The post-COVID-19 supply chain is speeding up to satisfy the consumer who has money to spend and is quick to hit the buy button on their laptop or phone for a variety of items.
Where the items are delivered depends on the consumer, and more times than not, it also depends on shipping costs.
Retailers face higher shipping costs from ocean and air to road and rail and to the last mile as consumers buy more items online and buy more frequently. As such, retailers try to pass these costs along to customers in various ways while trying to offer “free shipping” as a competitive requirement.
Carriers of all modes frequently announce general rate increases and surcharges to try to stay ahead of future demand. However, carriers often analyze historical data to determine what a rate and/or surcharge should be for a future period.
Indeed, the consulting firm, McKinsey, notes that pricing strategies in logistics have been less mature than in other sectors. Fragmentation and a historically low degree of digitization have been challenges in developing more complex approaches.
But, thanks to such technology as artificial intelligence (AI) and machine learning, logistics providers are dabbling in dynamic pricing.
According to a Logistics of Logistics podcast, dynamic pricing is a pricing strategy in which businesses set flexible prices based on current market demands. Companies can change prices based on algorithms that consider competitor pricing, supply and demand, and other external factors in the market.
The trucking market has been adapting to dynamic pricing for a while now. For example, the digital freight brokerage firm, Convoy, introduced dynamic pricing in 2018 to address the spot market within the trucking industry. According to Convoy, dynamic pricing ensures shippers can move their goods through a 100% coverage guarantee.
The End of Parcel Surcharges
FedEx and UPS already appear to be heading down the dynamic pricing path.
In 2020, FedEx introduced a new organization, FedEx Dataworks within FedEx Services, focused on "harnessing the power of the rich FedEx data ecosystem to transform the digital and physical customer experience. FedEx Dataworks will create solutions that build the network for what's next by collaborating across the enterprise to integrate the technology and services customers expect and deserve", according to the company's press release. This includes capturing information at every stage of delivery a package passes through, from creating a label and scanning it through to its last-mile delivery. Algorithms are developed from this data and build the best possible routes.
UPS has undertaken a similar task with its latest version Dynamic ORION (On-Road Integrated Optimization and Navigation), introduced in 2020. This version reoptimizes routes in real-time and based on changing conditions. As the routes are optimized in real time, it's just a matter of time before pricing will be optimized, in real time, based on these routes.
During UPS's recent investor and analyst virtual conference, UPS executives discussed their Next Generation Profit initiative, a cross-functional program that, among other things, allows UPS to "optimize pricing for each customer and better align our cost to serve with the value we create." During the discussion, UPS CFO Brian Newman said, "We are continuing to evolve the platform to leverage technology that will adjust pricing in a more dynamic manner to maximize overall profit in real time."
As such, surcharges, as we know them today, could disappear along with annual rate increases. Instead, pricing will likely be determined based on current demand and available capacity on any given route at any given time. For shippers, this means that accurately forecasting capacity needs will become even more critical as will parcel contract negotiations.
John Haber is Founder & CEO of Spend Management Experts. Contact solutions@spendmgmt.com for more information.
This article originally appeared in the July/August 2021 issue of PARCEL.
