Less-than-truckload (LTL) carriers are more aware of their operational costs than they have been in many years. Now that they have figured out how to control these operational costs, they are targeting how to get appropriate revenue for them. The most popular method used by LTL carriers to increase their revenue is to adjust their discounts or minimum charges. How does an LTL carrier decide how they will make these general rate changes? That is not an easy answer, but we can help you better understand your transportation costs.
To begin, LTL carriers use the term Operational Ratio (O/R) to help determine the profitability of an account. For example, an O/R of 95 means that for every $1.00 in revenue the carrier is profitable by $0.05. A non-profitable O/R could be 110, which would mean that the carrier is losing $0.10 for every $1.00 in revenue.
Your LTL carrier representatives may not be able to tell you all the pieces that fit to determine your O/R, but they should be able to help you identify where they aren’t profitable. If you’re lucky, you may be able to get O/R information on a state-by-state basis (lane). Do not forget that volume can have a great impact here, especially in the face of carriers still vying for freight to fill their trailers.
Work with your carrier representatives and develop a strategy where larger rate increases happen in poorly operating lanes with less volume. This may be more acceptable than a smaller increase that is spread out over all of your volume, and it won’t over-inflate the more common freight lanes. Keep in mind, LTL rate increases are going to happen. There’s nothing you can do to stop them, however, being knowledgeable about your freight lanes will prepare you for negotiating with the carrier representatives and finding a solution that works for everyone.