The latest chapter in the multiyear rate squeeze applied to parcel shippers by FedEx Corp. and UPS Inc. was written last week when FedEx changed the formula used to calculate prices for all its U.S. air and ground deliveries. The narrative, though, will remain the same as in the prior chapters: Large shippers will mostly skate by, while smaller shippers will pay more.
Memphis-based FedEx announced Tuesday that it would shrink the "volumetric divisor" used to calculate dimensions of the domestic parcels it transports. To arrive at a rate based on a parcel's dimensions, FedEx multiplies the length, width, and height by inches, and then divides the sum by a divisor. Effective Jan. 2, the divisor will reset to 139 from the current level of 166 that's been in effect since 2011.
The process may sound arcane and the change may seem like a tempest in a teapot. But it is consequential to millions of parcel shippers. With a divisor of 166, a parcel measuring one cubic foot, or 1,728 cubic inches, would yield a "dimensional weight" of 11 pounds, rounded off to the next highest weight. The same parcel, with a divisor of 139, would have a dimensional weight of 13 pounds, a near 20-percent increase. Because shippers pay the higher of either the parcel's dimensional or actual weight, a FedEx parcel that weighs, say, two pounds, would be priced, as of January, as if it weighed 13 pounds.
Yet if history is any guide, the vise will turn not on the big boys, but on smaller businesses that lack sufficient volumes to gain negotiating leverage with the carriers, are not schooled in the ins and outs of dim-weight pricing, or a combination of both. Satish Jindel, founder and president of SJ Consulting Group Inc., said that when the carriers changed their divisors five years ago to 166 from 194, they effectively gave big companies a pass, even though many of those firms frequently tendered packages with dramatically outsized dimensions.
Not much has changed, Jindel said in an interview Friday. Big shippers continue to get waivers at the expense of smaller firms, which effectively subsidize their larger brethren, he said.
Jack T. Ampuja, president of consultancy Supply Chain Optimizers, said in an e-mail last week that the FedEx move signals that cost pressures "will just continue to mount on smaller and medium-sized enterprises, especially those [that] are inefficient in density." Ampuja's firm, along with Niagara University and DC Velocity, recently released a study examining shippers' responses to moves made by both carriers more than 18 months ago to apply dimensional-weight pricing to all U.S. ground shipments measuring less than 3 cubic feet. Ampuja, who co-authored the survey's analysis, stressed the need for shipper education and awareness to mitigate the impact of the changes.
In an interview, Jim Haller, program director, transportation services, for consultancy NPI LLC, said the high-volume shippers that account for the bulk of FedEx's traffic may not experience any change in the near term. However, while customers in the midst of multiyear contracts may be granted waivers for their contracts' duration, they may be hit with an adjustment as a precondition of renewal, he said.
Jerry Hempstead, head of a consultancy that bears his name, said shippers whose parcels have never been subject to dimensional pricing might be in for a shock as the reduced divisor catches more parcels in its net. There is no dimension-related information contained in the bills of shipments that have traditionally been priced on their actual weight, Hempstead said in an e-mail. Shippers now facing dimensional pricing can only determine its impact if they have package dimensions in their files, which is rare, he said.
The FedEx action could have an enormous impact on e-commerce shipping costs, especially if UPS—which transports far more packages than its rival—follows suit as expected. The increases put even more pressure on merchants that offer free shipping as a way of attracting and retaining customers, who are conditioned to the supposed perk. Krish Iyer, director, shipping and tracking solutions, for consultancy Neopost USA Inc., said the typical e-commerce shipment weighs less than 7 pounds, which is the weight threshold where the FedEx change would have the most impact.
Iyer said in an e-mail that the FedEx move reflects the "unintended consequences" of the surge in e-commerce, which has left FedEx and UPS handling larger volumes of lightweight and sometimes bulky parcels. Those shipments lack the profitable density of business-to-business traffic because one package is usually being delivered to one residence at a time.
Iyer said shippers will likely turn more to the U.S. Postal Service, and to regional parcel carriers, out of necessity. According to a Neopost table that is current except for the latest FedEx change, no carrier applies a divisor below 166. USPS uses a divisor of 194, and that applies only for shipments transported more than 1,000 miles.
FedEx did not comment on the reasons behind the move or its financial impact. T. Michael Glenn, FedEx's executive vice president, market development and corporate communications, said during an analyst call Tuesday that the company hoped more customers would work with its packaging lab to streamline their packing processes and eliminate the bulk that surrounds relatively small items. UPS and FedEx executives have been pushing shippers, especially those involved in e-commerce, to remove the packing heft from their parcels that causes them to occupy a disproportionate amount of space on planes and truck trailers.
The FedEx move, and its timing, caught some parcel consultants by surprise. Rob Martinez, president and CEO of consultancy Shipware LLC, said he expected FedEx to announce adoption of dimensional weight pricing for the "SmartPost" last-mile delivery product it operates along with USPS. FedEx has yet to disclose its SmartPost pricing; UPS employs dimensional pricing for a similar product known as "SurePost."
Ampuja of Supply Chain Optimizers said he didn't think FedEx would move so quickly. As a result, Ampuja expects UPS to follow suit as early as January. Other experts said UPS would wait until mid-2017 or as late as early 2018 to act, noting that its 2017 published rate increases are, in some areas, higher than FedEx's, and UPS risks shipper backlash if it changes its divisor threshold so soon. Atlanta-based UPS, for its part, has said it plans no near-term changes to its pricing program.