The piping hot pandemic-era parcel market has cooled, giving way to softer demand. But while shippers currently navigate calmer seas, peak season looms on the horizon. Forecasts for this year call for a more muted peak, though shippers still face icebergs lurking beneath the surface that can cause carefully planned peak operations to leak cash and sink budgets.
1.Keep a close eye on carrier surcharges
After engaging in significant discounting to compete for falling package volumes last year, UPS and FedEx have more recently deployed accessorial charges as covert tools to increase yields, with changes to fuel, demand and delivery area surcharges. Carriers typically communicate changes to fuel tables and other accessorial charges as part of annual general rate increase (GRI) announcements, but in recent months, they have made several out-of-cycle changes to boost revenue. With new rules governing which surcharges apply in what circumstances and major increases applied to others, shippers could face higher costs to move the same parcel mix.
For example, UPS and FedEx expanded the delivery area surcharge (DAS) to more ZIP Codes earlier this year, adding 82 ZIP Codes clustered in urban centers that impact a full one percent of the US population. As a result, carriers now consider more than half of all ZIP Codes in the US “difficult or costly to access” and subject to the DAS. Carriers have also raised the fuel surcharge three times since the 2024 GRI announcement, with both ground and express fuel surcharges becoming increasingly divorced from the government indices on which they’re supposed to be based. As of March 2024, the jet fuel index was up 40% since 2021, but during the same period, the express fuel surcharge was up over 100% for both carriers. Over the same period, the diesel fuel index was up 22%, but the ground fuel surcharge for both carriers was up over 75%.
2.Conduct a package and service audit
Getting a thorough understanding of their package volume can help shippers navigate the evolving minefield of carrier surcharges. Audits can not only define the potential impact of recent changes but give shippers a view of their most expensive parcels and actions that could be taken to avoid incurring oversize and other major surcharges. For example, to avoid the particularly expensive additional handling surcharge that applies to large, bulky packages, it may be more cost-effective to divide them into two smaller ones that fall below the carriers’ size and weight thresholds for the fee.
Audits are also important tools to get ahead of the errors that tend to happen when shippers and carriers alike get busy working through higher volumes. Validating addresses in advance helps shippers avoid correction charges from carriers in case fulfillment operations neglect to check addresses in the rush to get orders out the door. And if carriers erroneously apply surcharges, audits equip shippers to quickly correct them before they snowball. For example, one inappropriately applied residential charge can turn into a recurring problem if a shipper has several customers in the same area.
Finally, shippers should take a critical eye to the service levels they use and evaluate whether more expensive express services are really necessary, or if a lower cost option like ground or even SurePost will do the job. For example, shipments within a 600-mile radius of their destination will typically make it there within two days via ground, without the added cost of more expensive express service.
3.Start promotions earlier to smooth out peaks
Remember the “peak surcharge” of years past? It now has a different name – demand surcharge – and rather than applying only during peak season, it lasts all year. However, a peak element still remains, as demand surcharges are at their most expensive from October through mid-January, and a lower demand surcharge is applied in other periods of the year.
For larger e-commerce businesses with a lot of residential deliveries, odds are that peak season will see them hit the volume threshold to trigger residential demand surcharges. To limit their exposure to demand surcharges when they are most costly, these shippers can take action to spread some of their peak volumes to earlier months. Whether by starting sales promotions early or other tactics, shifting volume to blunt spikes in demand for shipping services can not only save parcel costs, but smooth the operational burden inside distribution centers, too.
4.Onboard alternate carriers ahead of time
The worst time to onboard a carrier is when you need them urgently. Operations must be prepared well ahead of time to confidently pivot to a backup option so that a service interruption with a primary carrier does not trigger even greater complications when switching to an alternative to handle the delivery. Make sure an agreement is in place, software and other systems work, and tests have been completed to verify success and work out any wrinkles. That way, if the original carrier misses a pickup Friday, shippers can rest assured the other carrier is ready to hit the ground running when they call them on Monday.
Using alternate carriers can also help limit demand surcharges by keeping volumes below certain thresholds. However, volume-based discounts are an important consideration for diverting parcels from FedEx and UPS. Carriers determine discount tiers based on 52-week averages, so if shippers move away too much volume, they risk dropping to a lower discount tier. To prevent unintended consequences, avoid snap decisions and rely on careful analysis well ahead of the holiday rush.
Chart the Right Peak Season Course
While projections anticipate a more subdued peak season compared to the memorable highs of the pandemic era, shippers cannot afford complacency. They face a parcel landscape marked by complexity and a seemingly constant shift in pricing logic – who knows when the next fuel surcharge increase will materialize? Setting the proper foundation and finding the right formula requires expertise and experience, with careful decision-making that sidesteps adverse effects. Starting early and bringing in the right support can help businesses successfully chart the course of peak season success.
Micheal McDonagh is President of Parcel, AFS Logistics.
This article originally appeared in the July/August, 2024 issue of PARCEL.
