By Thomas Andersen, Partner / Vice President of Supply Chain Service – LJM Freight Auditing & Consulting
On June 17, 2014, UPS announced that it will apply dimensional weight to all packages moving by its ground service, rather than just those with dimensional weight greater than 3 cubic feet (L x H x W > 5,184 cubic inches). This change will be effective December 29, 2014. This announcement comes nearly seven weeks after FedEx announced the same change, effective January 1st 2015. As a result, a higher billable weight will apply to all Ground packages where the dimensional weight exceeds the actual weight. * This practice is already in effect for FedEx Express and UPS AIR services.
Experts claim that 33% of all Ground shipments will be impacted by this change. This would be accurate if the change were to happen right away. However, since shippers still have more than seven months to make the necessary changes, either contractually (renegotiating their carrier agreement) or operationally, the 33% will be significantly reduced. UPS and FedEx will still expect to experience a very healthy increase in profitability from many of its ground clients, however.
This increase may be viewed by many as being either shrewd or egregious, depending on how it affects them. The bottom line is that the change is going to negatively impact many shippers. BUT, it also 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 is little incentive for packaging optimization up to 5,184 cubic inches. In addition to not benefitting the Carrier, it doesn’t benefit the Shipper, other than minimizing box sizes and simplifying the pick and pack process. 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 (with most Shippers) we find that there is wasted space. There is no one to really blame for this, because there hasn’t been much incentive to operate more efficiently. Carrying additional box sizes or cut-down boxes (and labor costs associated with making them the correct size) certainly come at a cost, but opportunities to offset those costs for most Shippers exist.
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 likely 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.
This change will be impactful to most Shippers (especially initially), since it will require some type of action by nearly everyone that wishes to avoid an additional financial burden, and the action is required to be completed in the next six months. It will continue to be impactful to many Shippers in the long-term, as well. 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 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.
What’s also interesting about this was the timing of these announcements. FedEx historically begins the initial round of announcements related to rate increases in September each year with UPS following a few weeks later. 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. UPS and FedEx will need resources and time to address the contractual implications, whether through customized cubic inch thresholds, dimensional weight divisors, or other solutions. Their people will be busy.
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 protect what you already have. 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 others are taking significant increases, those that are aware of the options are positioned to negotiate more effectively than in the past.
* Dimensional Weight is calculated by multiplying the length by width by height of each 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.
Example: a 2 lb. package with dimensions of 10”L x 10”W x 10”H will be billed at 7 lbs. as of January 1, 2015 (10 x 10 x 10 = 1000 ÷ 166 = 6.024 rounded up to 7 lbs. In today’s environment, it is billed as a 2 lb. package.
Thomas Andersen is Partner / Vice President of Supply Chain Service for LJM Consultants (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. He attended University of Florida and Florida Atlantic University, where he received his Bachelor of Science in International Business and an MBA. To speak with him, please call (631) 844-9500 or email tandersen@myLJM.com.