At the beginning of 2015, UPS and FedEx introduced a new pricing model for all ground shipments called “dimensional weight pricing.” Package dimensions – length, width and height – are now a major factor when determining shipping rates for both of these small parcel carriers. Organizations across the globe are now discovering that this change is quickly having an undesirable effect on their business – a significant increase in shipping costs.
Shipping experts are predicting that these rate changes will ultimately result in a 20 to 30 percent increase in small parcel shipping costs. Consequently, many businesses are scrambling to find ways to offset these increases as quickly as possible. If supply chain executives do not adapt to this change, UPS and FedEx will put an additional strain on profit margins that are already difficult to maintain.
WHY THE CHANGE?
The increased popularity of e-commerce continues to change consumer-buying habits and has steadily increased the volume of packages that UPS and FedEx handle. As a result, these carriers are experiencing increased operating costs, which have resulted in more employees hired, more trucks purchased and more fuel used to handle the demand. According to a UPS spokesperson, “It enables us to more appropriately align rates with costs which are influenced by both the size and weight of packages.”
THE DIMENSIONAL WEIGHT CALCULATION
In the past, package dimensions only for air transportation or oversized parcels factored into pricing calculations. Any parcels less than three cubic feet in size were priced solely on weight for standard ground shipments. Now, size or weight – whichever is greater of the two – determines pricing.
Dimensional (DIM) weight is calculated by multiplying – in inches – the length, width and height of a package. The total product of these numbers is then divided by a predetermined DIM divisor of 166. Once the final DIM weight number has been calculated, it is then compared with the actual weight of the package, and the rate will be based on the larger number.
Here are a few examples of a package that is 12” long, 16” wide and 18” high, but with different weights:
1. 5 pound package: 12 x 16 x 18 = 3,456 / 166 = 21 DIM weight pounds.
• Since the DIM weight is higher than the actual weight, the shipper will be charged the rate for 21 pounds on this shipment.
2. 25 pound package: 12 x 16 x 18 = 3,456 / 166 = 21 DIM weight pounds.
• Since the actual weight is higher than the DIM weight, the shipper will be charged the rate for 25 pounds on this shipment.
OPTIONS FOR SHIPPERS
Here are five options that shippers will need to consider with the new dimensional weight pricing models in place:
1. Do nothing about it.
The first option is to simply do nothing about the change. Shippers who choose to do nothing will either absorb the cost increases or pass them along to their customers – but probably both. Although this is definitely the easiest option, organizations should strongly consider the financial implications on their bottom line and the potential damage to overall customer satisfaction.
2. Re-negotiate pricing.
Shippers can also make an attempt to renegotiate pricing with UPS and FedEx by asking for a new DIM divisor. Most likely, the ease of negotiation will boil down to the same factor as always in business – buying power. Organizations that ship a high volume of packages will probably be more likely to get an open ear from the major small parcel carriers on pricing negotiations.
3. Reduce the size of parcels.
Another way that shippers can offset these cost increases would be to reduce the size of the packages that they ship. Small parcel shipping costs will become much less expensive if shippers can find ways to use smaller boxes and/or less packaging materials when shipping products. If the product you are shipping is small enough, it may make more sense to avoid boxes entirely and use padded envelopes instead.
4. Implement new technologies and software.
For many organizations, creating packaging efficiencies will become a reality by implementing certain technologies and software into their shipping operations. Cartonization software is one option that works with the shipper’s warehouse management system and helps determine the best strategies for preparing shipments. Also, shipping management software is a tool that can take rates from multiple carriers and allow shippers the option to choose the cheapest rates, print labels and track shipments.
5. Use alternate methods for shipping parcels.
Finally, organizations always have the option to find other delivery methods for their small parcel shipping needs. Regional courier companies are a great alternative to UPS and FedEx in many situations. The U.S. Postal Service is also an option for small parcel shipping that many organizations often overlook when choosing carriers.
NO MORE “SNAIL MAIL”
In September 2014, the Postal Service implemented a different strategy after their competition announced new dimensional weight pricing structures – a price decrease. While UPS and FedEx applied significant price increases in the range of 20 to 30 percent, the Postal Service reduced their rates by the same amount and announced that they would not be implementing rate increases in 2015.
Aside from offering a more attractive pricing model, the Postal Service has also been busy improving its operations to be more competitive with UPS and FedEx. They have implemented many technology upgrades that include real-time tracking capabilities and barcode labeling improvements. Additionally, an e-commerce shipping study conducted by Stamps.com concluded that the Postal Service also provides faster transit times than their competition.
WHAT’S AT STAKE
All in all, it will be interesting to see how the shift toward dimensional weight pricing impacts the global economy. Who knows? The days of “free shipping” and Prime Memberships may soon become a thing of the past. Perhaps, these price increases will drive buyers back to brick-and-mortar stores and away from online ordering. Many shippers may even avoid UPS and FedEx altogether. Either way, the changes these carriers have made this year will guarantee one simple truth: dimensional weight pricing is going to cost us all.