Freight costs have historically been calculated on the basis of gross weight in kilograms or pounds. By charging only by weight, lightweight, low density packages become unprofitable for freight carriers due to the amount of space they take up in a trailer or container in proportion to their actual weight.
Dimensional weight is also known as DIM weight, volumetric weight, cubed weight or density-based pricing. The concept of Dimensional or Cube Weight is gaining popularity in the LTL freight industry as a uniform means of establishing a minimum charge for the cubic space occupied by a carton or pallet. Three of the largest LTL freight carriers, UPS Freight, FedEx Freight and YRC introduced dimensional LTL freight pricing this year. Currently FedEx Ground only applies dimensional pricing to packages measuring three cubic feet or greater. Effective January 1, FedEx and UPS will apply dimensional pricing to all packages.
The implication of this change in pricing methodology has caught the attention of the media (see article in Wall Street Journal). Experts say the impact could result in increased shipping costs of 5 to as much as 25% – – – if shippers don’t take action. This blog will provide shippers with a guide to prepare for the introduction of this LTL pricing methodology.
A Definition of Dimensional or Cube-Based Pricing
Dimensional weight is a calculation of a theoretical weight of a shipment. This theoretical weight is the weight of the package at a minimum density chosen by the freight carrier. If the shipment is below this minimum density, then the actual weight is irrelevant as the freight carrier will charge for the volume of the package as if it were of the chosen density (what the package would weigh at the minimum density). Furthermore, the volume used to calculate the Dimensional Weight may not be absolutely representative of the true volume of the shipment. The freight carrier will measure the longest dimension in each of the three axes (X, Y and Z) and use these measurements to determine the shipment volume. If the carton or pallet is a right-angled box, then this will be equal to the true volume of the package. However, if the package is of any other shape, then the calculation of volume will be more than the true volume of the package.
Steps to Prepare for Dimensional LTL Pricing
1. Examine your Freight
The first question is does your company ship any low density less than full truckload freight? If your company ships heavy objects such as fasteners, fruit juice, dog food, bar-b-ques, lawn mowers or other high density freight, it is unlikely that dimensional pricing will apply to your business. On the other hand, if your company ships dolls, games, puzzles, mops, pillows or any other low density objects, the new tariff may apply to you. Even if your company manufactures high density products, are they shipped in a way that minimizes the cubic space occupied on a trailer? Does your company ship spare parts for your high density products that are bulky and light in weight?
2. Do the Math
To determine the potential impact of dimensional LTL pricing, contact your local FedEx or UPS LTL account manager and ask for a copy of the tariff. Take a one month sample of your freight and calculate the freight costs under the current and new pricing structure. If there is a significant variance, you then need to look at what you can do to mitigate the cost increase.
3. Review Manufacturing and Packaging Options
Are your products manufactured and packaged in the optimum way? Is there a way to improve the products’ density and/or to remove some “air” from the cartons? Can the products be nested or vacuum packed in a way so as to make your freight denser? Have you engaged a packaging expert to perform an independent assessment of your packaging with a view to improving freight density? Note that some of these companies work on a contingency basis and only receive compensation if there is a defined cost savings.
Some companies are changing their packaging production lines by deciding to no longer purchase boxes. Although a bit counterintuitive, these companies are finding that the time required to make packaging on-¬‐demand is less than the time required to find and move packaging that has been purchased conventionally. Some firms are factoring in the time to plan inventory levels, address stock-outs, and manage weekly visits by the corrugated vendor and have found that the time savings are significant. On Demand packaging is being touted as achieving a smaller packaging footprint, lower labour costs, less waste, and increased product protection. They claim that it can result in a 20 to 35 percent savings over conventional packaging supply chains
4. Examine Order Sizes and Shipping Frequencies
Over the years, we have observed the shipment configurations of most of our clients. In some cases we see suppliers to large retailers shipping less than optimum pallet configurations. For example, some companies build pallets for individual stores. We have observed pallets where the freight is loaded around the circumference of the pallet. The individual pallets for each store are loaded on top of each other, six or seven pallets on a pallet.
When you step back and examine what is being shipped, you see mostly wood (pallets) and air (empty space) plus the actual freight itself. With dimensional pricing, the shipper will be paying for all of the space occupied by the wood and the air. In the end higher freight costs are going to have to be passed on to retailer and consumers. The solution is to speak to your vendors and customers. What can you do to help them and what can they do to help you? Can daily LTL orders be consolidated and shipped less frequently? Can the freight be consolidated with freight from other divisions or sister companies or even competitors to build more dense LTL shipments?
5. To Warehouse or Not to Warehouse?
Rather than ship LTL orders on a daily basis or multiple times a week direct to retailers or consumers, does it make financial sense to ship truckload or partial truckload volumes to local warehouses and ship local LTL from these warehouses. Would this reduce the overall landed cost?
6. Optimize your Shipping Processes
Do your LTL carriers use software to optimize the planning of their loads? Do they use logistics equipment with load bars to minimize the space occupied? Do they have pallet decks so you can load your freight on multiple levels?
In addition to on-demand packaging and possibly 3D manufacturing down the road, there are other technologies that will come into plan to design, ship and manage low density freight. As an example, FreightSnap (http://www.freightsnap.com) has introduced FreightSnap 3D which they are promoting as a cost-effective 3D technology capable of being installed anywhere in a cross-dock, terminal, or warehouse environment. The technology performs accurate dimensioning of pallets in less than 5 seconds per scan by utilizing sensor technology along with proprietary measurement algorithms developed by FreightSnap. While many companies have scales on their docks, not all of them have the technology to determine cubic space occupied by their freight. This type of service may be helpful in verifying the dimensions calculated by LTL carriers to ensure you are not being overcharged.
7. Shop Around for Dimensional Pricing Tariffs
Today there are a multitude of carrier LTL pricing tariffs in the United States based on the National Motor Freight Classification System. The base rates and discounts vary from carrier to carrier. The same situation will prevail with dimensional based tariffs. There are companies that will surface such as Dynarates (www.dynarates.com) that have their own dimensional pricing tariffs. Shop around.
Summary
The top 10 LTL carriers in Canada and the United States control over half of all LTL freight moving in each country. It won’t be long before other major LTL carriers jump on the dimensional pricing bandwagon and follow FedEx and UPS, particularly since it will improve yields. Shippers with low density LTL freight should be proactive by exploring all reasonable options to mitigate what could be large increases in LTL freight rates. As outlined above, shippers should keep in mind that dimensional LTL pricing will have an impact, not just of freight costs but on supply chain strategy.
