Don’t be a DIM weight; think outside the box

From an economic perspective, what you are shipping tends to matter less than the language of the agreement you have in place with the carriers that govern it. So never mind how you’re going to fit that 3.4-cubic-foot (18” x 18” x 18”) box into the trailer, sit back and let the driver handle that. What you need to worry about most is small in dimension, yet enormously influential – your pricing agreement.

As many of you know, FedEx Corp. and UPS ushered in 2011 with rate increases, which they have outlined on FedEx.com and UPS.com, respectively. Here is an overview.

In January both carriers implemented a net average ground increase of 4.9 percent. The full average rate increase of 5.9 percent was partially offset by adjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surcharge by one percentage point.

Even though the average announced increase was 4.9 percent, the all-important zone 2 one-pound minimum charge is up $0.33 cents to $5.17, a 6.8 percent increase. Analysis shows the 1-5 pound ground rates are up 7.7 percent, 6-10 pounds +7.2 percent, 11 – 15 pounds +6.5 percent, 16 – 20 pounds +6.1 percent and 21 -35 pounds +5.8 percent.

The carriers also implemented a number of changes to their accessorial rates — here are the highlights:

  • Residential/Home Delivery Surcharge is up $0.25 to $2.45, an 11.4 percent increase.
  • Declared Value has increased $0.05 per $100 to $0.75, a 7.1 percent increase. The minimum charge for Declared Value has increased $0.15 to $2.25.
  • The Address Correction charge for ground has increased $1.00, from $10.00.
  • Delivery Area Surcharges are up 15 cents to $1.85 for commercial addresses (an 8.8% increase) and up 25 cents to $2.75 or $3.00 for residential addresses (9% and 10% respectively).

UPS Air and International services had an announced increase of a net 4.9 percent through a combination of a 6.9 percent increase in rates and a 2 percent reduction in the UPS Air and International services fuel surcharge. FedEx Express rates had an announced increase of a net 3.9 percent through a combination of a 5.9 percent increase in rates that are partially offset by adjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surcharge by two percentage points.

An example of similar services for the carriers reveals the following: a FedEx Priority Overnight package weighing 5 pounds to zone 4 had a published rate increase from $50.35 in 2010 to $54.00 in 2011. This represents a 7.2% increase. The same package with an AM delivery at UPS increased from $46.70 to $50.80; an 8.8% change. Keep in mind that different comparisons may show slightly different increases for all services.

Without question, the biggest surprise of this year’s GRI announcement was the effect of the change to the dimensional weight factor (DWF). The carriers changed the dimensional weight volumetric divisor from 194 to 166 for U.S. domestic services. Dimensional weight factor for international export shipments has changed from 166 to 139.On its face, the 2011 rate change, while undesirable, is not unprecedented. But a closer look at how you could be affected by the DWF reduction is an eye-opener.

Remember that 3.4 cubic-foot (18” x 18” x 18”) package? Let’s assume it has a scaled weight of 27 pounds. When the divisor changed from 194 to 166 in 2011, its billable weight increased from 31 to 36 pounds. Assuming an average incentive of 30 percent for this shipment (an easily attainable incentive) and considering the rate change, on Dec. 31, 2010 that package would have a net rate of $10.56 to zone 5 before any other surcharges. On Jan. 3, 2011, that same package has a net rate of $12.84 prior to surcharges. No need to break out your calculator, that’s a 21.6 percent increase, a far cry from the advertised general rate increase of 4.9 percent for ground shipments.

While a hike in the neighborhood of five percent might not break the bank, it more importantly does not break the ice. In reality, the advertised increases are just the tip of the iceberg. And failure to adequately understand what lay beneath the surface can sink the margin between your budget and your bottom line, fast.

Another area that requires a second look is optimization; to help you understand your own business at a more granular level than you may have ever imagined. Optimization is about utilizing current technology and reporting capabilities to get your package off of a plane and onto a trailer, or to reduce the number of packages in multiple piece shipments. There are reporting services available that will highlight each package that would have arrived at the same time/day regardless of whether you shipped via ground or air. Of course, your business has rules in place, and they are there for a reason. Still, utilizing optimization technology efficiently will allow you to have visibility of such scenarios, making it easier to hold your employees accountable and to make adjustments where possible.

I know what you’re thinking: “Decisions about ground vs. air probably don’t apply to this company. We have great discounts within the terms of our agreement with our carrier.”

While it may be true that you have a great air discount, think of it like this: If you ship a package via air for a cost of $19 and the package would have arrived at the same time had you shipped ground for $6, you’re looking at a discount of nearly 70 percent. Regardless of your agreement with your carrier, savings that measurable will trump even the best incentives. In situations such as this, the implementation of optimization to effectively move from air to ground can put money back on a shipper’s bottom line in ways far greater than even the deepest air discounts. Simply put, switching service levels will always override incentives.

The other area of focus through optimization is package consolidation. Multiple package shipments may be the result of packages being prepared/manifested at different times during the day or even by different employees. Look for reports that identify opportunities to consolidate such shipments. One 20 pound package to a receiver will always be less expensive than two 10 pound packages to the same address.

Another area ripe with savings opportunity lies within the “SmartPost” and “Basic” services offered by FedEx and UPS, respectively. Industry sources have unofficially confirmed that UPS will launch a new service offering in early 2011, which is designed to better rival FedEx’s “SmartPost”.

These hybrid services are offered by the carrier to clients that may require certain volume levels. The aim is to eliminate certain surcharges. There are drawbacks, however. Due to the fact that these programs mix the services of the private carrier with the United States Postal Service, the savings they produce can come at the expense of limited visibility and an increase in the total time in transit.

How does your pricing agreement fit in the trailer?