It is critical for organizations with any kind of parcel volume to understand the impact of the carriers’ general rate increase (GRI). Yet, while the annual announcement by FedEx and UPS is probably the most significant event that affects a small-package shipper’s transportation budget, the details driving shipping cost changes are not always readily apparent. Not only do you have your standard rate increases, but the past couple of years have seen an increase in fuel surcharge changes, new surcharges, and changes to existing surcharge criteria.
To gain a comprehensive awareness of parcel shipping cost changes, small-package shippers must also be mindful of hidden charges lurking among the details of national carriers’ annual rate announcements. Honing in on off-the-radar cost and service tweaks is integral to effectively planning your budget for 2020.
History Reveals Announced vs. Actual Increase
In the past, annual GRI announcements of 4.9% often resulted in a much larger increase for many shippers. Many times, the actual rate increase that a shipper experienced could be much higher than the carriers’ announced increase. The good news is that this trend has diminished in the past few years, and the announced rate increase is very close to what the average customer will experience. However, that’s before you take into account the accessorial increases, new charges, and increased fuel surcharge changes that are applied. Efforts to maintain cost alignment for your operation – and your ability to complete long-range planning – can benefit from the implementation of rate caps in your parcel carrier agreements. If you do not have a rate cap in place, it is something to think about going forward.
Hidden Changes Affect Cost
In addition to the overall rate increase, efforts to uncover hidden changes that occur throughout the calendar year can become a major cost component. Between reviewing contract details closely, pivoting your parcel shipping strategies to minimize cost impact, and then budgeting (or re-budgeting), operational expenses stemming from changes to the parcel carriers’ pricing strategies can be a burden.
Understanding a national parcel carrier’s techniques for generating additional revenue across its customer base can help you pinpoint how your parcel program is in jeopardy with respect to new or hidden costs. Common areas where small-package shippers experience hidden rate increases include rate service guide changes, fuel surcharges, and language adjustment in the carriers’ terms and conditions.
Rate Service Guides
Close scrutiny of the rate and service guides published with national carriers throughout the year can reveal significant opportunities to tweak parcel shipping characteristics and avoid costly budget impacts. Changes in the service guide are common, and they can cause ripples across the entire small-package shipping network. Identifying new specifications quickly is instrumental to budget planning for 2020.
Look no further than FedEx’s shift in weight bands for additional handling charges. Increasing additional handling charges by four dollars to $24 will affect shippers, but more importantly, moving the weight down to 50 pounds from 70 pounds will apply that charge to an enormous number of domestic packages. Also factor in the changes in delivery area surcharges as ZIP Codes are redefined and oversized shipment charges (particularly for residential deliveries), are increased. Applying fuel surcharges to more accessorial fees creates additional complexity.
When costs are assessed as an additive, the ability to calculate the impact quickly is paramount. Effective management of historical data combined with parcel analysis reveals how your parcel program could be impacted by these types of changes – and it helps you engineer alternative solutions to minimize cost impact.
Fuel Surcharges
Originally meant to protect parcel carriers when gas and diesel prices were high, fuel surcharges have withstood the test of time and are still being levied (even though fuel prices have since receded). With continued volatility in fuel prices, this is an area to watch. Carriers can implement these fuel charge increases quickly and often with nothing more than a note on their website.
Minimizing the impact of these cost changes requires an awareness of your position in the carriers’ eyes. Algorithm-based modeling that offers insight on possibilities for alternative network design can produce cost-saving opportunities. What is your position in the carrier index table – and is there an opportunity for a strategic change that can move you to another table? Are there opportunities to get around the constraints of your contract? By assembling alternative and information-backed arguments, shippers position themselves to work with carrier partners to achieve redefinitions for how fuel surcharges are applied.
Terms and Conditions
Terms and conditions are a very big issue for many small-package shippers, especially since every contract stipulates that all charges are dependent on the terms and conditions or based on the service rate guide. This document can be changed multiple times a year, and it requires regular review. Fortunately, these terms and conditions display the date of last revision. While not always the case, the national carriers typically apply changes at every rate change and also mid-year in July.
Within the terms and conditions, simple changes in wording can have a significant impact. A notable definition change to UPS additional handling charges is a good example – and this small tweak could affect 2020 parcel shipping costs, especially as e-commerce continues to blossom. Specifically, in 2018, the addition of “hard plastic, soft plastic (e.g. plastics bags), or expanded polystyrene foam (e.g. Styrofoam)” has been included in the definition for additional handling. As the use of polybags escalates, look for these types of changes to continue as carriers face increasing infrastructure costs to manage changing shipper demands.
Also, it is important to note that currently, UPS does not apply existing discounts to peak season charges, but in most cases, FedEx does extend these discounts to the peak season period. Again, a difference in wording can make a huge difference in one of your most impactful shipping months.
Stumbling Blocks
The history of general rate increases gives us a roadmap to what carriers are doing and why they are doing it. It also grants shippers insight on how to predict future changes. An organization’s ability to analyze those increases and maintain historical awareness of its parcel shipping characteristics also provides ammunition for shippers seeking opportunities to protect their profitability from annual changes in the pricing structures.
Often, however, that ammunition is hard to find. Beyond the hidden changes that affect cost, it is important to be aware of stumbling blocks that may slow your ability to quickly complete the analysis required to fully understand your parcel shipping profile.
First, if you have to calculate based on package dimensions, remember FedEx typically provides package dimensions in the billing detail. UPS does not provide dimensions unless a dimension-based shipping charge correction is applied. Without visibility to these dimensions, it may be difficult to determine the actual impact of the GRI on your parcel program.
Also, many shippers overlook their minimum charge, a cost that is very important to understand. Without awareness of when packages are susceptible to a minimum charge or how a dollar-off discount applies to the minimum charge, it is easy to miss budgeting calculations and jeopardize profitability.
Forecasting your business conditions for the year ahead requires a piqued awareness of the intricacies of carriers’ pricing strategies. It is also important to have a grasp not just on your data, but also an understanding of what that data says about your parcel shipping program. Just like mining details from carriers’ GRI announcements provides value, mining the critical data across your transportation program can be impactful if you are able to take that data and quickly recognize how it will apply to your operation — and your profitability.
Todd Benge is Vice President – Parcel Operations, Transportation Insight. Bernie Reeb is Senior Parcel Operations Consultant, Transportation Insight.
This article originally appeared in the November/December 2019 issue of PARCEL.
