In the wake of FedEx’s recent GRI announcement, which, surprisingly, did not mirror the changes announced by UPS a few weeks prior, I sat down with industry experts Rob Martinez, President & CEO, Shipware, and Krish Iyer, Director, Shipping and Tracking Solutions, Neopost, to get their take on what this divergence means for the small parcel industry. Rob and Krish will also be presenting a webinar on this topic on November 17th at 2 pm EST; register here!

Q. Now that both carriers have made their announcements, what are the biggest things that stand out to you?

A. (Rob): It's an absolutely brash move for FedEx to make. First, they are sending the signal that they are the market leader, no longer following the lead of UPS. For the first time in a long time, published rates entirely differ, as do minimum charges, dimensional divisors, many accessorial charges, and fuel surcharges.

A. (Krish): One thing that strikes me are the dates of both the announcements themselves and the dates of implementation. UPS announced in late August/early September, while FedEx announced in late September. UPS also is implementing as of December 26, 2016, which will impact returns and back orders. FedEx’s changes go into effect in January. I do wonder whether the timing of the announcements mean that another announcement of a separate increase for something else could come before the end of the year.

Q. This marks the first year where there has been a major divergence both in the actual rate of increase between the carriers and in terms of major changes to package measurement calculations. What is the impact for shippers?

A. FedEx picked up its marbles and is now playing entirely in its own sandbox. The changes will make it difficult for most shippers to accurately compare rates and proposals from the two giant shipping companies. Perhaps the biggest impact for shippers is that managing transportation spend becomes more complex and potentially more confusing. Major shippers without access to analytical tools and personnel will be at a significant disadvantage in understanding their transportation spend. It’s no longer as simple as comparing discount % and perhaps minimum charge. In 2017, with differences in transportation rates, dimensional weight factor, residential fees, DAS fees, address corrections, and other surcharges, it will be extremely challenging for a shipper to determine which carrier offers the best deal without major investments in internal analytical capabilities or engaging a third party with this expertise.

A. I always assumed that the carriers would eventually move to a DIM divisor of 139 inches. They both have a habit of “realigning” their rates, surcharges, and policies for services to match the policy of the service where the fee is higher. Historically, both companies had differing rates for address correction, residential surcharge, and many other charges between their air and ground services; over time, they have “realigned” these charges to whatever service had the higher surcharge under the auspices of “ease of use and understanding for the customer.” So, I was not surprised that a move to 139 inches happened, since it was already the policy for import/export. That said, I am quite surprised to see that a change has occurred less than two years after the last major DIM announcement.

Q. Are there any fees and surcharges that DIDN’T get implemented/announced that surprised you?

A. I'm a bit surprised that FedEx didn't again adjust its fuel surcharge index to be more in line with UPS. UPS continues to enjoy significantly higher fuel surcharge revenue from its customers.

It's also surprising that FedEx has maintained its non-dimensioning policy on the FedEx SmartPost product, given that its largest competitor UPS SurePost applies the same dimensional pricing as Ground. It is unusual for either carrier to knowingly leave money on the table. But again, this year’s GRI announcement represented a marked departure from FedEx's historical strategy of matching the other carrier's pricing. FedEx is clearly staking its own path now.

A. Yes, I was surprised that FedEx didn’t announce something along the lines of a third-party shipping fee the way UPS did last year. While they did say earlier this year that they wouldn’t have this fee, I did expect something to happen that would address third-party shipments in some regard, whether it was a policy or billing change. This new surcharge greatly impacted drop shippers this past year.

I am also a little surprised that we didn’t see more of a pronounced policy change around peak season shipping, whether it would be an extra surcharge or spelled out policy change when it comes to customer discounts. Peak season planning, especially due to e-commerce shipping, has been a hot topic the past few years.

Q. Have the past few GRI announcements given us any trends?

A. The biggest trend is what the carriers refer to as “yield management,” which we all understand as continuing price increases. Over time, domestic dim has gone from 194 to 166 to 139 for FedEx. Ground packages under three feet are now subject to dim. AHS size limits have been reduced. Surcharges frequently increase much more than the stated GRI increase amount. The GRI itself is often unevenly applied, with higher increases at lower weights. All of these things combine to raise costs for most shippers.

Another trend I’ve observed is a reduction in what I call the “speed premium.” The percentage price increase to upgrade from 2nd day, to 2day AM, to Next Day PM, to Next Day service has been trending downward for the past five years.

A. It is clear that the carriers are shooting for changes/increases under the auspices of “increasing network efficiency.” This past year showed dramatic increases to over limits/oversize fee increases. The latest announcement showed a dramatic increase in the Extreme Length surcharge for FedEx freight, from $85 to $150 and applied to shipments with dimensions of 12 feet or greater versus 15 feet.

Q. What about regional carriers and the USPS? How do they fit into a parcel shipping strategy?

A. Shippers that want greater flexibility, improved transit times, and lower-cost alternatives to FedEx and UPS are wise to evaluate today’s regional delivery providers. These providers offer multiple benefits including cost savings up to 35%, fewer surcharges, a larger 1-2 day delivery footprint, as well as lower-cost dimensional and minimum package charges.

The U.S. Postal Service has seen record growth in small parcel deliveries. Key to its growth, the USPS offers several advantages over the private national carriers including no accessorial charges, shipper-friendly dimensional pricing rules, 6 days/week delivery, ounce-based and flat, unlimited weight pricing, and more. Shipware’s 2016 Parcel Forum Pricing Survey reveals that 64% of shippers intend to increase use of postal shipping products in the coming year.

A. With the latest DIM announcement by FedEx, both regional carriers and the USPS become a MUST in any parcel shipping strategy. Most regional parcel carriers have flexible DIM policies, more so than the major carriers. The USPS has a policy of a DIM divisor of 194 inches, but for parcels that travel 1,000 miles or more. Go to www.dimweightresources.com to check out the various policies for DIM with the regional carriers and the USPS.

Q. Are there any particular industries where you see the announced changes affecting more than others?

A. Consumer electronics, pharmaceuticals, and e-commerce are the most likely to suffer higher price increases due to FedEx’ reduction in dim factor from 166 to 139. More generally, any shipper with a high percentage of low-density parcels that does not have a custom dimensional weight factor at or better than 166 is going to be impacted. Conversely, shippers with predominantly high-density shipments (greater than 1lb per 139 cubic inches) will see minimal impact due to the change in volumetric pricing.

A. Yes, e-commerce and e-commerce fulfillment. The DIM change to 166 inches greatly affected lower weight e-commerce shippers; historically, e-commerce shipments tend to be less than six pounds. A second DIM change makes it even more imperative to accurately measure packages.

One other segment here is interesting to note: customers that have heavy reliance on mail. Many shippers don’t realize that mailers can be subjected to DIM weight; the carriers’ measurement devices essentially “create a box” around the mailer to then measure cubic dimensions. Mail-centric businesses that then divert some of the volume to the major parcel carriers for higher-priority items would then see their costs go up.

Q. So how can shippers manage these changes? Are there options?

A. Visibility is critical. Shippers must have a solid understanding of their shipping patterns, service usage, and package characteristics. They must also be intimately familiar with their transportation contracts and a deep understanding of how various pricing terms impact their costs. Very large organizations may choose to make significant investments in analytical tools and personnel. Others may prefer to engage with third-party experts.

A. I agree with Rob that the key is visibility. Do you truly understand that a 3.9% or 4.9% increase likely means a much higher increase of 7-10% year over year if you ship parcels between one and 10 pounds (which is the majority of parcel shipments)? Do you have the tools and/or partners that can give you the visibility into how the DIM changes will affect your parcel shipping? A DIM change that results in a price increase of $0.75-$1.00 per parcel may not sound like much, but adds up dramatically over the course of a year.

Also, knowing that everything really is negotiable with the carriers is important. They are generally loathe to negotiate per-package minimum billable charges, fuel surcharge discounts, and DIM weight divisors and will in fact generally make you believe those elements are non-negotiable, but the reality is that they are things you can absolutely negotiate, especially if you have a lot of volume.

{bottom_comments_ads}

Follow