Countdown to D-Day
The upcoming holiday peak season will be the first since FedEx and UPS moved to dimensional weight pricing. Are the nation's parcel shippers ready?
In the spring of 2014, FedEx Corp. and UPS Inc. announced plans to price deliveries of ground parcels measuring less than three cubic feet by their dimensions instead of their weight. At the same time, they said the respective changes would not be implemented until after the 2014 holiday season. That way, the carriers reasoned, businesses would have time to adjust to what was expected to be major changes to their shipping patterns. It would also avoid any unnecessary headaches during the hectic peak shipping period.
The start of the 2015 peak cycle is less than three months away, and shippers have been through nearly a year under the new pricing regimes. While no crystal balls were available for comment, it seems logical to postulate that, for shippers, the upcoming holiday experience will resemble that of the first 10 months: namely, those who've not felt much of an impact, for whatever reason, will skate through the holidays unscathed. Those whose budgets have been hit will continue to feel the pain, amplified by the increased holiday volumes and the year-round increase in shipping complexity brought about by the digital commerce and fulfillment tsunami.
When the changes were announced, several parcel consultants who work with shippers every day warned they would result in massive price increases for shippers tendering lightweight, bulky packages, which account for a large chunk of digital commerce. Dividing a three-cubic-foot package that measures 5,184 cubic inches by 166, the divisor set by the carriers in 2011 to calculate dimensional weight (or dim weight), would result in a rate equal to a 36-pound shipment, even though the parcel's actual weight would be much less. Shippers generally pay the greater of the actual or dimensional weight rate. Until this year, ground shipments measuring less than three cubic feet had been exempt from dimensional pricing.
Rob Martinez, president and CEO of consultancy Shipware, LLC, who forecast huge rate increases at the time the changes were made public, said prices have indeed risen significantly throughout the year and will cause economic turbulence for shippers through the holiday period as volumes accelerate. "Just because the impact of the increases has already been felt doesn't mean it will stop being felt," he said.
Based on Shipware data, the 2015 billed weight for parcels moving via FedEx Ground, the company's ground-delivery unit, was 28.7 percent higher than the parcels' actual weight. At FedEx Home Delivery, which delivers business-to-consumer (B2C) shipments to residences, the discrepancy was even wider; in 2015, the billed weight was 45.1 percent higher than the actual weight, according to Shipware data. In 2014, the gap was 11.6 percent.
At UPS, the 2015 billed weight for all its ground services was 16.4 percent higher than the actual weight, according to Shipware data; in 2014, the discrepancy was 12.8 percent. Martinez believes the UPS differential is not as extreme because the pricing change fell more heavily on B2C transactions and UPS handles more commercial packages than residential shipments. Martinez said only a handful of the very largest shippers have been granted waivers or deferrals from the pricing changes. Virtually the entire shipping population lost the exemption, though some of the larger shippers were given a higher divisor to work with, thus effectively mitigating some of the increases, he said.
FedEx will likely decrease the benefits of the higher divisor over the life of the contract, which is typically three years, Martinez said. By contrast, UPS generally ties any divisor-related concessions to the length of the contract without any phase-outs, he added.A DIFFERENT VIEW
Martinez's comments stand in sharp contrast with those of Paul Steiner, vice president of strategic analysis at consultancy Spend Management Experts. Steiner said the vast majority of large shippers his firm consults for have received either full waivers for the length of their contracts or, in the worst case, deferrals that run for most of the contractual period. He added that few customers have felt the need to ask how to reduce box sizes and empty packing space, steps that would help cut dimensional shipping costs.
Steiner said the 2011 reductions in the carriers' dim-weight divisors to 166 from 194, which applied to all shipments except ground parcels of under three cubic feet, had more of a profound change on the market than the most recent adjustments.
That said, Steiner, who spent 17 years at UPS in various executive roles including global pricing, said both carriers will find ways to offset foregone revenue associated with waivers and that their compensation will likely come from the budgets of small to mid-sized shippers that lack the volume and negotiating leverage of bigger companies.
Paula Heikell, chief marketing officer for consultancy Advanced Distribution Solutions Inc. (ADSI), concurred with Steiner's assessment of a bifurcated market with large and small shippers experiencing different outcomes. Heikell said all shippers stand to benefit from the development of mobile handheld dimensioning devices that provide upstream visibility of package dimensions so orders then don't have to be pulled and repacked to comply with the carriers' guidelines. The equipment, which is not cheap but stands to gain critical mass as prices come down, will also be invaluable in helping companies manage dimensioning in the complex but increasingly important area of returns management.
Michael Lambert, vice president of strategic solutions for consultancy Green Mountain Technology (formerly Green Mountain Consulting), falls somewhere in between Martinez's views and those of Steiner and Heikell. Lambert said the company and its customer base, whose core is large retailers, have spent a lot of time over the past 16 months preparing for the changes. Through negotiations with the carriers, Lambert said, Green Mountain has helped shippers mitigate a portion of the increases. "There has been some impact, but it's not as bad as it could have been," he said.
Lambert said the most revealing part of the past year's process was discovering that many shippers had no data-collection tools to capture dimensions or to determine whether their package sizes met the carriers' revised criteria. Before the changes, shippers were "not really thinking about what they were giving" the carriers, he said, adding that the new regimen sparked a behavioral change on the part of shippers.
Lambert said Green Mountain has followed a three-step plan to deal with the changes: understanding its impact, collaborating with carriers in rate negotiations, and implementing data-collection practices. The first two have largely been completed; the third is a work in progress that will take some time, he added. All of this will come as retailers move from having two to four distribution centers for fulfillment, to managing hundreds if not thousands of nontraditional locales like retail stores that are now beginning to serve as DCs.ALTERNATIVE ACTIONS
FedEx and UPS originally made the moves in an effort to better align package pricing with the amount of space the parcels occupied on a truck. They also believed that customers could gain by streamlining their packaging to remove unneeded "empty air" surrounding the product. Spokeswomen for the carriers said they've made a concerted effort to work with customers to make their packaging more efficient, in some cases connecting shippers with packaging and technology companies to help them remove "filler" and shrink shipment dimensions.
There are also alternatives. Shippers can use regional parcel carriers and the U.S. Postal Service (USPS), both of which offer higher dim-weight divisors and thresholds. They could shift packages to services like FedEx "SmartPost," managed in conjunction with USPS and which does not use dimensional pricing. Apparel shippers in particular could migrate to polybags for lighter, smaller shipments. Martinez suggested that merchants offer online shippers free shipping only to retail stores rather than to the consumer's residence. That way, multiple orders can be consolidated into one commercial shipment, he said.
See related news story: "UPS to hire 95,000 seasonal employees to handle holiday rush"
About the Author
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.
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