Corporate vs Carrier Rate Bases - Who Cares?
01/22/2016
Phillip Riback - Vice President for Development
We all know how LTL pricing works. Apply the FAK to get the rating class and go to the black box known as a rate base and get a price per hundredweight. Then factor in the discount. Make sure it is above the absolute minimum charge, and if not, use that. Then add the fuel surcharge and any accessorial charges and we have a rate. Straightforward, right? As long as you have an idea as to the list price from the rate base. If all of your carriers use the same rate base and FAKs, comparing their pricing is simple and you don't even need to know the list price to compare. Of course, you still need to know the shipment cost for auditing and payment, one of many reasons to use a Transportation Management System (TMS).
So why would some shippers use carriers' rate bases instead of a single corporate one for all of their carriers? To answer this, we need an idea of how rate bases are constructed and used by carriers.
Each carrier has a unique distribution of their terminals, originally based upon their customer base, proximity to other transportation modes and highways, and available real estate. Of course, over time these factors may change and with it, the network. Knowing these details, the carrier determines the cost of moving shipments from shippers to terminals, between terminals and from terminals to final destinations. Using this information, they determine profitable base pricing throughout their shipping lanes. A well-developed rate base will not require rate exceptions and can even avoid some location-related accessorial fees such as high-cost delivery area and congestion fees. When the network or other conditions change, the rate base is modified. This way, both the carrier and shipper can easily determine the cost of each shipment in advance.
So if Carrier A were to use Carrier B's rate base, their cost to carry the freight would rise as the rate base does not match their terminal network. Carrier A's most remunerative lanes would Carrier B and vice versa. Optimally, they would use a tariff with discount and floor exceptions donot match those of wn to the ZIP code level to tailor the yield to their network of terminals to keep shipping profitable. Pricing analysts are loathe to do this and in practice, typically offer lower discounts, higher floor charges and less generous FAKs to offset the increase in their own costs. The carrier earns less and shipper spends more. A LOSE-LOSE proposition.
By definition, corporate rate bases are built from averages of shipping costs throughout the effective region. As such, they do not favor any one carrier over another. But each carrier's rate base favors themselves. The corporate rates are less profitable for both carriers A and B. So they will pass on part of their increased expense to the shipper. Using a TMS designed to handle multiple rate bases, the shipper can see the cost of shipping by any carrier. Allowing a carrier to use their own rate base will make your account more profitable for them and allow them to offer you better discounts, floors and FAKs, saving you an average of 5-8%. A WIN-WIN situation.
3/3/2016 - How Old is Your Rate Base - Does it Matter?
