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October 15 2018

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34 The Journal of Commerce | October 15 2018 www.joc.com Inland Distribution Special Report 29073 to ZIP 75201. The actual charges were computed at $2,933 but billed at $2,460, a reduction of $473, or 19 percent. The second shipment of Class 60 weighing 4,500 pounds was moved from ZIPs 30301 to 23211. The actual charges were computed at $3,801 but billed at $3,276, a reduction of $525, or 16 percent. Let's get this right: The carriers take on extra work (including reweighing the shipments) to collect lower charges by adjusting the weight to a higher number so they can apply a lower rate per hundredweight to charge less than if it was just billed at its actual weight of 4,500 pounds. Common sense would indicate that if a shipper has a lower rate for a 5,000-pound shipment, then it should be told to put extra product in the shipment to increase the weight. That doesn't happen, however. The parcel carriers also have lower rate for heavier parcels but do not apply such deficit rating to billing. For some shippers, parcel contract rates on a 5-pound package are higher than on a 6-pound package. However, our ShipMatrix database on hundreds of millions of parcels shows that parcel carriers do not charge a 5-pound par - cel at the lower 6-pound parcel rate. Lower margins in the LTL industry can be attributed to the antiquated LTL pricing model. LTL carriers use rate tables that date back to 1988, before many pricing analysts were even born. In addition, with several hundred rate tariffs and a very aggressive discount structure — ex- ceeding 90 percent in some cases — the mattress retail business, with its even 80 percent off list price offers, has more pricing discipline. While carriers and shippers are familiar with such aspects of LTL pricing, few are aware of the problems created by deficit pricing. Antiquated pricing This deficit rating practice actually dates to the regulated era of 1970s. It made sense then since the LTL carriers had to depend on basic calculators to determine charges as computers were not available. However, over these 40-plus years, although the LTL industry has invest- ed hundreds of millions of dollars in powerful computers to handle more weight bands, it still relies on an Pricing in the LTL and parcel industries has been primarily de- termined by two factors: shipment weight and the distance between origin and destination. Since parcel carriers handle weights ranging from 1 to 150 pounds, parcel rates change with each pound. However, the LTL industry handles shipment weights with a much wider range, from 100 pounds to 10,000 pounds. So, during the 1970s, LTL carriers developed pricing bands that range from 100 to 500 pounds, 501 to 1,000 pounds, 1,001 pounds to 2,000 pounds, 2,001 to 5,000 pounds, and 5,001 to 10,000 pounds. As a result, LTL carriers have the same rate per hundredweight for all shipments ranging from 100 to 500 pounds and similarly for all shipments ranging from 2,001 to 5,000 pounds. Billing by weight To make matters worse, to avoid charging more for a lighter shipment than a heavier shipment, LTL carriers rate the shipment at its actual weight at the higher hundredweight rate, then compare it to what the charge would be at a higher weight with a lower hundredweight rate, and then bill for the lower amount. Here are details of this pricing in- sanity for two real-life shipments. The first shipment of Class 100 weighing 950 pounds was moved from ZIP code Eliminate LTL deficit rating THE LTL INDUSTRY has long practiced what can best be described as "deficit rating." For those who think that it's somehow counterintuitive to have a pricing model designed to create a loss or to reduce operating margins, rest assured, it is. Like many other bad habits acquired over the decades, the LTL in- dustry routinely prices its services to give away money. In this case, carriers charge the same amount per hun- dredweight to recognize economies of scale that result from an increase in weight. The problem is caused by the weight bands used to recognize such economies. 1988 LTL carriers use rate tables that date back to before many pricing analysts were even born. -20% -10% 0% 10% 20% 30% 40% Jan- 13 Mar-13 May- 13 Jul-13 Sep- 13 Nov- 13 Jan- 14 Mar-14 May- 14 Jul-14 Sep- 14 Nov- 14 Jan- 15 Mar-15 May- 15 Jul-15 Sep- 15 Nov- 15 Jan- 16 Mar-16 May- 16 Jul-16 Sep- 16 Nov- 16 Jan- 17 Mar-17 May- 17 Jul-17 Sep- 17 Nov- 17 Jan- 18 Mar-18 May- 18 Jul-18 DAT Spot Van Rate YOY Change Cass Fr eight Shipments YOY Change Cass Fr eigt Expenditures YOY Change Trucking spot market trends hint at future contract levels Source: DAT, Cass Information Systems © 2018 IHS Markit Notes: DAT rate excludes fuel surcharges Year-over-year change in DAT spot van rate and Cass Freight Shipments and Expenditures Spot rate growth peaks Volume and contract rate growth slows

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