Logistics professionals have been hearing the same two words for years: “Cut costs.” But each year these words have a different tone. In 2009 the tone was panicky, which resulted in layoffs and production cuts. Last year it was challenging; the low-hanging fruit had been eliminated and if you wanted to reduce shipping costs, you had to get downright creative. So, what will the tone be for 2011, with parcel carriers announcing the largest effective price increases on record?
The word “tense” comes to mind. The tension between shippers and carriers is palpable. Shippers are still fearful of economic conditions, while carriers continue to raise rates at historic levels. Meanwhile, carrier capacity and staffing issues have the potential to negatively impact shippers. And UPS and FedEx are facing a federal lawsuit for trying to prevent shippers, who are tired of sorting through the ambiguous pricing and contracts, from bringing in third-party expertise to benchmark pricing.
Today’s shippers have a choice to make in 2011 – either learn how to navigate the complexity and volatility of the carrier landscape, or overpay billions in the coming year.
Understanding Carrier Rate Increases
The rate increases for 2011 do not reflect the economic pinch still being felt by a majority of today’s shippers. In fact, one would think we were operating in a boom economy based on the unprecedented rate increases announced by UPS and FedEx at the end of 2010. Keep in mind how this compares to the Consumer Price Index – a bellwether for price increases across industries. As of November 2010, the CPI was up 1.55% over 2009 year-end levels, up 1.2% over 2008, and up 5.1% over 2007.
Here is a summary of the hikes that will have the most impact on your spending:
Dimensional Weight (DIM) Factor: If you ship lightweight, bulk packages (e.g. luggage, pillows, etc.), beware. Carriers have substantially raised their margins through an increased DIM factor. In 2011, the DIM factor for UPS and FDX will decrease (causing the billed weight of packages to increase) by 16.9%, from 194 cubic inches per pound to 166 for domestic shipments and from 166 to 139 for international, a change of 19.5%. In fact, when combined with the announced base freight increases and increase in accessorial charges, shippers could be looking at cost increases of 20% to 30% for certain packages.
Accessorial Rates & Minimum Charges: The jump in surcharges for 2011 marks the largest increases of their kind in history. Here are a few that will pack a powerful punch to your shipping spend in the coming year –
• Delivery Area Surcharges: Up 6% to 10% over last year and 20% to 31% over 3 years. You will incur a surcharge to ship to certain zip codes.
• Residential Area Surcharges: Up 10.0% to 12% over last year and 20% to 26% over 3 years. This is the surcharge for shipping to residential destinations.
• Declared Value Insurance: Up 8% over last year and 25% over 3 years. This is an additional fee to insure the value of a package shipped using a parcel carrier.
• Ground Address Corrections: Up 10% over last year and a whopping 84% over 3 years. This is the cost to correct an incorrect recipient address and attempt to complete delivery.
• Ground Commercial and Residential Minimum Charge: Up 7% over last year or almost 24% over 3 years. This is the minimum charge for ground shipments.
Announced Rate Increases (Long Zone Air Rates): Carriers excel at announcing “average” rate increases that seem justifiable at first glance. In reality, they can be very misleading. Take air rates, for example. UPS announced an effective 4.9% average increase for 2011, while FedEx announced an effective 3.9% average increase. What most shippers don’t realize is how the carriers arrive at these rate increase figures. Is it a straight average or is it based on a weighted average? Recent analyses of different shippers’ volume and weight distributions in addition to the net increases indicate the increases are closer to 6-7%. One thing is abundantly clear; both carriers increased rates for long zone shipments at a much higher rate than short zone shipments. And, in many cases the parcel carriers are moving the short zone air through their ground network. For example:
• UPS Next Day Air rates, including the reduction to the fuel surcharge index, increased an average of 4.13% for zone 2, but an average of 6.83% for zone 8.
• UPS 3 Day Air rates, including the reduction to the fuel surcharge index, increased an average of 4.70% for zone 2, but an average of 7.43% for zone 8.
How Capacity and Staffing Will Impact Your Spend
Rates aren’t the only things that shippers should be concerned about. Other market forces, like capacity and staffing, will have an indirect impact on how much you spend on shipping in the months ahead.
There is more freight moving today than there was a year ago, which signals economic recovery across the supply chain. The problem is there is a lot less capacity in the market. Many carriers are underutilizing their infrastructure (i.e. parked trucks) even though retailers, manufacturers, suppliers and consumers are moving more goods. This tight capacity provides the opportunity for transportation providers to create greater leverage to raise their rates.
In 2009 and 2010, many carriers incurred the same layoffs and pay cuts that the rest of the corporate world did. The result was a mass exodus of drivers, especially in truckload shipping, who had been let go or quit their jobs to look for better paying work.
In addition to a shortage of drivers, the federal government is also in the process of implementing the 2010 Comprehensive Safety Analysis (CSA) program. This is a federal program that will measure and rate carriers on overall driver safety. As a result, drivers with less than stellar safety records - which could account for as much as 5-8% of the current workforce – may be unemployable. This will put further strain and increased cost pressures on transportation providers, which could translate into higher prices for shippers.
Stay Alert, Stay Smart
Times may not be as tough as they were two years ago, but they are just as tense and equally volatile. No one knows what to expect from the economy in 2011, and that includes shippers. Forecasting is harder than ever, as consumers and manufacturers teeter between confidence and worry. In the past, the answer has been to cut and control costs. Yet, if they aren’t mitigated or negated, big carrier rate increases will throw a wrench in many companies’ cost reduction initiatives.
The key is to keep abreast of all the moving parts – the economy, rates and surcharges, capacity and staffing issues, as well as your specific contract terms. If you don’t understand how each piece impacts your budget, you may be in for some surprises in 2011.
The word “tense” comes to mind. The tension between shippers and carriers is palpable. Shippers are still fearful of economic conditions, while carriers continue to raise rates at historic levels. Meanwhile, carrier capacity and staffing issues have the potential to negatively impact shippers. And UPS and FedEx are facing a federal lawsuit for trying to prevent shippers, who are tired of sorting through the ambiguous pricing and contracts, from bringing in third-party expertise to benchmark pricing.
Today’s shippers have a choice to make in 2011 – either learn how to navigate the complexity and volatility of the carrier landscape, or overpay billions in the coming year.
Understanding Carrier Rate Increases
The rate increases for 2011 do not reflect the economic pinch still being felt by a majority of today’s shippers. In fact, one would think we were operating in a boom economy based on the unprecedented rate increases announced by UPS and FedEx at the end of 2010. Keep in mind how this compares to the Consumer Price Index – a bellwether for price increases across industries. As of November 2010, the CPI was up 1.55% over 2009 year-end levels, up 1.2% over 2008, and up 5.1% over 2007.
Here is a summary of the hikes that will have the most impact on your spending:
Dimensional Weight (DIM) Factor: If you ship lightweight, bulk packages (e.g. luggage, pillows, etc.), beware. Carriers have substantially raised their margins through an increased DIM factor. In 2011, the DIM factor for UPS and FDX will decrease (causing the billed weight of packages to increase) by 16.9%, from 194 cubic inches per pound to 166 for domestic shipments and from 166 to 139 for international, a change of 19.5%. In fact, when combined with the announced base freight increases and increase in accessorial charges, shippers could be looking at cost increases of 20% to 30% for certain packages.
Accessorial Rates & Minimum Charges: The jump in surcharges for 2011 marks the largest increases of their kind in history. Here are a few that will pack a powerful punch to your shipping spend in the coming year –
• Delivery Area Surcharges: Up 6% to 10% over last year and 20% to 31% over 3 years. You will incur a surcharge to ship to certain zip codes.
• Residential Area Surcharges: Up 10.0% to 12% over last year and 20% to 26% over 3 years. This is the surcharge for shipping to residential destinations.
• Declared Value Insurance: Up 8% over last year and 25% over 3 years. This is an additional fee to insure the value of a package shipped using a parcel carrier.
• Ground Address Corrections: Up 10% over last year and a whopping 84% over 3 years. This is the cost to correct an incorrect recipient address and attempt to complete delivery.
• Ground Commercial and Residential Minimum Charge: Up 7% over last year or almost 24% over 3 years. This is the minimum charge for ground shipments.
Announced Rate Increases (Long Zone Air Rates): Carriers excel at announcing “average” rate increases that seem justifiable at first glance. In reality, they can be very misleading. Take air rates, for example. UPS announced an effective 4.9% average increase for 2011, while FedEx announced an effective 3.9% average increase. What most shippers don’t realize is how the carriers arrive at these rate increase figures. Is it a straight average or is it based on a weighted average? Recent analyses of different shippers’ volume and weight distributions in addition to the net increases indicate the increases are closer to 6-7%. One thing is abundantly clear; both carriers increased rates for long zone shipments at a much higher rate than short zone shipments. And, in many cases the parcel carriers are moving the short zone air through their ground network. For example:
• UPS Next Day Air rates, including the reduction to the fuel surcharge index, increased an average of 4.13% for zone 2, but an average of 6.83% for zone 8.
• UPS 3 Day Air rates, including the reduction to the fuel surcharge index, increased an average of 4.70% for zone 2, but an average of 7.43% for zone 8.
How Capacity and Staffing Will Impact Your Spend
Rates aren’t the only things that shippers should be concerned about. Other market forces, like capacity and staffing, will have an indirect impact on how much you spend on shipping in the months ahead.
There is more freight moving today than there was a year ago, which signals economic recovery across the supply chain. The problem is there is a lot less capacity in the market. Many carriers are underutilizing their infrastructure (i.e. parked trucks) even though retailers, manufacturers, suppliers and consumers are moving more goods. This tight capacity provides the opportunity for transportation providers to create greater leverage to raise their rates.
In 2009 and 2010, many carriers incurred the same layoffs and pay cuts that the rest of the corporate world did. The result was a mass exodus of drivers, especially in truckload shipping, who had been let go or quit their jobs to look for better paying work.
In addition to a shortage of drivers, the federal government is also in the process of implementing the 2010 Comprehensive Safety Analysis (CSA) program. This is a federal program that will measure and rate carriers on overall driver safety. As a result, drivers with less than stellar safety records - which could account for as much as 5-8% of the current workforce – may be unemployable. This will put further strain and increased cost pressures on transportation providers, which could translate into higher prices for shippers.
Stay Alert, Stay Smart
Times may not be as tough as they were two years ago, but they are just as tense and equally volatile. No one knows what to expect from the economy in 2011, and that includes shippers. Forecasting is harder than ever, as consumers and manufacturers teeter between confidence and worry. In the past, the answer has been to cut and control costs. Yet, if they aren’t mitigated or negated, big carrier rate increases will throw a wrench in many companies’ cost reduction initiatives.
The key is to keep abreast of all the moving parts – the economy, rates and surcharges, capacity and staffing issues, as well as your specific contract terms. If you don’t understand how each piece impacts your budget, you may be in for some surprises in 2011.
