Bad News from UPS and FedEx is Bad News for Shippers

Spend Matters welcomes another guest post from Jim Haller of NPI, a spend management consultancy focused on eliminating overspending on IT, telecom and shipping.

Earlier this week, UPS lowered its Q2 earnings forecasts, a move that came just three months after similar actions from FedEx in March of this year. According to the Big Two, the lower-than-anticipated financial performance can be attributed to more customers opting for less expedited (thus, less profitable) shipping services.

At this juncture, conventional wisdom would say that shippers finally have a leg up and that carriers should soon feel the pressure to offer expedited services at a slightly lower cost. Right?

Wrong. If anything, shippers should get ready for the storm ahead. History tells us that when the market gets tough for carriers like UPS and FedEx, shippers pay the price. In the second half of 2013, we should expect these small parcel giants to come out swinging to increase profit margins and make up for lost revenues.

There are three market forces that will shape the cost of shipping for the remainder of the year. They are:

  • A capacity crunch. The bright spot in UPS’s and FedEx’s immediate future is demand. Capacity is tightening by the day, thanks to an uptick in manufacturing and consumer confidence. It will only get tighter as manufacturers, suppliers, and retailers gear up for the 2013 holiday season, thereby giving carriers the leverage to raise rates.
  • Higher labor costs. Neither carrier is happy about new, stricter labor regulations that limit hours of service per driver. But, don’t expect them to take an increase in labor costs sitting down. Guess who will pay the price? That brings us to the next point…
  • Pricing and service level changes. Carriers, especially UPS and FedEx, are on the hunt for higher profit margins. Higher accessorial fees, new surcharges, and service level changes like the removal of Guaranteed Service Refunds from customer agreements are but a few examples, and the storm has only just begun.

How will you preempt and negate the cost increases of these changes? It’s a question every logistics executive should be asking. Those shippers without a strategy in place to offset these market forces will be well positioned to overspend in the months ahead.

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