Third-party shipping is a vital and ever growing area of today’s modern supply chain and one that UPS, through its 2016 GRI, has targeted for additional yields. Effective January 4th, 2016 UPS began charging a "Third-Party Billing Fee," which is 2.5% of the total shipment charge that is billed to the Third Party.
Let's provide a little clarity to the situation. What type of shippers are we talking about? A third-party shipment, as defined by UPS, is "UPS bills shipping charges to a party other than the shipper or receiver." Let's look at an illustration. A consumer orders a product from a website which offers a variety of products from a myriad of different manufacturers. The company which owns the website does not manufacture any goods, nor does it warehouse any inventory. The consumer places the order with the website; the website owner then places its order with the goods manufacturer or distributor and has the product shipped directly to the consumer (a practice known as Drop-Shipping). The website owner never takes possession of the product but has the UPS shipping fees charged to them. There are many other examples of business models, which are being affected by this new surcharge.
We have found a particularly virulent reaction among shippers in response to this new surcharge. Who it targets, how it is administered, and when it was announced all combine to create significant pain points among certain segments of the supply chain. Many shippers who are subject to this new fee are in low margin industries: Low value consumer goods, clothing, replacement parts, etc. These industries have traditionally low margin transactions to begin with, and many must offer free shipping to be competitive. To heap another 2.5% surcharge on top of already steadily rising rates and an increased fuel surcharge table could turn sales, which were profitable in 2015, into unprofitable sales in 2016.
This surcharge is a completely new fee. This means that almost no shippers will have any contractual rate protection against it, as there was no way to previously negotiate more favorable terms on a fee that did not exist. From announcement to implementation, shippers had only a few short months to attempt to get any contractual relief, and many were unable to do so.
The 2.5% is applied to the entire shipping charge, which includes the base rate plus all applicable accessorial charges. This may make the true impact per shipment difficult to predict as some accessorial charges are applied post-shipments and are unanticipated at time of shipment.
What is the justification provided by UPS for this new fee introduction? Along with the published rate increase, UPS included the following statement, "The published rates for our services will increase. This supports ongoing expansion and capabilities enhancements, as we strive to maintain the high service levels you expect from UPS."
In conversations and meetings with shippers, UPS representatives have offered some additional justifications for this new fee. Following are the three most commonly offered.
1. "Third-Party Shipments vary more in package characteristics than Prepaid Shipments." This justification seems to hold little validity, as the packages coming from the origin point do not vary at all. This could be a valid reason for less aggressive discounts on Third-Party Shipments, but not on the general fee itself
2. "Third-Party Shippers tend to default on their bills more often than Prepaid Shippers." This is undoubtedly true, but it may prove a hard pill to swallow for a shipper who has reliably paid their UPS invoices, for possibly decades, to know they are subsidizing the non-payment of others.
3. "There are higher administrative costs related to billing Third-Party Shipments." This is probably also accurate, though 2.5% on total shipping charges seems rather excessive for this justification.
What are effective mitigation strategies for this new cost burden?
To date, we have identified several potential solutions to help reduce the negative impact of this fee.
1. The most effective and long lasting solution is to have this fee addressed in your contractual agreement with UPS. Depending upon your shipping volumes and negotiating acumen, seeking a waiver or reduction to this fee through new contractual rates will provide some relief and will be guaranteed for some time into the future.
2. A second option would be to provide the shipping point, the manufacturer or distribution center, your UPS account number and have them ship on a Prepaid basis. You could then receive your invoice electronically and bypass the "Third-Party" billing designation. This solution has the advantage of avoiding the fee entirely; however, we do not yet know how UPS will respond to this type of arrangement and may very well identify and halt these activities. This appears to be a dubious long-term solution.
3. Consider other carrier options who do not have this Third-Party Fee. FedEx, to date, has not yet followed UPS in introducing this fee and there are many regional parcel carrier options to consider.
Annually, UPS seems to put its considerable intellectual talent to work in devising new and creative ways to drive additional revenue from its shippers. From last year’s new DIM rules to this year’s Third-Party Billing Fee, shippers have an annual puzzle to solve in trying to keep shipping costs from escalating uncontrollably.
With a thoughtful and informed approach, there are viable and effective solutions to keep shipping costs under control and allow shippers to stay effective and competitive.
Kenneth Moyer serves as Vice President of Supply Chain Strategies with LJM Consultants. He brings over 24 years of industry experience, including a 16-year multidisciplinary tenure at UPS. Kenneth spent 8 years in the UPS Pricing Group; developing, analyzing, and implementing UPS Pricing and Costing Models. He has spent the last 10 years directing audit and contract negotiation activities to maximize client value in every transportation dollar.
