Barely a week in, 2015 may well have proven itself as the most interesting year in the history of parcel shipping (What a triumph!). During the home stretch of 2014, tryptophan wasn't the only source of heartburn for shippers across the country.
Rising costs in the face of poor prior-year holiday performance forced businesses of all types and sizes to trim the fat from various facets of their operations. Though many struggled to prepare for dimensional pricing changes that piled onto FedEx and UPS general rate increases that have long been the norm, at least they knew what was coming.
The mere calculation of the bottom-line impact of the dimensional weight pricing changes, difficult in itself, was only part of the problem. The trickle-down effect of those rate hikes, shippers knew, would require the exploration of more efficient packaging, regional carriers, tech upgrades: a gamut of 2015 initiatives that surely hung like an albatross from the necks of businesses already facing a revolutionary shift in consumer behavior, and thus increased competition.
The silver lining in it all was the general uptick in consumer confidence in the American economy, significantly fueled by, well, fuel. With gas no longer syphoning bank accounts, businesses everywhere were the beneficiaries.
Shoppers showed their appreciation by spending.
It was, as closely as it could be, a win-win-win. Consumers had more disposable income, businesses had more product to replenish, and the carriers had more volume whipping through their feeders and onto their package cars and planes.
But as has been the case for billions of years, time marched on, and the calendar turned. As of January 6, reality — and higher prices — took hold, and shippers have now had a little more than a month to determine how much their efforts during the latter part of the previous year paid off.
For FedEx shippers in particular, there's a part of the equation that they either didn't have time to prepare for, or may not even have known took place. During its quarterly earnings call on December 23, FedEx quietly notified the world that its fuel surcharges would increase. Those changes became effective February 2, and now more closely parallel UPS's charges for fuel. The move was compensation, FedEx said, for the decline in the cost of fuel and thus the decline in revenue from the fuel surcharge.
Famous for its marketing tactics, FedEx's reported justification fails to pass the sniff test in one important regard. Sure, as gas prices fell, so too would the FedEx's top-line revenue associated with fuel. At the same time, though, costs could also decline in proportion with the fall in revenue, making it conceivable that FedEx would not end up on the losing end despite being a little lighter in the wallet.
Moreover, the general consensus of economists is that oil won't be this cheap forever, and probably not even very much longer. The President himself was forthcoming in admitting that this trend cannot be sustained. The general assumption of just about everyone on earth is that oil prices will soon begin to rise. As they do, the percentage increases (for both carriers) will compound the cost to the customer.
That can't be welcome news to shippers already clamoring to find ways to lower costs in the face of their carriers' continuing to turn in record numbers for their shareholders.
Even the savviest of shippers could have a hard time sifting through invoices in search of optimization opportunities, a theme that has perhaps never been more prevalent throughout every facet of the shipping industry.
Both carriers base their price for fuel on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel for ground shipments and on a rounded average of the U.S. Gulf Coast (USGC) spot price for a gallon of kerosene-type jet fuel for air shipments. In each instance, the charges are updated monthly, based on the prices reported by the U.S. Energy Information Administration (EIA) for the period two months prior.
What in the world does that mean?
Well, to start, depending on what those published prices are, each carrier assesses its fuel surcharge percentage according to these tables for UPS, and these for FedEx.
From there, the percentage is applied to the net transportation charge amount (the base transportation charge minus any discount incentive) plus any delivery-related service charges (delivery area surcharge, residential surcharge, etc.).
For example, let's look at a Zone 4 FedEx Ground Commercial shipment with a rated weight of 11 pounds and assume the customer had a 15% base transportation charge discount for this service level and weight break. Let's also assume that the package originated in Atlanta (30338) and was destined for Hebron, IN (46341), a commercial delivery area surcharge destination, and that the shipper has requested an adult signature upon delivery.
The FedEx published rate for a Zone 4, 11-pound package in November 2014 was $9.95 (we'll get to 2015 in a minute). To apply the fuel surcharge, you must first deduct the 15% discount from the $9.95 base rate, which subtracts $1.49, leaving a net transportation charge of $8.46. The published commercial delivery area surcharge for each carrier was $2.07 last year, and since that is a delivery-related service charge, it will get added to the rate before applying the fuel surcharge, marking the package up to $10.53, excluding any other delivery-rated service charges (the surcharge for adult signature in this instance) that might be applied. In November, the fuel surcharge for FedEx was 6.5%, or $0.68 for this package. Tack that on to arrive at a net rate of $11.21, then add on the charge for adult signature ($4.75 in 2014) to arrive at the package's true, net billable rate of $15.96.
Generally, FedEx fuel surcharges rose anywhere from 0.5% to 1.0% effective February 2, hikes which are compounded by three factors: dimensional weight pricing changes, 2015 general rate increases and potential increases to the average cost of a gallon of diesel fuel.
Assuming the dimensions of the box in the example shipment above were not large enough to increase the 11-pound billable weight of the package in 2015, the base transportation charge increased 5.5%, from $9.95 to $10.50, the commercial delivery area surcharge rose 6.3%, from $2.07 to $2.20, and the charge for adult signature rose 5.3%, from $4.75 to $5.00.
If the price of fuel in the example remains relatively constant at the time of the shipment in 2015, that same package will cost between $16.91 and $16.96, an overall increase of between 6% and 6.3%. If the dimensions of the shipment do impact the billable weight of the package, then the net rate could soar even higher.
And if the price of fuel goes up • You get the idea.
Alas, though much collective attention was paid to the news of these changes at the end of last year, the practice of determining just how much they are now impacting shippers, in conjunction with the recent change in FedEx's fuel surcharge table and the potential for the price of fuel to increase in general, likely is just getting started.
Even companies equipped to analyze huge data sets will have to strain their resources to find better, more cost-effective options to get their shipments to their destinations. Shops without those resources face a potentially perilous period of rising costs, which now seem to be originating from every direction. Regardless of whether it is in the best interest of a company to make the costly investment to bring more resources in house, or to outsource cost initiatives to third party consultants, 3PLs, regional carriers, etc., the most effective way to drive cost out of a business will prove to be a case-by-case scenario.
The only certainty is that costs are rising at an alarming rate during a time when commerce, and the economy as a whole, seems to be developing a level of confidence not seen in years. In a perfect world, this would be a period of peace of mind for companies and personnel that were dealt a significant and lingering blow during the latter stages of the 21st century's first decade. The reality however, is that the landscape we do business within has drastically changed, and the demands of staying on top of price and consumer behavioral shifts have never been more important.
The good news is that the opportunities are endless in this, an entrepreneurial age. If companies take the necessary measures to ensure that their supply chain engines are optimized and well oiled, they can still go far.
If not, though, they could eventually run out of gas.
Brandon Staton is the Marketing and Public Relations Manager for Transportation Impact, LLC, and First Flight Solutions, LLC, industry-leading parcel spend management firms and back-to-back Inc. 5000 honorees. Brandon and the Transportation Impact team have helped negotiate small package contracts for some of the most well-known companies in the world, reducing their respective parcel shipping costs by an average of 22%. Brandon can be reached directly at 252.764.2885 or via email atbstaton@transportationimpact.com.
Rising costs in the face of poor prior-year holiday performance forced businesses of all types and sizes to trim the fat from various facets of their operations. Though many struggled to prepare for dimensional pricing changes that piled onto FedEx and UPS general rate increases that have long been the norm, at least they knew what was coming.
The mere calculation of the bottom-line impact of the dimensional weight pricing changes, difficult in itself, was only part of the problem. The trickle-down effect of those rate hikes, shippers knew, would require the exploration of more efficient packaging, regional carriers, tech upgrades: a gamut of 2015 initiatives that surely hung like an albatross from the necks of businesses already facing a revolutionary shift in consumer behavior, and thus increased competition.
The silver lining in it all was the general uptick in consumer confidence in the American economy, significantly fueled by, well, fuel. With gas no longer syphoning bank accounts, businesses everywhere were the beneficiaries.
Shoppers showed their appreciation by spending.
It was, as closely as it could be, a win-win-win. Consumers had more disposable income, businesses had more product to replenish, and the carriers had more volume whipping through their feeders and onto their package cars and planes.
But as has been the case for billions of years, time marched on, and the calendar turned. As of January 6, reality — and higher prices — took hold, and shippers have now had a little more than a month to determine how much their efforts during the latter part of the previous year paid off.
For FedEx shippers in particular, there's a part of the equation that they either didn't have time to prepare for, or may not even have known took place. During its quarterly earnings call on December 23, FedEx quietly notified the world that its fuel surcharges would increase. Those changes became effective February 2, and now more closely parallel UPS's charges for fuel. The move was compensation, FedEx said, for the decline in the cost of fuel and thus the decline in revenue from the fuel surcharge.
Famous for its marketing tactics, FedEx's reported justification fails to pass the sniff test in one important regard. Sure, as gas prices fell, so too would the FedEx's top-line revenue associated with fuel. At the same time, though, costs could also decline in proportion with the fall in revenue, making it conceivable that FedEx would not end up on the losing end despite being a little lighter in the wallet.
Moreover, the general consensus of economists is that oil won't be this cheap forever, and probably not even very much longer. The President himself was forthcoming in admitting that this trend cannot be sustained. The general assumption of just about everyone on earth is that oil prices will soon begin to rise. As they do, the percentage increases (for both carriers) will compound the cost to the customer.
That can't be welcome news to shippers already clamoring to find ways to lower costs in the face of their carriers' continuing to turn in record numbers for their shareholders.
Even the savviest of shippers could have a hard time sifting through invoices in search of optimization opportunities, a theme that has perhaps never been more prevalent throughout every facet of the shipping industry.
Both carriers base their price for fuel on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel for ground shipments and on a rounded average of the U.S. Gulf Coast (USGC) spot price for a gallon of kerosene-type jet fuel for air shipments. In each instance, the charges are updated monthly, based on the prices reported by the U.S. Energy Information Administration (EIA) for the period two months prior.
What in the world does that mean?
Well, to start, depending on what those published prices are, each carrier assesses its fuel surcharge percentage according to these tables for UPS, and these for FedEx.
From there, the percentage is applied to the net transportation charge amount (the base transportation charge minus any discount incentive) plus any delivery-related service charges (delivery area surcharge, residential surcharge, etc.).
For example, let's look at a Zone 4 FedEx Ground Commercial shipment with a rated weight of 11 pounds and assume the customer had a 15% base transportation charge discount for this service level and weight break. Let's also assume that the package originated in Atlanta (30338) and was destined for Hebron, IN (46341), a commercial delivery area surcharge destination, and that the shipper has requested an adult signature upon delivery.
The FedEx published rate for a Zone 4, 11-pound package in November 2014 was $9.95 (we'll get to 2015 in a minute). To apply the fuel surcharge, you must first deduct the 15% discount from the $9.95 base rate, which subtracts $1.49, leaving a net transportation charge of $8.46. The published commercial delivery area surcharge for each carrier was $2.07 last year, and since that is a delivery-related service charge, it will get added to the rate before applying the fuel surcharge, marking the package up to $10.53, excluding any other delivery-rated service charges (the surcharge for adult signature in this instance) that might be applied. In November, the fuel surcharge for FedEx was 6.5%, or $0.68 for this package. Tack that on to arrive at a net rate of $11.21, then add on the charge for adult signature ($4.75 in 2014) to arrive at the package's true, net billable rate of $15.96.
Generally, FedEx fuel surcharges rose anywhere from 0.5% to 1.0% effective February 2, hikes which are compounded by three factors: dimensional weight pricing changes, 2015 general rate increases and potential increases to the average cost of a gallon of diesel fuel.
Assuming the dimensions of the box in the example shipment above were not large enough to increase the 11-pound billable weight of the package in 2015, the base transportation charge increased 5.5%, from $9.95 to $10.50, the commercial delivery area surcharge rose 6.3%, from $2.07 to $2.20, and the charge for adult signature rose 5.3%, from $4.75 to $5.00.
If the price of fuel in the example remains relatively constant at the time of the shipment in 2015, that same package will cost between $16.91 and $16.96, an overall increase of between 6% and 6.3%. If the dimensions of the shipment do impact the billable weight of the package, then the net rate could soar even higher.
And if the price of fuel goes up • You get the idea.
Alas, though much collective attention was paid to the news of these changes at the end of last year, the practice of determining just how much they are now impacting shippers, in conjunction with the recent change in FedEx's fuel surcharge table and the potential for the price of fuel to increase in general, likely is just getting started.
Even companies equipped to analyze huge data sets will have to strain their resources to find better, more cost-effective options to get their shipments to their destinations. Shops without those resources face a potentially perilous period of rising costs, which now seem to be originating from every direction. Regardless of whether it is in the best interest of a company to make the costly investment to bring more resources in house, or to outsource cost initiatives to third party consultants, 3PLs, regional carriers, etc., the most effective way to drive cost out of a business will prove to be a case-by-case scenario.
The only certainty is that costs are rising at an alarming rate during a time when commerce, and the economy as a whole, seems to be developing a level of confidence not seen in years. In a perfect world, this would be a period of peace of mind for companies and personnel that were dealt a significant and lingering blow during the latter stages of the 21st century's first decade. The reality however, is that the landscape we do business within has drastically changed, and the demands of staying on top of price and consumer behavioral shifts have never been more important.
The good news is that the opportunities are endless in this, an entrepreneurial age. If companies take the necessary measures to ensure that their supply chain engines are optimized and well oiled, they can still go far.
If not, though, they could eventually run out of gas.
Brandon Staton is the Marketing and Public Relations Manager for Transportation Impact, LLC, and First Flight Solutions, LLC, industry-leading parcel spend management firms and back-to-back Inc. 5000 honorees. Brandon and the Transportation Impact team have helped negotiate small package contracts for some of the most well-known companies in the world, reducing their respective parcel shipping costs by an average of 22%. Brandon can be reached directly at 252.764.2885 or via email atbstaton@transportationimpact.com.
![GettyImages-914834678-[Converted]](https://cms-static.wehaacdn.com/parcelindustry-com/images/GettyImages-914834678--Converted-.1133.widea.0.jpg)
