UPS & FedEx Rate Hikes: How Will They Impact Your Supply Chain Spend?

Spend Matters welcomes another guest post from NPI, a spend management consultancy focused on delivering savings in the areas of IT, telecom, transportation and energy.

This is the time of year when the two gorillas in transportation, FedEx and UPS, announce their annual rate increases. FedEx announced their 2011 rates last month, and UPS gave the market a snapshot last week of what to expect when they fully disclose rates on November 12th.

Let's just say the numbers aren't very pretty, especially as most shippers are teetering between economic recovery and recession. Here are a few of the most notable price increases that will impact shipping costs:

Dimensional Weight (DIM) Factor: Carriers have historically charged by weight. However, moving large-sized, lightweight packages wasn't very profitable, so carriers established a minimum charge for the cubic space a package occupies. This charge is based on a DIM (dimensional) factor. In 2011, that DIM factor for both UPS and FDX will increase by 16.9% from 194 cubic inches per pound to 166. This will have tremendous cost implications for shippers of all sizes, especially those with lighter-weight, bulky shipments (e.g. plastic containers, pillows, luggage, etc.). The carriers, on the other hand, will increase their margin on this category of shipping spend.

Accessorial Rates: When FedEx announced their 2011 rates, it included the largest accessorial cost increases in history (we expect UPS will follow suit). These costs, otherwise known as surcharges, are the profit center for carriers. Here are several to consider:

  • FDX Express Delivery Area Surcharge up 8.9% ($1.85 vs. $1.70) – Depending on the recipient's zip code, you may be charged an extra fee to ship to that destination.
  • FDX Express Residential Area Surcharges up 10.0% ($2.75 vs. $2.50) – This is a surcharge for shipping to residential destinations.
  • FDX Express Extended Area Surcharge up 9.1% ($3.00 vs. $2.75) – If you're shipping to more rural destinations, as determined by FedEx, you may pay an additional fee.
  • FDX Express Indirect Signature Required up 14.3% ($2.00 vs. $1.75) – This is a surcharge for requiring a general signature upon delivery of a package.

Long Zone Air Rates: Here is how the 2011 air rate increases break down: UPS announced an effective 4.9% rate increase (6.9% rate increase with a 2% reduction to the fuel surcharge index). FedEx announced an effective air rate increase of 3.9% (5.9% rate increase with a 2% reduction to the fuel surcharge index). But, there's a good chance these increases will feel like a lot more to many shippers. That's because carriers announce air rates as a straight average rate for short and long zone delivery, which can be misleading as a high percentage of air shipments are long zone. In reality, a long zone priority overnight delivery will cost 7.5% more in 2011, while a short zone priority overnight shipment will cost 4.8% more. All in all, expect that 5.9% increase to deliver the impact of a 7.5% increase.

It's alarming that UPS and FedEx will be raising rates at historic levels despite economic conditions. It's also interesting to note that they announce these changes in lock step. But, is it surprising? Not really. They've been doing it for years. Some shippers are confused into passivity by the carriers' complex pricing schemas and surcharges. Because they don't fully understand the increases, they don't know how and when to push back on carriers.

What do you think? How will these price increases impact your organization?

-- John Haber, EVP of Transportation, NPI

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