Aardvark Supply Chain Solutions-An Introduction to Freight Classification and Pricing

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Founded in 2009, Aardvark is a transportation management consulting firm headquartered in Chicago, Illinois specializing in global trade network optimization and supply chain solutions.
Offering an extensive portfolio of carrier and customer services, Aardvark’s team of industry experts design and implement customized solutions to meet the organizational needs and industry requirements of each individual customer.
Providing the framework and support necessary to implement sustainable transportation management initiatives, companies of any size can now realize the significant long-term savings and benefits associated with supply chain visibility and carrier network optimization.

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Aardvark Supply Chain Solutions-An Introduction to Freight Classification and Pricing

  1. 1. An Introduction to NMFC Classification & LTL Freight Pricing
  2. 2. Freight Classification Standards NMFC: National Motor Freight Classification •Classification •Industry Standard for determining freight class •Publication (NMF-100AF), Software, Data NMFTA: National Motor Freight Tariff Association •Owner of NMFC copyright •Non-profit industry association •1,200+ motor carrier participants •Antitrust immunity
  3. 3. NMFC Overview Standardized information for approximately 10,000 articles •Description of articles •Class assignments for LTL rating •Rules for shipping and handling •Packaging requirements and specifications Rules for Shipping and Handling Packaging Requirements and Specifications Bill of Lading Formats Participating Carriers Index
  4. 4. Classes and Characteristics Commodities are evaluated and grouped according to four transportation characteristics •Density •Stowing •Handling •Liability (value and risk) There are 18 classes (50-500): •Class 50 – Highest Density; iron or steel plates NOI •Class 60 – balls, shot-putting •Class 70 – ball bearings •Class 85 – baseballs •Class 500 – Lowest Density; ping pong balls
  5. 5. Value and Density NCC Density Guidelines NCC Value Guidelines Minimum Average Density Minimum Average Value (in pounds per cubic foot) Class Class Per Pound 50 50 50 $0.91 35 55 55 $1.78 30 60 60 $2.70 22.5 65 65 $4.48 15 70 70 $6.76 13.5 77.5 77.5 $9.00 12 85 85 $13.52 10.5 92.5 92.5 $18.00 9 100 100 $22.51 8 110 110 $24.77 7 125 125 $28.14 6 150 150 $33.79 5 175 175 $39.42 4 200 200 $45.05 3 250 250 $56.31 2 300 300 $67.56 1 400 400 $90.09 Less than 1 500 500 $112.62
  6. 6. LTL COSTING AND PRICING
  7. 7. Breakdown of LTL Carrier Costs 3% 6% Wages and Benefits 5% Operational Supplies 6% Purchased Transportation7% Depreciation Taxes 11% 62% Insurance Miscellaneous *LTL Industry Wage – approximately $39.12 per hour with benefits
  8. 8. The LTL Costing Model General Ledger Labor costs (wages, benefits, hours, etc.) Driver logs Electronic devices •Driver – arrival and departure times •Dock – handling time and the number of times a shipment is handled Linehaul miles Balance – loaded and empty Load Factors Substitute service costs and/or credits Individual shipment information •Revenue per shipment •Handling characteristics – loose pieces or pallets •Live load, dropped trailer, shipper load and count, etc. •Specialized equipment requirements – drums, long pallets, etc.
  9. 9. The LTL Costing Model (continued) Route density •Stem time •Multiple pickup or delivery Labor cost per hour – wages, benefits, etc. •Pickup and delivery •Terminal – origin and destination •Hub •Clerical Linehaul cost Account History •Payment History •Claims ratio •Tendering process
  10. 10. Common LTL Costing Variables Class 100 Density 9 PCF Equipment (2 pups 56’x8’x8’) = 3,584 ft3 Shipment weight 5,000 lbs Cube utilization 15% Linehaul cost per mile $1.11 Pickup and delivery cost per minute $0.65 Terminal cost per minute $0.36 Hub cost per minute $0.36 Billing and collection per shipment $3.51
  11. 11. National Carrier Shipment Cost Savannah, Georgia to Omaha, Nebraska Direct miles = 1,239 Carrier miles with two transfers = 1,485 Circuity (extra mileage cost) = 19.9% Cost Percentage Linehaul $316.77 65.17% P&D $ 86.24 17.74% Terminal $ 38.39 7.90% Hub $ 41.16 8.47% Billing & Collecting $ 3.51 .72% Total $486.07 100.00%
  12. 12. National Carrier Cost Per Shipment 0.72% 8.47% 7.90% Linehaul P&D Terminal 17.74% Hub 65.17% B&C
  13. 13. Regional Carrier Shipment Cost Savannah, Georgia to Birmingham, Alabama Direct miles = 394 Carrier miles with one transfer = 436 Circuity = 10.7% Cost Percentage Linehaul $ 93.01 38.48% P&D $ 86.24 35.68% Terminal $ 38.39 15.88% Hub $ 20.58 8.51% Billing & Collecting $ 3.51 1.45% Total $241.73 100.00%
  14. 14. Regional Carrier Cost Per Shipment 1.45% 8.51% Linehaul P&D 15.88% 38.48% Terminal Hub B&C 35.68%
  15. 15. National vs. Regional Comparison 65.17%70.00%60.00%50.00% 38.48% 35.68%40.00%30.00% 17.74% 15.88%20.00% 7.90% 8.47% 8.51% 0.72% 1.45%10.00%0.00% Linehaul P&D Terminal Hub B&C National Regional
  16. 16. Shipper Influenced Cost Pickup and Delivery •Live load or unload •Drop trailer •Multiple shipments per stop •Handling units – pallets, drums, loose, etc. •Cube utilization – pyramid pallets, stackable, etc. •Have dock doors available for pickup and delivery •Have an adequate staging area for loading and unloading •Have shipments ready for pickup •Freight handling equipment availability •Have dunnage, bracing, and blocking materials available if required to properly secure and protect shipment •Tender and/or pickup at the carrier’s dock •Properly marked or labeled shipments
  17. 17. Shipper Influenced Cost (continued) Terminal •Handling units – pallets, drums, loose pieces, etc. •Loaded to ride to first hub •Special equipment requirements – drums, long pallets, etc. Linehaul •Handling units/cube utilization •Lane balance •Lane density Other •Payment history •Packaging – claims ratio •Tendering process – paper, electronic, etc. •Special requirements – inside delivery, appointment deliveries, COD, sort and segregate, no dock facility, etc.
  18. 18. Fixed Cost Fixed cost can be viewed as consisting of those expenses which are incurred on behalf of the operation as a whole. They can only be avoided by abandoning the entire operation, or at least, very substantial parts of it and they cannot be traced to particular units of output.Variable Cost Variable cost represents the actual cost of providing the service. It is normally the lowest price that would be charged for providing a service. To price lower than actual cost would create a loss on the actual service provided. Pricing at this level is not advantageous for the long term since it does not contribute to covering fixed cost or provide an adequate margin for reinvestment into the business.
  19. 19. Semi-Variable Cost Semi-variable cost are the costs that increase or decrease with changes in volume but unlike variable cost, do not vary in direct proportion. Thus, they have characteristics of both fixed and variable cost.Incremental Cost Incremental costs are the combination of variable and semi-variable costs.Fully Allocated Cost Fully Allocated or Total Cost includes variable, semi- variable, and fixed costs.
  20. 20. Live Load - Single Shipment Savannah to Birmingham Shipment weighs 950 pounds Class 92.5, Density 10 PCF 18 loose pieces Single shipment Incremental Fixed Total Pickup 15.69 3.76 19.45 Origin Terminal 4.87 1.03 5.90 Hub 5.02 1.06 6.08 Linehaul 30.59 4.33 34.92 Destination Terminal Handling 4.91 1.04 5.95 Delivery 17.30 4.00 21.30 Billing and Collection 2.90 .61 3.51 Total Cost 81.28 15.83 97.11 Revenue 91.50 Operating Ratio 106.1
  21. 21. Live Load - Multiple Shipments Savannah to Birmingham Shipment weighs 950 pounds Class 92.5, Density 10 PCF 18 loose pieces 15 shipments Incremental Fixed Total Pickup 4.19 .92 5.11 Origin Terminal 4.87 1.03 5.90 Hub 5.02 1.06 6.08 Linehaul 30.59 4.33 34.92 Destination Terminal Handling 4.91 1.04 5.95 Delivery 17.30 4.00 21.30 Billing and Collection 2.90 .61 3.51 Total Cost 69.78 12.99 82.77 Revenue 91.50 Operating Ratio 90.4
  22. 22. Drop Trailer – Shipper Load & Count Savannah to Birmingham Shipment weighs 950 pounds Class 92.5, Density 10 PCF 18 loose pieces 15 shipments Spotted Trailer – 30 minutes Incremental Fixed Total Pickup 1.76 .39 2.15 Origin Terminal 4.87 1.03 5.90 Hub 5.02 1.06 6.08 Linehaul 30.59 4.33 34.92 Destination Terminal Handling 4.91 1.04 5.95 Delivery 17.30 4.00 21.30 Billing and Collection 2.90 .61 3.51 Total Cost 67.35 12.46 79.81 Revenue 91.50 Operating Ratio 87.2
  23. 23. Drop Trailer – NOT Stackable Savannah to Birmingham Shipment weighs 950 pounds Class 92.5, Density 10 PCF 18 loose pieces 15 shipments Spotted Trailer, 2 pallets – NOT stackable Incremental Fixed Total Pickup 1.76 .39 2.15 Origin Terminal 3.16 .67 3.83 Hub 3.68 .78 4.46 Linehaul 37.98 5.38 43.36 Destination Terminal Handling 3.14 .65 3.79 Delivery 14.30 3.28 17.58 Billing and Collection 2.90 .61 3.51 Total Cost 66.92 11.76 78.68 Revenue 91.50 Operating Ratio 86.0
  24. 24. Drop Trailer – Stackable Freight Savannah to Birmingham Shipment weighs 950 pounds Class 92.5, Density 10 PCF 18 loose pieces 15 shipments Spotted Trailer, 2 pallets - stackable Incremental Fixed Total Pickup 1.76 .39 2.15 Origin Terminal 3.16 .67 3.83 Hub 3.68 .78 4.46 Linehaul 30.59 4.33 34.92 Destination Terminal Handling 3.14 .65 3.79 Delivery 14.30 3.28 17.58 Billing and Collection 2.90 .61 3.51 Total Cost 59.53 10.71 70.24 Revenue 91.50 Operating Ratio 77.8
  25. 25. Reducing Your Transportation Cost Packaging Sales or Marketing decisions – standard order size, packaging, etc. Properly described shipments Handling equipment requirements and availability Facility Layout Shipping and/or receiving hours Shipper load and count or consignee unload vs. live load or unload Use of technology Third party (3PL) assistance and consultation
  26. 26. Distribution Shipments Moving multiple long haul LTL shipments from origin as a full truckload to a common break point, then tendering them as individual, short haul LTL shipments Works best with high volume shippers •Consistent high volume shippers •Seasonal high volume shippers •Products with specific delivery dates Reduces LTL carrier shipment cost Can reduce shipper cost May improve transit time Technology requirements
  27. 27. Direct LTL vs. Distribution LTL Direct LTL Example Atlanta, GA to Boston, MA 1,000 pounds Class 70 70% discount Distribution LTL Example TL from Atlanta GA, to Carlisle, PA 40 shipments weighing 1,000 pounds each Class 70 70% discount TL cost: $950 TL Cost per shipment: $23.75 LTL Cost – Carlisle to Boston: $162.51 Direct LTL cost: $227.22 Distribution LTL cost: $186.26 Cost Savings: $ 40.96
  28. 28. Industry and Customer Trends Increased use of technology 1. To gather data 2. Plan and route freight – equipment, labor, control cost 3. Exchange information with customers and vendors 4. tracking, tracing, tendering, rating, proof of delivery Costing at the individual shipment level and by individual account locations Faster transit times More efficient, reusable handling units – pallets, bins, etc. Use of analysis tools for modeling and profitability projections of potential customers
  29. 29. The Future Of Transportation Increased use of technology More detailed analysis of shipment cost Use of cube measuring tools to improve costing Density based carrier pricing Continued U.S. Import shipment growth Shift in population Shift in lane and trade balance Increased use of distribution shipments Supply chain network optimization Super carriers offering complete service portfolios Single point of contact and bundled pricing agreements 1. UPS 2. FedEx 3. DHL 4. YRCW
  30. 30. Summary / Conclusion National carriers and regional carriers costs are very different Both shippers and consignees can control the cost and operating ratio of their freight Supply chain network optimization is directly tied to cost and OR Continued Industry consolidation •Fewer options, larger carriers, bundled pricing for all modes Technology creates easily accessible, detailed shipment data and provides additional opportunities for cost savings and process improvement through supply chain visibility and optimization

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