Tidbits from Russ - Base Rate Math
Part 3 of what caused the demise of the Interstate Commerce Commission
In today’s Freight World the carriers have their base rate, but the usage of that base rate by shippers is fairly limited. These base rates can vary pretty dramatically from one to another.
In 1979, all carriers used the same base rate which, simply put, was agreed to by the shipper and carrier reps on the Board. The MCA of 1980 began the dismantling of this way of doing things. By 1988 the rates varied so much from one carrier to another that it was impossible to know what the discount meant unless you rated every shipment with each carrier’s proposed rate. Time-consuming, confusing and even then, it could fall short of what you needed to know. One carrier even punished larger shipments, via its rate base, by not having the cost per hundredweight drop significantly on higher weights. Carriers usually encourage higher weight shipments, up to a point, but this carrier charged higher than usual rates on 2,000 lbs and heavier. If your freight ran to 3,000 -5,000 lbs average weights, you were taking it on the chin when you used this carrier, even if that carrier offered a bigger discount.
The solution was, of course, to use a single base rate for all the carriers to employ to get a valid comparison on each proposal. Yellow was very generous in allowing shippers to use their YFSY 500 base. (Certainly it was in their best interest, but hats off to them for thinking of it first. Yellow VP of Pricing back then was a man named Roamey Lathan. He was a real forward thinker during the early years of deregulation. Sadly, one of his thoughts was to get out of the trucking business.) There was real push back from the other carriers, many of which said no when asked to participate in a bid using the YFSY 500. Most shippers stuck to their guns so when the carriers got sick of missing opportunities to gain market share, they began agreeing to use one base rate. When the CZAR rates came out it made it easier for the carriers to agree. Now, almost all shippers of certain size use a fixed set of base rates. That plus advances in computing software and the reduction in the price of the programs have made this comparison faster and far easier to explore the proposals.
Price without service is not a good value.
The protocol in our business is to find out what service level the client needs, and only ask the carriers that can meet or exceed that service to participate in a bid proposal. If a shipper’s customer needs two-day transit to Toledo, it’s worthless to bring in a carrier that takes three days. Even if he offers everything for $1. Price without service is not a good value. When people talk about service they’re usually talking about transit time. However, service includes picking up the shipment on time, and delivering it on time and intact, and billing it correctly. It also includes keeping the shipper and/or customer informed if problems develop along the way. This is either done by computer or phone. Everyone understands that snow can shut down a road, but if I don’t know there’s a blizzard In Iowa, and you don’t tell me my shipment is sitting in a rest stop in Sioux City, I can’t give my customer a heads up.
From the shipper's side of things, the business used to be all about having the right stuff in the right place at the right time at a great price. Now, you still need all those things but also you need to provide a level of communication that would have been mind-boggling in 1980.
To be continued...
About the author:
Working with more than 300 companies over his career, Russ is a transportation expert who has conducted 100s of assignments aimed at reducing transportation costs. Russ is involved in freight negotiations for clients at the level of more than $300 million annually.
