Another year, another major carrier rate increase, as UPS and FedEx continue to raise their list rates for transportation charges and accessorial charges, as well as implementing new methods to squeeze additional revenue from their clients.
Much like last year, shipments that are impacted by oversize fees, including Additional Handling, Large Package/Oversize, and Over-maximum/Unauthorized charges, are taking a substantial increase. Delivery Area surcharges are also taking unusually high increases, approaching nearly 30% in some instances. Beyond that, every accessorial charge is taking an increase, ranging from five percent to more than 30%.
The GRI is certainly not limited to accessorial charges. The announced 4.9% increase is also not a flat increase by service, zone, and weight. The increases vary based on the shipment profile. It is therefore essential that businesses understand the distribution and impacts of the general rate increase (GRI) across each service level, weight, and zone distribution relevant to their shipping patterns.
Following is a list of six common items to consider in your negotiation for 2020:
1. Rate Cap: Perhaps the single most important opportunity for most shippers is having a rate cap. Although it’s limited to transportation charges, it keeps rate increases in check. For example, in 2020, where 3Day/Express Saver will increase by more than seven percent for most shippers, one could expect to limit the increase to a value that’s very close to the negotiated rate cap, leading to approximately four percent in cost savings.
2. Additional Handling – Weight Surcharge: The Additional Handling – Weight charge will now start to apply at 50 pounds (actual weight) rather than the current 70 lbs. At $24 per instance, this is impactful to many shippers. Requesting a discount is the most effective approach to offset the increase.
3. Fuel Surcharge: Many are not aware that the fuel surcharge not only applies as a percentage of your discounted transportation charge, but also to select fees, including the following: Residential Delivery Charges, Delivery Area Charges, Pickup Charges, Return Services Charges, A.M. Charges, International Extended Area Charges, Saturday Delivery and Pickup, Large Package Surcharge/ Oversize Fees, Peak Surcharges, C.O.D., Signature Required, Additional Handling, and Peak Additional Handling. The last four are new for 2020. The fuel surcharge is applied in a similar fashion by both carriers, with subtle differences. Yes, nearly every impactful accessorial charge is further impacted by the fuel surcharge.
4. Delivery Area Surcharges: The graph below shows the increase to Delivery Area Surcharges in 2020 vs 2019, as well as over the past six years. With 23,223 of the 41,702 ZIP Codes in the US being impacted by Delivery Area Surcharges, 55.7% of areas are impacted, accounting for approximately 25% of the US population. With the growth in e-commerce (improved delivery density), these costs should be decreasing for the carriers, not increasing.
5. Third-Party Billing: In 2016, UPS instituted a Third-Party Billing Service of 2.5% applicable to the total charges on all packages that are billed to third parties. FedEx followed in 2018 with the same fee at 2.5%. UPS increased this amount to 4.5% in 2019. You should have success getting the fee removed or discounted substantially with either carrier.
6. The list rates for UPS SurePost increased substantially (~ 12%) in 2019. Although the increase for 2020 is more reasonable, the gap between UPS SurePost and FedEx SmartPost is now quite significant. In addition, FedEx has greater pricing flexibility. Consider using this as leverage in your negotiations.
Some additional tips and items to consider:
• The Service Guide trumps the terms and conditions in your agreement and can’t protect against specific accessorial charges that have yet to be introduced. Anytime a change applies, such as shifting from 70 to 50 pounds, you can expect to be impacted, unless you take action.
• When possible, negotiate % reductions vs. flat $ reductions. With each increase, you’re a bit more protected. Flat fees are ideal, but less common.
• If negotiating a Rebate (Deferred Agreement) with UPS, be aware of the following language: “subject to all applicable minimums.” This means that the rebate will not apply to shipments where the minimum charge is applied. This is a common oversight.
• The following package characteristics are subject to an Over Maximum Limits surcharge ($875 surcharge) and should be avoided:
--Packages that exceed 108 inches in length
-- Length (longest side of the package) plus girth [(2 x width) + (2 x height)] combined exceeds 165 inches
--Packages with an actual weight of more than 150 pounds
• Don’t sign an Early Termination clause – with the carriers having the ability to apply new charges at their convenience, this clause leaves you vulnerable to excessive increases.
• Service Guarantee Waiver (Moneyback Guarantee / GSR Waiver) – hold your carrier accountable to on-time delivery. You’re paying a premium and should expect shipments to be delivered on time.
• Audit Fee: In June 2018, UPS began penalizing customers for entering incorrect box dimensions. It’s less damaging than most people believe, since it only applies if the average shipping charge correction (SCC) in an invoice week is more than $5.00. By accurately assessing package characteristics on the front end, this fee can be avoided.
• Some additional fees to consider:
--Residential Surcharges: The Residential Surcharge will increase a “modest” 5.3% to 5.7% in 2020. Given the commonality of the fee, it should be on your radar.
-- Peak Surcharges: Consider negotiating based on the impact on your costs.
-- Late Payment fees: Negotiate longer payment terms or improve internal processes to eliminate these charges.
Mitigating the Rate Increase
Whether you prioritize your logistics needs on any combination of convenience, reliability, on-time performance, or other criteria, we all want to work with a reli¬able carrier that meets our service expectations. Although FedEx and UPS justify their rates and increases by claiming to protect margins and yield, they are still, in the end run, competing for your business. As a result, there remains tremendous pricing flexibility from the carriers.
Having a solid grasp of your shipment analytics will allow you to identify all the charges that are incurred, and this knowledge will provide you with a better framework when approaching the carriers for either your initial contract negotiations or adjustments. Competitive pressure between the carriers, and your own shipment profile, are key components to what options may exist for the shipper. A solid grasp of key variables, including but not limited to, dimensions of packaging, conveyability, pickup and delivery density, single versus multi-piece, commodity type, need for special handling, perishability, weights, services and products, and zone distributions will help you get a better contract specifically tailored to your business and impactful to your bottom line.
The understated increases that accompany the 2020 GRI are a great reason for you to introduce your concerns now about rising shipping costs when you have the conversation with your carrier. Ultimately, the bottom-line is that the flexibility to negotiate your small parcel typically exists, as long as you understand your business, recognize what flexibility exists with each of the carriers, and know how and when to ask for the right kind of discounts.
In the end, remember that your business is important to the carriers, especially your account rep! Each one typically has specific discounts, fees, rebates, and incentives that are negotiable beyond just the initial offer they put on the table. Taking the time to analyze your shipment profile and assess your needs versus your costs will allow you to negotiate discounts and fees beyond just their average, standard template contract, to one that fits your business and operations model. Most importantly, being within the term of a current contract with any of the carriers does not mean you must continue to overpay, and having another year or two left on your current contract does not limit your ability to negotiate any component of your contract, as a 30 day out clause exists, for you the customer, as well as the Carrier.
Thomas Andersen is Partner/Executive Vice President of Supply Chain Service for LJM Group. LJM Group has been helping shippers save time and improve profitability with expert FedEx & UPS auditing, as well as shipping consulting services focused on cost management since 1998. Please visit our website at www.myLJM.com. To speak with Thomas and/or for a complimentary analysis of the impact of the GRI, please call 631.844.9500 or email tandersen@myLJM.com.