York City, 4 pallets:
Base rate: $ 375.96
Real cost: $ 1,213.26

I won’t get into the details for above, but if interested, I have placed these examples on our website.

In Closing:  Some Numbers

ERP and TMS systems do not have a good track record in regard to contract management technology.  In fact, a survey in American Shipper (Transportation Procurement | Benchmark Report: 2013) shows 60% of small/medium shippers are using manual/spreadsheet for contract management and only 4% of these shippers are using the contract management module of their TMS.

The fact that less than 40% of shippers even use a TMS is also related to this gap.  I believe there are plenty of shippers who either have not found a suitable TMS, or don’t want to buy a full system just to do comprehensive rating.  A sharper point is that most TMS technology is not capable of such rating, anyway—or else more than 4% of shippers would be utilizing their TMS’ contract management module.

Do you see this gap in the industry?  We’d love to hear your comments and input.