Continental LTL Neutral Rate Base Raises Questions

Continental Rate Base Questions

 

We have had many calls regarding our Continental Rate Base this week and I’m sure it’s in response to a marketing campaign we initiated recently.  We’ve had several conversations, including media calls, that focused on not only Continental, but the “state of the neutral rate base.”

 

Generally, I don’t like to discuss our products in the blog, but it’s probably the best place given that there are several questions that are common to our conversations.  So, I’ll try to answer some here.

 

Q.   What is Continental?

A.    Continental is a neutral rate base for pricing LTL class shipments in the U.S. and Canada.

 

Q.   What do you mean by the only rate base not controlled by a rate bureau?  What is a rate bureau?

A.    Rate bureaus were established when LTL transportation was regulated by the federal government, similar to the airlines a few decades ago.  Deregulation ended with the Motor Carrier Act of 1980.  Upon deregulation, Rate bureaus such as SMC3, Middlewest Bureau, Pacific Inland, and others started offering products outside their traditional services.  SMC3 was by far the smartest of the bureaus by moving into products for the masses, such as Czar Lite.  It was the first nationwide rate base and had no reasonable competition for many years.  By the time competition evolved, it owned a vast majority of the industry.

 

Q.   What do you mean when you state that Continental is “the only rate base not governed by carriers”?

A.    There are three primary companies that make commercially available neutral rate bases for US and Canada: SMC3, Middlewest Bureau, and Transite.  While others exist, they are generally a derivative or reseller of some of the above.  Transite does not allow any carriers to influence its rates, how general rate increases are applied, or any other rules regarding the rate base.

 

Q.   Why does Czar Lite have such a big market share?

A.    SMC3 was very smart.  They saw changes coming and filled a need.  That doesn’t mean it’s the best, most neutral choice for purchasing or bidding freight.  Remember, carriers also purchase it as their sell rate base. 

 

Q.   What about a customized rate base?

A.    Customized rate bases are good for shippers that have become frustrated with the imbalanced rates in bureau bases, or that have specific needs that can only be addressed in a customized base.  Transite provides this to shippers also, but it doesn’t make sense in all situations.

 

Q.   Why haven’t I heard more about Continental?

A.    Transite’s revenue mostly comes from transportation management system and transportation spend management services and we’ve never put any marketing behind it.  While our rate bases have been available since 2002 and are used by many shippers and 3PLs, publicity has come mostly from industry professionals and word of mouth.  Transite has a unique perspective on this market as we are deeply involved in the optimization and cost reduction when purchasing freight by shippers and 3PLs, we are also heavily involved in development of rate bases and bid analysis software for carriers.

Neutral Rate Bases: When it Hurts and When to Use

Hello Everyone,

I promised on my last blog to answer two questions:
1. When does using a commercial neutral rate base increase my costs
2. When is it appropriate to use a commercial neutral rate base

To answer the cost issue, I’ll give you a real example. A smaller regional carrier in Colorado serviced five states with excellent service and pricing. They were handling a few states for a customer when the customer outsourced to one of the top three largest logistics (3PL) companies.

The 3PL came back to this original carrier and asked them to carry the customer’s freight. The carrier agreed, but the 3PL stated they must needed to be priced using one of the industry’s most widely used commercial rate bases. To make a long story much shorter, the cost to the carrier just to use the rate base was $18,000 in software licensing fees. The carrier’s revenue from the customer was around $200,000. With an operating margin of 10%, it would take nearly the entire $200,000 in revenue just to break even on using the rate base mandated by the 3PL.

When the carrier balked, the 3PL was forced to pay a much higher rate to get the carrier to take the freight. So, the result: higher rates for the 3PL, higher freight charges for the customer, higher costs for the carrier. We just increased the supply chain cost by 10%, not to mention the cost to the audit firm and everyone else involved in the customer’s and 3PL’s basic freight process. The only true winner here was the provider of the rate base!

So, when does it make sense to use a commercial neutral rate base?

First, when the actual cost of freight is not a primary issue; such as when you aren’t paying for the freight. If everything you ship is prepaid and you charge your customer. However, you might be concerned about the competitiveness of your offering.

Secondly, it’s valid when ease of negotiating with your carriers is a priority. It’s easy to compare discounts by carrier by state and not worry about the rates or calculating the actual cost. Caution, remember the warning in our last blog: it’s not the avenue to get the lowest rates.

Thirdly, it makes sense if you need to use rates for performing a cost analysis, typically for the location of a new distribution center. Since you aren’t negotiating, it’s easier to use these, but make sure you don’t use a single carrier’s base as it will dramatically skew the results.

Agree? Disagree? Comment and share your thoughts and experiences. We can all learn from each other.

Geoff

The Truth: Neutral Rate Bases vs. Carrier Rate Bases

Hello everyone,

I had an interesting conversation at the NITL conference in November around the disadvantages of using a neutral LTL rate base. The person with whom I was speaking was with a good-sized 3PL; he managed their carriers and conducted all negotiations. He was perplexed at my questions regarding his use of a neutral rate base since Transite (Continental) is a leading developer of these bases, along with SMC3 (Czar Lite) and Middlewest Bureau (Mars).

Specifically, I asked him why he didn’t use the carrier’s bases and if he ever measured how much he might be giving up by using a neutral base. “Giving up?” he asked. He laughed a bit, and then asked why I would ask such a question.

I replied that using a neutral base generally does not provide the best rates in actual practice. Instead, it makes bidding easier on the shipper or 3PL, but rarely yields better rates. That said, there is a cost penalty in many cases for doing so.

I could tell he was a bit bothered by my comments, but still listening…

How and Why a Neutral Rate Base Does Not Achieve the Best Rates

The irony behind a neutral rate base is, while it “levels the playing field”, it removes any opportunity to utilize lower rates in lanes that a carrier desires to make more attractive, especially within states where rates can vary greatly such as CA, NY, FL, OH, MI, PA, NC, etc. To understand this, you need to know how a rate base is generally constructed by carriers. Among many parameters that go into rates is the need to distribute assets appropriately around the carrier’s system. So, just as a rental car company drastically lowers its prices to get cars out of Florida after spring break, so does a carrier when customer’s freight movement creates an imbalance. However, carriers don’t dynamically change their rate bases (yet); instead, it’s done about every 10-11 months. Offering back haul lanes and rate specials have not been successful, especially when customers have integrated their freight pricing into a routing guide, ERP, or transportation management system.

Therefore, if the neutral rate base states $46.80 per hundred pounds of freight either way between Cleveland and Los Angeles, one of your carriers probably charges $36.22 just going from Cleveland to Los Angeles. However, coming back from Los Angeles to Phoenix might be higher than the neutral base. Since you did a great job negotiating a state to state discount, you should be able to get lane specific pricing, right? Not really. The rate to the northern part of a state can be completely different from the southern part. So, you lost out on a savings of 23%, or more.

What’s worse than a neutral rate base?

If achieving the lowest rates is the goal, then the worst option for a neutral base is using a rate base from a single carrier, such as the popular Yellow 1998 base.

How could any carrier, including Yellow (since their business is completely different now), provide you pricing that makes any sense if you’re using rates designed for a specific network from many years ago? Well, it doesn’t. Some lanes become extraordinarily high such as regional lanes. Since the carrier can’t give you zip code specific pricing for your entire bid, and you can’t properly apply this level of pricing, you can’t gain an advantage. And, that older base is missing many zip codes, creating problems in carrier rating and auditing.

I know I’ve gone on way too long for a blog—especially our first–but I haven’t even started down the path of how you just increased the cost of doing business for your carriers, 3PLs, and audit/payment company because they must now all purchase the neutral rate base and pay transaction charges. Obviously, this cost is passed on to you.

I would be willing to bet a cold one if you are using a neutral rate base, you’re probably paying more for your freight than you know.

Next time, I’ll answer the question of, “When is the right time to use a neutral rate base?”

See you soon and comments are always welcome.

Geoff

Return to www.transite.com