Spend Matters welcomes this guest post by Jim Haller, program director of transportation services at from NPI (www.npifinancial.com), a spend management consultancy, focused on eliminating overspending on IT, telecom and shipping.
If January’s activity is any indicator, the changes coming out of FedEx in 2015 will be both numerous and significant. During the carrier’s December 2014 earnings call, the company reported strong results and higher operating margin and emphasized the transformative role 2 recent acquisitions (Genco and Bongo) will have on its portfolio of e-commerce and supply chain solutions. But, the most noteworthy announcement was that the carrier’s fuel surcharge is under review and certain tables at FedEx Express, FedEx Ground and FedEx Freight may be updated as early as Feb. 2, 2015.
Net impact of fuel involves 3 considerations: 1) timing lags and adjustments to the fuel surcharges, 2) the structure of the fuel surcharge tables, and 3) the manner in which fuel is purchased. For years, FedEx and UPS took a similar approach to fuel surcharge indexing, which resulted in comparable fuel surcharges. Then, in April 2011, FedEx changed its practices and announced a different indexing approach that resulted in fuel surcharges that were markedly lower than UPS. Many shippers saw it as a competitive advantage over UPS.
Today, however, because the cost of fuel is lower than it’s been in years, the basis for the index is lower, and FedEx is making less off of its surcharge. (Yes, it’s counter-intuitive that lower fuel prices mean FedEx makes less on the surcharge.) Our prediction? Expect FedEx to increase its fuel surcharge to be more in line with that of its biggest competitor.
The industry’s expectation for change extends beyond the fuel surcharge. During its earnings call, FedEx executives made the following comment regarding dimensional weight pricing: “long-term, that is a key objective of ours to keep on moving both our businesses that way...” As part of its exploration into moving more business towards DIM pricing, FedEx announced that it will roll out dimensional overhead machines to capture instantaneous revenue data, monitor accurate dimensions on existing FedEx Freight volume and continue to improve pricing knowledge about what’s actually going through the entire network. Will dimensional weight pricing go beyond Ground and Express shipments? It’s very possible.
One thing is certain – accurately predicting transportation costs is getting harder by the minute. As shippers acclimate to upcoming changes in carrier pricing, they must have sophisticated cost modeling tools to calculate the impact of current and prospective carrier price changes, as well as cost-to-serve intelligence to ensure fair carrier pricing and discounts. Finally, they must be agile in their ability to quickly identify options for mitigating carrier price increases – we can expect more to come in the year ahead.