This article originally appeared in our July/August issue
If UPS and FedEx follow their 2017 timelines, general rate increase (GRI) announcements for 2018 are on the horizon. No matter when they are announced, it’s important not to wait for New Year's Day to prepare for their effects (or April, when you review your first quarter parcel spend and panic at the sticker shock).
In fact, it's never too early to answer the fundamental GRI question: Do I know what to expect and how to adjust for next year?
Anticipating what's to come will provide you the intel to make data-driven decisions for 2018 and re-engage with your carrier reps to ensure your parcel costs are within your control. As we dive into how parcel shippers should plan for – and mitigate – these inevitable increases, let’s look back at recent history to find our jumping-off point.
Rate History Is Instructional
By examining recent trends in GRI, we can get a better sense of what to expect from 2018 announcements and identify tangible impacts on parcel spend for various shipping profiles.
- Last Year: For 2017, average rate increases by UPS were 4.9% for ground and air service types. FedEx, meanwhile, also increased ground by the 4.9% average while air jumped 3.9% on average.
- Last Decade: Since 2008, average rate increases for ground have consistently been between 4.9% and 5.9%, while air has been fickler across carriers, with a low of 3.9% and a high of 6.9%.
With this knowledge, we can make a few assumptions when trying to predict GRI impacts for 2018:
- Air and ground increases are unlikely to deviate from the post-2008 mean. For UPS, that's a 6.1% average increase for air versus a 5.5% increase for FedEx. Ground rates have been 5.3% for both carriers.
- In fact, if the past four GRI announcements are an indication, the percentages may be even lower than those 10-year averages. Since 2014, yearly rate increases have decreased: FedEx air has averaged 4.4% and UPS a smidge under five percent. For both, ground has been consistently 4.9%.
- Carriers are more creative with surcharges and other fees. A more generous GRI will be more than offset by surcharge changes. Just look at what’s happened recently: revised DIM thresholds, peak season surcharges, increased minimum charge floors, and more frequent fuel surcharge calculations, to name a few.
- Carriers will continue making it hard to “comparison shop.” After the carriers broke from their longtime alignment by diverging in base pricing last year, it seems unlikely they come back together this year.
GRI Impacts on Parcel Spend: A Case Study
It's worth remembering – and this is very important – that GRI is an average percentage across all service types and accessorial categories. If a business uses every service type and is charged every fee or surcharge at equal rates, sure, you're likely to be affected by the increase at, or close to, the announced GRI rate.
Truth is, no shipper operates that way, which means no shipper is seeing flat 4.9% or better increases across their package volume.
To make this more concrete, let's look at the pre-negotiation shipping profiles of two companies I work with.
- Company A, a supplier of construction materials, had about $800,000 in small parcel shipping volume in 2016 – more than 99% via ground, which increased by 4.9% for 2017. But the rate increases for its most common accessorials were more burdensome: 8.2% for its most assessed surcharge. All told, Company A's average GRI was 5.2% and projected to add more than $41,000 to its shipping spend year-over-year.
- Business B is a multichannel retailer shipping close to $5 million annually – almost half via ground, another 35% 2-day, and a sizeable percentage home delivery. The average GRI for those service types was 6.7%. Across the board, Business B saw an average GRI of 6.4% and projected parcel spend increases of $315,000 in a single year.
The lesson: don't assume that 4.9% will apply to you by default.
Next Steps for Parcel Shippers
- Once GRIs are official, and before the busy holiday season, contact your carrier rep and ask, “How will this affect me?” Remember, they have the data.
- Like you would with car repair estimates or medical diagnoses, always get a second opinion. Connect with your parcel auditing and contract negotiation partner and ask the same question you ask your carrier rep. You'll receive a more objective perspective and, if they’re thorough, they'll also have data – yours, plus billions of data points collected over years to establish benchmarks that align with you shipper profile. If you don’t have a parcel intelligence company working on your behalf, now’s the time to find one.
- In ongoing discussions with your carrier rep, work toward mitigating potential impacts for 2018 and beyond.
- Model what your budget should look like for 2018 and plan accordingly, including opportunities to make operational changes to offset rate increases.
- When rates go into effect around the New Year, monitor, monitor, monitor. While UPS or FedEx make big fall GRI announcements, don't assume they won't continue to tweak to their advantage. You still have negotiating power if costs don't mesh with projections.
- It’s important that you find a contract negotiation partner that doesn’t treat every business and carrier agreement with a one-size-fits-all strategy.
Andrew Brueckner is the Vice President of Business Solutions at VeriShip, the leader in parcel intelligence. Backed by a team of data scientists and 10+ years of benchmarking data, Andy and his team work with shippers to understand and optimize their carrier contracts. He can be reached at email@example.com or 913.933.3519.