Much has been written about the adjustments small package carriers have made to service and accessorial charges in recent years. Most of these seemingly minor changes are helping carriers achieve significantly higher compensation for shipments they consider “pain-points;” those that are large, yet lightweight, or destined for doorsteps off the beaten path, for example.
A subtler change, however, has not been explicitly spelled out by either carrier, but is burrowing its way through supply chain budgets, hollowing long-range cost strategies that first appeared structurally sound.
Instead of discounting the amounts charged to customers based on percentage, more and more discounts are being offer in dollar form. While that may equate to six of one and a half-dozen of the other at first, the two means are far from apples to apples.
To illustrate the impact over time, it’s easiest to look at one charge and then understand that the same rules apply to all surcharges discounted in this fashion.
So, let’s look at every shipper’s favorite charge: the minimum.
Surprisingly few supply chain professionals wholly understand how minimums work. Even fewer realize that those charges can actually be discounted just like any other line item within a carrier agreement. Therefore, it really comes as no surprise that only a select few have really caught wind of the subtle change to how those discounts are applied.
The Zone 2, one-pound minimum for a ground package shipped via FedEx or UPS currently is $6.94. Regardless of how much any of your ground shipments are discounted, the price, in theory, will never fall below that minimum charge. If you have a 50% discount, for example, and the base price of a shipment is $10, you will not pay $5; you will pay $6.94 and thus receive a net discount of about 30%, not 50.
As mentioned, it isn’t the best-kept secret that carriers will discount the minimum charge, just like any other service, to allow customers to receive a higher percentage of their gross discounts. The kicker more recently, though, is that those discounts are now being offered as a dollar amount off rather than a percentage off.
What’s the big deal, you ask?
Think about it. Each year, both carriers increase their rates by an average of about five percent. When that happens, and the discount on the minimum has been applied via a dollar amount, then the percentage the customer actually receives off of the gross cost decreases. Applied as a percentage, the dollar amount would increase after an annual rise in cost.
Confused yet? Check out the visual below for a better understanding.
Net $ Off
Net % Off
Realized % Cost Change
Minimum charges and other fees added to shipments often are add-ons that can make financials more difficult depending on the complexity of a company’s supply chain. Shippers being offered discounts need to think through the long-term implications of rate changes and diluted discounts offered in dollar form prior to executing agreements with their carrier, then remain diligent in their efforts to monitor and their carrier agreement to ensure that the math shakes out three years down the road the same way it did on day one.
As illustrated within the example, if a customer received a 15% discount on the $4.57 minimum charge in 2009, then the hard-dollar savings realized during the period until now would actually increase by about 50%. If the carrier had slipped in the hard-dollar equivalent of that 15%, then the customer would actually have seen its discount erode over time, resulting in higher costs.
With minimums and other accessorial charges, it is important to do your homework. As shippers continue to find new ways to charge customers, customers will need to find new ways to combat rising costs.
You would be surprised. Sometimes, it’s as simple as doing the math.