Parcel carriers, through early adaptation of barcodes, have been conducting micro-analysis of data collected on package, shipper, and network operations for more than 20 years, and are experts on cost efficiencies. Advances in data warehousing by parcel carriers and the use of overhead scanners to collect dimensions and weight were implemented in the late nineties for load planning optimization. The data and subsequent analysis of the impact on costs resulted in assessorial charges for packages that incurred greater costs in processing, such as non-conveyable packages that required manual handling outside the high speed automated conveyor systems. Before now, parcel carriers rated packages on three factors – weight, distance, and service type. The fourth factor, dimensions, is critical to efficiencies in space utilization at the trailer and delivery van level. It is no surprise that now seemed to be the perfect time to extend the dimensional weight system to all packages.

    As the e-commerce industry continues its double-digit growth, its shipping characteristics will continue to play a major role in the parcel carrier’s strategy. According to Internet Retailer, mass merchants represent 38% of online sales, dominated by Amazon, Walmart, Sears, Costco, and Target. Dimensional rates are likely to have a large impact on these retailers due to the fact they ship a wide range of products. Direct-to-Consumer t-shirts are not likely to see a rate increase, but a bulky office chair may incur higher shipping costs. Apparel is the second largest web sales category at 15%; however, dimensional rates are the least of their worries as most items are less than 10 lbs. and ship in polybags. Housewares, home furnishings, hardware, and home improvement, collectively over $13 billion in online sales, will be the hardest hit due to undesirable weight to dimension ratios. 

    Dimensional pricing is an antidote for greater accuracy in cost calculation and an opportunity to elevate sustainability in parcel processing. Less waste in packaging materials and damage rates will help the shipper recoup the increase in shipping costs. Shippers will become more cognizant of using right-sized cartons, grouping multiple item orders into a single carton, and incorporating best practices in regards to shipment weight to cube characteristics. For the carrier, improved trailer cube utilization, reduced handling costs, and an increase in packages per stop perpetuates efficiencies in fuel use and carbon emissions.

    The Alternatives

    What are the alternatives to the traditional integrators? Is there a multi-carrier strategy that fits each individual shipper? In response to the growth of shopping online, several viable alternatives have emerged.

    For high volume shippers, UPS SurePost and FedEx SmartPost offer economical ground residential service by using the United States Postal Service (USPS) to make final delivery. The USPS’s density of daily stops (153 million addresses) is most cost-effective. The packages are not rated using the dimensional rate structure, nor do they have a residential surcharge. Service times are longer and not guaranteed and would only be substitutable for shipping commitments of 7-10 days. 

    The USPS has found its niche, providing e-commerce shippers residential coverage and density, and a pricing structure independent of UPS and FedEx. Over the past few years, USPS has eliminated the gap of not having tracking capabilities and automated distribution centers to provide shipment visibility and consistent transit times. 

    To build on its burgeoning Priority Mail growth from online retailers, USPS took an unprecedented step in 2014 and lowered rates on Commercial Priority Mail services an average of 0.9% and 2.3% for the Commercial Plus, a service available to shippers of 50,000 packages or more annually. USPS has been the lowest cost option for packages less than five pounds, but was higher priced above five pounds. To correct the inequity, the rate decrease concentrated on the 7-16 pound range with reductions in rates equivalent to 58%, significantly below published UPS and FedEx rates. With USPS pricing announcements and service enhancements they are positioned to attract more e-commerce shippers.

    While fragmented, metro and regional parcel carriers are emerging as an option for a segment of shippers whose customer base is concentrated. Services are typically in high density lanes and delivery areas where competitive pricing and service times are achievable. Some are final mile agents, providing same-day delivery from local DCs and stores. By forging relationships with multiple carriers, an integrated solution can be developed to best fit the shipper’s characteristics. 

    2015 Expectations

    When the ball drops and ushers in 2015, the hope is that parcel shippers will be knowledgeable of, prepared for, and mitigating the impact of dimensional pricing. It can be anticipated the environment will be aggressive and competitive to keep shipping costs in line with the ability of shippers to meet consumer demand for free shipping when shopping online. Some shippers will be able to navigate the waters, and some that can’t could suffer, paying much higher rates than they should. The rate increases could mean the difference between turning a profit and being uncompetitive. 

    Bold changes to parcel market pricing will impact 2015 with shifts in parcel carrier market share, service level volumes, and average yield per package. Serious evaluation of options and rate negotiations will result in shippers switching among UPS, FedEx, and USPS. Parcel strategies will include multiple carriers and service levels based on package and delivery characteristics. Size comes into play again, as large shippers will have the leverage and acumen to make the changes effectively and smaller shippers will suffer the consequences if not prepared.

    Larger shippers and those aligned with 3PLs will have the advantage as they have become very astute in collecting and analyzing data. The visibility to that data, their knowledge of parcel rate composition, a superior ability to control and forecast product mix, will enable them to ensure that processes are in place to minimize the impact of dimensional pricing. Or at the very least, they will be able to pass increased shipping costs of specific items on to their customers. 

    For shippers who lack volume leverage, data, and acumen to react effectively to the change, January may come all too soon. There are thousands of businesses with $1 million to $2 million in annual parcel spend, not enough to leverage rate discounts from the parcel carriers. Yet, small shippers can be as efficient as large shippers with the knowledge of expert logisticians. 

    When the industry is all about the size of your packages, the volume of your shipping and the leverage you have in negotiating, knowledge and data can level the playing field. The winners in parcel will be those who prepare and have strategies in place to adjust to the rapidly changing market. It is all about size and there are ways to right-size shippers' selection of parcel alternatives.

    Tom Nightingale is President, Transportation Logistics, GENCO.