Attention FedEx and UPS Ground Shippers: New Carrier Policies Amount to Largest Rate Increase Ever!
By now it's likely you've heard that both FedEx and UPS are revising pricing policies for ground packages, moving from weight-based to pricing based on package size starting in 2015. Currently, both parcel carriers apply dimensional weight pricing only to ground packages measuring three cubic feet (5,184 cubic inches) or greater. The elimination of the three cubic foot exception is effective Dec. 29, 2014 for UPS, and Jan. 1, 2015 for FedEx.
FedEx was the first to announce the move to price by package volume — the amount of space a package occupies in relation to its actual weight. Scott Davis, UPS's chief executive officer, recently called the FedEx policy "sensible," and this week UPS too eliminated the three cubic foot exception for ground products.
FedEx justified the change as a way to align the FedEx ground dimensional weight pricing with FedEx Express. UPS says volume-based pricing will enable the carrier to more appropriately align rates with costs. E-Commerce shipping trends have resulted in a decrease of package density, which causes cargo space to be less efficiently utilized, resulting in an increased cost per package.
UPS foresees benefits for shippers as well as the environment. UPS's website states, "as a result of the dimensional weight pricing method, more shippers will seek to optimize their packaging practices. These efforts will reduce excess packaging materials and overall package sizes, leading to related reductions in fuel use, vehicle emissions and transportation costs."
While arguably true, make no mistake about it: These changes will amount to one of the largest rate increases in the history of the parcel industry. The majority of ground packages are less than three cubic feet, especially ground residential packages. Shipware estimates that 55 percent to 65 percent of ALL ground packages between FedEx and UPS will be impacted by the new pricing rules.
The table below shows the new dimensional weight calculations applied to the 25 most common box sizes sold in the U.S. The first three box sizes result in a dimensional weight of 1 pound — the absolute minimum weight — and therefore aren't impacted by the change. However, the next 15 box sizes (highlighted in yellow) will be subject to the new dimensional policies in 2015. The remaining seven box sizes — those at or above 5,184 cubic inches — are already impacted by the current dimensional rate calculation, and as such aren't incrementally impacted by the announced change.
Some shippers are making the mistake of thinking they're not affected because they've negotiated nonstandard dimensional divisor greater than 166. While many volume shippers have contract dimensional divisors (greater than the standard 166), few have negotiated specific cubic thresholds written into their contracts. A shipper's carrier contract must specify a three cubic foot (or other such exception), and such exceptions are rare. Shipware estimates that fewer than 5 percent of parcel pricing agreements for volume shippers include specific cubic threshold exceptions.
Like FedEx, UPS made the announcement several months in advance of the actual increase knowing that its biggest customers will want to negotiate, and that obviously takes time. UPS's announcement is significantly more impactful than FedEx's, as it does three times the ground volume as FedEx. When fully deployed, Shipware estimates $380 million/year to the upside for UPS, and $180 million/year for FedEx.
Neither carrier will be able to implement the new policy with ALL customers right away. What we've been seeing is a multiyear approach to implementation. For example, no changes to the 5,184 cubic inch DIM exception in year one; year two = DIM exception decreases to 4,000; year three = 3000; year four = no DIM exception. For 2015, Shipware forecasts the carriers will get about half the potential revenue windfall.
So what can shippers do? Consider the following tips:
- Understand the impact of these dimensional changes to your business. Review the table of box sizes above, and conduct a similar analysis using your primary box sizes and actual weights to compare with the new dimensional weight.
- Contact your FedEx and UPS representatives in an effort to amend your current contract with a customized cubic inch threshold and/or dimensional factor. Both FedEx and UPS know they won't be able to implement volume-based pricing with all of its customers — or at least not right away.
- Consider deferred ground services. FedEx SmartPost packages are NOT affected, as that service doesn't apply a dimensional rule, making SmartPost an even better economic alternative to FedEx Home Delivery for lightweight, nonurgent, residential packages. As far as we know, UPS SurePost will maintain the 1,728 DIM exception policy.
- Consider alternative carriers, including the USPS and regional parcel carriers. The USPS offers a 194 DIM factor, and some regional carriers don't plan on matching the 2015 increases.
- Seek help. Shipware has established a review-and-action plan for shippers concerned about this rate change.
Rob Martinez is the CEO of Shipware LLC, a professional services firm that transforms businesses through intelligent distribution solutions and strategies. Rob has helped some of the world’s most recognizable brands reduce parcel shipping costs an average of 25 percent through contract negotiations, rate benchmarking, modal optimization, invoice audit and other savings vehicles. A cum laude graduate of UCLA, Rob has 20 years of transportation industry experience, including executive positions at DHL and Stamps.com, in addition to his work as an outside consultant since 2001.