If you use UPS to service your business, your rates increased on January 6th significantly! UPS press release announcing the new rates contained exactly two sentences pertaining to the actual impact to the customers. Despite the weak announcement and the various pundits who immediately proclaimed the increases to be fair given UPS new labor agreement, this years rate increase was, once again, big. If you thought UPS would take it easy on you during this soft economy, guess again! It sure makes it a lot easier for UPS to provide a rich deal to the Teamsters when they can quickly pass it on to you. As I am sure youve noticed, there arent many industries in this country with the unbridled power to raise rates to their liking. Pity the poor buyer in a non-competitive market.
Once again, there are healthy increases in all service sectors: ground, air, domestic and international. Select accessorial charges increased and continue to impact total shipping costs. The residential differential went up a nickel while even more ZIP Codes are added to the high-cost delivery area surcharge. And, oh yeah, the fuel surcharge remains intact. Did I miss anything? Lets take a look!
Ground Service
Ground service represents UPS largest volume and revenue source. The base rate increase for commercial service is 3.6% (based on a straight dollar average of all weight and zone cells). However, this year UPS continued the practice of varying percentage increases by weight and zone. For example, there is an average increase of 4.1% for 1 to 15 pounds, 3.6% for 16 to 70 pounds and 3.6% for 71 to 150 pounds. Closer inspection shows that a one-pound, zone 2 parcel increased 5%.
UPS continues to increase rates at a higher percentage for those weights for which the company has greatest market share, such as low-weight residential and short-haul/overnight ground markets. With FedEx Grounds movement into residential service along with hub capacity expansion, there may be less advantage of significantly varying rate increases by zone and weight in the future. But dont ever underestimate the stealth factor when it comes to UPS pricing strategy. It sure is convenient to tout a 3% increase in a press release but load up the increase in the high-volume weights and zones and go soft on the extremely high-weight cells (50+ pounds).
Lets take a look at Charts A and B to see the cumulative percentage rate increases among the different zones and weights that UPS has enjoyed over the last five years in its Ground service. There has been an increase of 18.3% for 1 to 15 pounds, 15.4% for 16 to 70 pounds and 17.9% for 71 to 150 pounds. Zones 2 to 4 had the most dramatic increase: 18.5%, 17.9% and 18.1%, respectively. If you happen to ship 1- to 5-pound parcels in zone 2, your rates went up 20.4% compared to 18.4% for that same weight range in zone 8.
The Residential Differential has been increased from $1.10 to $1.15 over commercial rates. Thats a 4.5% increase! And dont forget about the infamous Delivery Area Surcharge. It has been increased from $1.50 to $1.75. Thats an amazing 16.7% increase! These two big hitters are tremendous money makers for Brown. There are now 24,496 ZIP Codes impacted by the surcharge. Thats close to 60% of all US ZIP Codes! UPS would be better off publishing a list of ZIP Codes that arent subject to the surcharge. The added charges are killers! If you dont believe me, just ask the non-store retailers and Internet merchants.
Ground Commercial Hundredweight base rates increased a whopping 8.5%. And youll recall that last years increase was 8.4%. (And you thought Ground service rates only increased 3%. For some strange reason, UPS forgot to include this increase in its press release!) Hundredweight rates for Ground Residential continue to be identical to Ground Commercial Hundredweight.
Time Definite/Express Services
Like Ground service, Time Definite/Express Service rates increased this year. UPS has many service options to address your time definite service requirements. In the process of doing so, it has become somewhat confusing to select the appropriate offering as it relates to cost versus service tradeoffs. The following is a summary of the various service offerings and the respective rate increases:
Next Day Air:
10:30 AM delivery of letters, documents and parcels to all major US metropolitan areas.
There was no increase in zone 102 for letters or packages. For the other zones, letters increased from $0.25 to $0.75 (1.7% to 4.9%). Non-letter rates increased an average of 3.9%, but an average doesnt tell the true story. For example, in the 1- to 15-pound range, the increase was a mere 2.4% in zone 103, while zones 106 to 108 were nearly 5%. By going with a very small increase in short zones, UPS continues its efforts to decrease the number of low-zone Next Day Air packages being shifted to the less profitable Ground service. The prudent shipping manager recognizes that zone 2 Ground packages are delivered next day with a guarantee and that the majority of UPS deliveries occur before noon. So there is no reason to spend the extra money on Next Day Air service. Table 1 on page 26 summarizes the impact of the increase.
Next Day Air Hundredweight rates increased in all zones except 102. The impact is as follows:
Next Day Early AM: 8:00 AM delivery of US domestic letters, documents and parcels from most metropolitan areas. In addition,
Add $28.50 to the appropriate Next Day Air rate. This is the same amount as last year.
Next Day Air Saver: 3:00 PM or 4:30 PM delivery to commercial destinations where UPS Next Day Air is committed by 10:30 AM or noon, respectively. Residential deliveries to UPS Next Day Air Saver destinations receive delivery by end of day.
There was no increase in zone 132 for letters or packages. For the other zones, letters increased between $0.50 and $0.75 (3.6% to 5.4%). Non-letter rates increased an average of 5.5%. The rates for this service average a mere 9.3% off of the Next Day Air rate. The price difference between Next Day Air and Next Day Air Saver continues to tighten. UPS is clearly discouraging the use of Next Day Air Saver through its pricing strategy. Table 2 summarizes the impact of the increase.
Next Day Air Saver Hundredweight rates increased in all zones except 132. The impact is as follows:
2nd Day Air:
A second business day delivery of both letters and parcels.
There was an increase in all zones. Letters increased between $0.30 and $0.40 (3.9% to 6.3%) depending on the zone. Non-letter rates increased an average of 4.4%, but as with Next Day Air service, there is a large disparity among the various weights and zones. For example, the increase for a one pound, zone 202 parcel is a staggering 9.1%, while the increase for a two pound, zone 206 parcel is 3.6%. The rates for this service average 40.8% off of the Next Day Air rate. Table 3 summaries the impact of the increase.
2nd Day Air Hundredweight rates increased in all zones. The impact is as follows:
2nd Day Air AM:
There was an increase in all zones. Letters increased from $0.30 to $0.50 (3.8% to 6.9%) depending on the zone. Non-letter rates increased an average of 4.5%. The rates for this service average 12.5% more than 2nd Day Air.
2nd Day Air AM Hundredweight rates increased in all zones. The impact is as follows:
3 Day Select:
A third business day delivery of parcels.
There is not a letter rate with this service. There was no increase in zone 302. For the other zones, rates increased an average of 4.2%. Zones 306 to 308 increased nearly 5%. The rates for this service average 32% less than 2nd Day Air but double the price of ground service. Since the majority of UPS ground parcels are delivered within three days, careful study of this service should be conducted prior to its use. If you are using this service for zones 302 to 305, you are spending a lot of extra money for this service when ground service will satisfy your service day requirement. Table 4 summarizes the impact of the increase.
3 Day Select Hundredweight rates increased in all zones except 302. The impact is as follows:
International
Worldwide Express: Letters increased between $0.50 and $1.75 (1.7% to 4.5%) depending on the zone. Non-letter rates increased an average of 3.7%. Table 5 summaries the impact of the increase.
Worldwide Expedited: Package rates increased an average of 7% with limited disparity among the various zones. However, the higher the weight, the greater the increase.
Worldwide Service To Canada: Rates increased. Standard, Expedited and Express service had an average increase of 3.9%, 7% and 3.6%, respectively.
Accessorial Charges
Eleven Accessorial Charges have increased. Most of the increases were hefty. And a new proactive alert notification, Quantum View Notify, appears on the scene. Chart C summarizes the changes.
There you have it! What does the rate increase mean to your company? You can find that out by analyzing your monthly parcel expenditure using the old and new rates and computing the incremental cost. (To help you accomplish that task, dont forget that you can download 2003 UPS rates directly from the companys Web site at www.ups.com.) A detailed cost analysis will provide the necessary information to help you decide which service offerings best serve your companys needs. No matter what services you select, understanding how your carriers rate increases impact your budget and bottom line is a top priority! Have a great 2003!
Joe Loughran is president of SmartTran, Inc. and an expert in parcel carrier rate analysis. SmartTran is a transportation consulting company offering services in carrier rate negotiation, guarantee refund service and logistics planning. SmartTrans management team has over 50 years of experience in parcel transportation management. Joe can be reached by phone at 724-934-0626 or by email at loughran@smarttran.com.
