By Thomas Andersen, Partner / Vice President of Supply Chain Service – LJM Freight Auditing & Consulting
UPS and FedEx will soon implement what is said to be the largest pricing increase in their company’s history. Both carriers announced they will be applying Dimensional Weight Pricing to all ground shipments, whereas today, only ground packages measuring greater than 3 cubic feet (5,184 cu. inches) are subject to Dimensional Weight pricing (this pricing is already in effect for all FedEx Air and UPS AIR services). This change is leaving shippers scrambling to try to quantify the financial implications. The Dimensional Weight rule change coupled with their annual general rate increase (GRI) only adds to the ongoing budgeting dilemma and pricing confusion.
Basically, a higher billable weight will apply to all packages where the Dimensional Weight exceeds the actual weight. Dimensional Weight is calculated by multiplying the length by width by height of the package (in inches) dividing by 166 (for domestic shipments) or 139 (for shipments to Canada) … unless a customized Dimensional Weight factor has been negotiated, in which case that factor should be used (any fraction is rounded up to the next lb.).
Example: beginning December 29th, 2014 a UPS domestic ground package, Zone 2, weighing 4 lbs. with dimensions of 12″L x 12″W x 12″H will be billed at the 11 lb. rate (12 x 12 x 12 = 1728 / 166 = 10.4 lbs., rounded up to 11 lbs.; currently, this package is billed based on the actual weight of 4 lbs.. The Dimensional Weight rule change causes a base rate increase of 24% increase for this particular package. NOTE: this increase represents the Dimensional Weight Increase only (please click the following link to see the complete UPS 2015 rate chart for specific base rate pricing).
Industry insiders estimate that about 33% of overall Ground shipments will be impacted by this change, however, e-commerce companies, who ship mostly residential packages that are less than three cubic feet in size and typically weigh less than 25 lbs. will be impacted at a much higher rate. The bottom line is the change will likely negatively impact most shippers and you should be preparing for this monumental increase.
From the carrier’s perspective, the Dimensional Weight rule change makes perfect business sense for UPS and FedEx and the change was inevitable. In every other mode of transportation, pricing is based on the combination of volume and weight. The Carriers typically run out of space in their trucks and planes long before they exceed weight limits. Yet, with the 3 cubic foot threshold, there has been little incentive for packaging optimization up to 5,184 cubic inches (3 cubic feet). In addition to this not benefitting the Carrier, it doesn’t benefit the shipper either, other than minimizing box sizes and simplifying the pick and pack process. In fact, if shippers believe that they haven’t directly or indirectly been penalized by Dimensional Weight pricing for less than 3 cubic foot ground shipments historically, they are mistaken. Carrier Pricing Departments pay close attention to package dimensions versus actual weight. They measure their profitability based on several factors… density is one of the primary drivers and impacts the discounts and other incentives that are approved. (Arguments can be made that additional space for dunnage is a necessity to minimize damages, and in some cases that’s true, but in the majority of cases we find that there is wasted space).
This pricing change will require some type of immediate action by shippers who wish to avoid an additional financial burden. Unfortunately, the increase will continue to be impactful to many shippers in the long-term being that some shippers are limited by the operational changes that can be made and will need to resort to negotiating the necessary terms with the Carrier. For those that have the flexibility, this change in business practice may encourage shippers to evaluate options and utilize packaging that’s more appropriate based on the commodities that are shipped. With space often being UPS and FedEx’s operational bottleneck, these changes should help improve the revenue per cubic inch, resulting in opportunities to pass savings along to the shipper (the carriers ultimately operate on overall margin), especially in the long-term. Those with more favorable freight then become a desirable target for UPS and FedEx, which ultimately benefit the Shipper.
These Dimensional Weight increases were announced four months earlier than usual. UPS and FedEx understand that their clients need time to make the necessary changes, either operationally or contractually, or both. They expect their clients to demand changes to their contracts, which address these issues.
So how can this benefit you? If you have built your business exclusively around shipping lampshades and light bulbs, you may only be able to hold on to what you already have, if you’re lucky…If you have more desirable freight however, this could be a great opportunity to evaluate packaging processes and identify potential changes. Start by gaining visibility to your data and then determine what changes can be made internally. You can then approach the Carriers to manage effective negotiations based on the remaining gaps. Now that many shippers will be taking significant increases, those that are aware of the options are positioned to negotiate more effectively than in the past.
What you can do to prepare for the Dimensional Weight Rule Change?
- Examine your current shipments best you can and calculate the Dimensional Weight vs. the Actual Weight. If you don’t have this information electronically, spend time in the warehouse measuring box sizes and weighing packages using the 2015 Dimensional Weight rules
- Speak with your vendors and third-party shippers to make certain they are packaging properly when shipping in-bound to you or using your account number to ship to third parties. It is difficult enough controlling your own warehouses and employees let alone trying to advise other companies
- Consult with your carton manufacturer and /or a package design consultant and ask for package design help
- Consider increasing the amount of box sizes you use
- Reconsider your packaging material
- Consider Regional Carriers, Consolidators, U.S.P.S. SmartPost and SurePost
- Install a carrier neutral third party shipping system. UPS WorldShip, UPS ConnectShip and FedEx ShipManager systems are costing you a lot of money. They are not FREE!
- Look into Address Hygiene Software and Dimensional Weight Scales
- Audit your weekly carrier invoices for overcharges and errors. This is “FREE” money
- Negotiate, Negotiate, Negotiate – do not wait until 2015. Renegotiate your carrier agreement now.
- Ask for professional help from a third party contract negotiating company/consultant
***View the following negotiation video by clicking here.
Thomas Andersen is Partner / Vice President of Supply Chain Service for LJM Consultants, one of the leading UPS/FedEx invoice auditing and contract negotiating firms in America (www.myLJM.com). Thomas has more than 15 years of logistics and transportation experience. His core expertise is negotiating contracts with UPS, FedEx, DHL, and the Regional Carriers. Thomas began his career in the transportation industry with DHL Express, where he served as a Senior Pricing Manager. Thomas held Senior Level Executive positions with two other contract negotiating and auditing firms prior to being hired as partner at LJM Consultants. He attended the University of Florida and Florida Atlantic University, where he received his Bachelor of Science in International Business and an his MBA. To speak with Thomas, please call (631) 844-9500 or email tandersen@myLJM.com or info@myLJM.com.