LTL Freight Costing – Grouping and Weight Breaks

By Sai Teja Yerapothina -08/12/2015
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Accurate freight rating is at the heart of cost savings benefits when implementing a Transportation Management System (TMS) for a shipper for costing (or) LSP for revenue. Precisely rating LTL shipment in North America brings forth many challenges with having to consider Hundredweight (CWT) rating, customer specific discounts, minimums for specific O-D pair combinations, accessorial charges, and fuel surcharges are typically added on top of the base freight calculations. Modeling these in a TMS can be challenging, especially if you are maintaining these rates within the system as opposed to calling 3rd party tools such as SMC3-Rateware XL to retrieve the base rate.

 

In the US, for LTL mode, base freight is typically calculated based on the weight of the shipments. Usually, this base freight depends on the weight bracket {[0,500), [500, 1000), [1000, 2000) etc.}. Hundredweight rates are usually negotiated as part of the contracts.

 

Deficit-weight rating is one of the most popular forms of base rate calculations where the base freight is calculated by comparing two weight brackets. The actual weight bracket is determined for the shipments and this is compared against the next higher weight bracket. The minimum cost of the higher weight bracket is compared with the actual weight bracket. The lower of both these costs is applied to the shipment. Basically, the shipper is charged for a higher weight if the cost is less, even though the actual weight is lower.

 

For example, per pound rate for 500 to 999 lbs. bracket is $1/lb. and per pound rate for 1000 to 1999 lbs. is $0.8/lb. and for 2000 to 2999 lbs. is $0.75/lb, and the shipment weight is 900 lbs. Now the base rate for this weight is $900 and the minimum rate for the next bracket is $800 (1000 * 0.8). So LTL carriers charge $800 to the shippers. This is usually the agreement between the LTL carriers and shippers.

 

This calculation seems simple enough and SAP TM9.x provides the solution in standard to use Deficit weight. However, shippers today also have scenarios where their orders consist of products that belong to multiple freight classes and you need to group the “same” freight classes together in order to get the accurate rating. Also, when we rate at the product level, we need to group these products (based on freight class) and get the base rate according to this grouped weight. SAP TM provides us the flexibility to model this in the system.

 

An example - a shipper is shipping 5 products (A, B, C, D, E) in a shipment. A, B, C belong to freight class 60 and D, E belong to freight class 125. The weights of the 5 products are 400, 300, 200, 1000 and 900 lbs., respectively. Now for calculating the base freight for this shipment, the grouping rule will group products A, B, C together and products D, E together based on the freight class.

 

The base freight calculation according to the rates used above is: Grouped weight of A, B, C is 900 lbs. & grouped weight of D, E is 1900 lbs. The base freight is thus calculated as $1/lb. for A, B, C and $1.2/lb. for D, E and assigned to the products according to the weight. Now the break weight rating will compare these combined rates to the rate in the next bracket. For freight class 60, the combined rate is $900 and the minimum cost of next bracket is $800, similarly for freight class 125, the combined rate is $2280 and the minimum cost of next bracket is $2000. So, for both the cases, the rate from the next weight break is applied. Thus $800 is apportioned among products A, B, C as $355.55, $266.66 and  $177.77 respectively according to their weight. The $2000 is divided among products D, E as $1052 and $948, respectively.

 

 
Base Freight Rate Table for Freight Class 60
 

 

Base Freight Rate Table for Freight Class 125

 

So how can you model freight class grouping, and deficit weight together? In Transportation Charge Management, we have different calculation methods such as break weight and deficit weight to address specific scenarios of rate calculation of LTL rating. Also, there are standard grouping rules in TCM to group products based on a common attribute; in our case - freight class. The calculation resolution base must be set at product level as we intend to group products (and calculate charges at that level). Remember to use the same calculation method and resolution base for charge type – discount, if you use discounts for the carrier. In order to apply both the calculation method and the grouping rule together, some enhancements for grouping rules need to be created that are not available in standard.

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