The Actual Impact of a GRI (General Rate Increase)

I don’t want to scare anyone, but freight rates are going up. I am not making this up either; by the end of this month forecasters are predicting that most major trucking companies will have implemented about a 5.5% rate increase to your freight rates. What that means in dollars is that if your annual freight spend is $500,000, you will now be spending $527,500.

Now if you don’t like the sound of that, what if I told you that this is the second increase you will have taken in 9 months. In other words, if in January of 2007 your freight spend was $500,000, your current annual freight spend is $556,516.50. Sound crazy? It actually gets worse than that...read on.

On January 11th, UPS Freight (UPS’ less-than-truckload division) implemented a 5.4% increase off their regular tariff rates. Then FedEx Freight followed suit by implementing a 5.48% increase on January 14th. Now Old Dominion Freight Lines has just announced that they will be taking a 5.4% increase on February 11th. It will be just a matter of weeks before every major common carrier has taken their "annual general rates increases".

Actually they call them “annual general rate increases” but they really should be called "bi-annual rate increases". What the freight carriers hope everyone forgets is that they just implemented an increase in May of '07. That is not even nine months ago. It is amazing that the trucking industry can get away with this especially on top of the outrageous fuel surcharges they charge (that were as high as 25% a few weeks ago).

Here’s where it actually gets worse; these increases are only a “weighted average increases”. This means that you are probably actually realizing a much higher increase. So if the thought of paying an extra $56,000 on a $500,000 freight spend was bad, consider if you were actually taking 10% increases twice a year (which is what you are likely realizing). That turns your $500,000 freight spend into a $605,000 freight spend!

The freight carriers do not highlight the fact that these increases are "weighted average increases". So for your sake, I will. Look at the fine print in Old Dominion’s recent AP announcement of their 5.4% rate increase (I am not picking on Old Dominion...every carriers rate increase announcement says the same thing):


What exactly does this mean? Well, it means that you will be taking an increase higher than 5.4% basically. More specifically it means the carriers will be taking higher increases in longer haul lanes and minimum charges. Many of the carriers will also take higher increases on lower weight shipments. Shipments under 500lbs get hit the hardest. The next hardest hit are shipments between 500lbs and 1,000lbs (which, by the way is probably your average shipment size). And so on...

What can I do for my company? Well, nothing. Unless you are owned by General Electric and are taking advantage of their multi-gazillion dollar freight spend and their nationally negotiated corporate freight contracts. Either that, or (here comes the sales pitch) solicit the services of Logistics Management, Inc. (LMI).

I really try not to sell too much on this blog, but when this topic comes up the value of a company like ours is immeasurable. LMI customers actually have nothing to worry about with all this increase talk. In fact, we have not allowed an increase (with most of our carriers) since the end of December of 2006. So that means if your freight spend was $500,000 at the beginning of January 2007, it will still be a $500,000 at the end of December 2008. That extra $105,000 goes right into your companies pocket.

LMI's Top 10 Account Status with all of its carrier partners (Top 5 with most), allows LMI to protect its customers from things like multi-year rate increases. In fact, LMI's contract rates are frozen on a calendar year basis. So their is no way our customers could be hit with a mid-year increase(s).

Every January 1st, LMI customers are subject to an increase, however, it is usually half of what the carriers increase their rates. Most year's when the carriers take two 5.5% increases, LMI actually only takes one 2.5% rate increase...and when LMI takes their increase, it is an increase right off the previous years base rate. So when LMI announces a 2.5% rate increase, it is 2.5% across the board (it does not vary on weight or lane).

But, like I said above, this year LMI did not feel the market warranted an increase. So when it came time to negotiate with our carrier group, LMI was able to avoid an increase for its customers this past January with most of them.

A good analogy of working with a company like LMI is like if your company was bought by General Electric. Immediately your freight expense would go dramatically down because you would be taking advantage of their corporate freight tariffs. Then your freight deals would be protected from unforeseen increase by GE's corporate traffic council who are always looking to ensure they have the best freight deals.

So if you want a great way to reduce your freight cost and lessen your exposure to unexpected rate increases you can do one of two things: 1) You can try to see if GE will buy your company or 2) you can contact me to have LMI perform a complementary Freight Cost Containment Review on your freight expense.

I can be reached at (908) 879-2978 or gmuha@lmiservices.com.