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FedEx's Move to Dimensional Pricing: How Shippers Should Respond

Shippers are bracing for a big increase in the cost of moving packages by ground service.

FedEx's Move to Dimensional Pricing: How Shippers Should Respond

On Jan. 1, 2015, FedEx will begin applying dimensional weight pricing to all ground shipments. No longer will shippers pay the same rate for all parcels of less than three cubic feet. The change is expected to boost rates by 30 to 50 percent in some cases, and affect an estimated one-third of FedEx’s ground shipments.

The increase was buried in a May 2 announcement of FedEx pricing changes, which also included a 3-percent rise in FedEx Freight’s fuel surcharge indexes, to take effect on June 2 of this year. But FedEx gave customers a full eight months’ advance warning of the shift to dimensional weight pricing – perhaps to give rival UPS time to match the action.

Industry observers expect UPS to do just that, given the propensity of the two parcel-handling giants to follow one another’s pricing moves. One way or another, though, shippers are about to experience “a significant change for the industry in terms of how packages will be rated,” says Jaris Briski, general manager of integrated parcel solutions with third-party logistics provider Genco.

What can shippers do? Dominant as FedEx and UPS are, their customers aren’t without options. Step one, says Briski, is to conduct a self-assessment to determine the impact on your own operation. Do you fully understand the change, and how it will affect you? What do your current contracts with the parcel-handling giants, as well as with other providers, look like? Make certain that you have a method of calculating the true landed cost of every shipment.

Beyond that, there are certain “levers” you can work in order to mitigate the impact of a price boost, Briski says. Large-volume shippers can explore opportunities for discounts or even free shipping.

There are a number of package-rating options that can lower costs and free you from static routing guides. Even the standard divisor by which carriers determine the space that a bulky or lightweight package occupies on a van – FedEx and UPS have been using the number 166 for more than three years – could be up for discussion. “In the end,” says Briski, “it’s between the shipper and the carrier.”

In addition, take a look at the packaging itself, which is often excessive and can easily be reduced in size, both for purposes of cutting the shipping rate and forging a greener supply chain. Extra packaging material such as bubble wrap can markedly increase the dimensions of a box and drive up shipping costs under the new regime.

Even if UPS follows FedEx in adopting the new pricing structure, other carriers will continue to offer competitive options. One alternative is the U.S. Postal Service, which does not engage in dimensional weight pricing. Stung by a steady loss of first-class mail business, it has been ramping up service on the package side in recent years, offering free insurance and improved tracking capability.

Those moves have already drawn some ground business away from private parcel handlers, particularly in the area of e-commerce shipments to consumers. The Postal Service has experienced growth of between 10 and 15 percent in lightweight parcels since 2011, according to Amine Khechfe, co-founder and general manager of Endicia, a provider of online postage supplies. FedEx and UPS, meanwhile, have both seen declines in that type of business, he says.

Endicia’s own calculations show the Postal Service as a viable candidate for a 12-inch-cube package going to any zone and weighing up to three pounds – and even four pounds for larger shippers, Khechfe says.

Regional parcel carriers are also in a good position to steal some business from FedEx as a result of the price increase. “If they choose not to follow, it will give them another way to differentiate themselves in the eyes of the shipper,” says Briski. “They may view this as a great opportunity on which to capitalize.”

Still, there are limits on the ability of regionals to compete directly with the big national carriers. “UPS and FedEx command a far more significant market share than what regionals have today,” Briski says. “That dominance will continue, in my opinion.”

Adding fuel to the competitive fire is the expected emergence of a new delivery service by Amazon.com, which reportedly is readying a fleet of its own trucks and drivers to deliver online orders directly to customers. The company already offers same-day delivery of groceries in Southern California, San Francisco and Seattle, under the AmazonFresh brand. With its dominant position in e-commerce, it controls enough package volume to justify an in-house service that will compete directly with FedEx and UPS. In addition, Amazon is partnering with the Postal Service to provide Sunday delivery in 17 cities.

FedEx and UPS will continue to call the shots on nationwide ground service. But smart shippers aren’t without options. Maybe FedEx’s move to dimensional weight pricing will motivate them to take a closer look at their parcel-shipping programs – and even save some money in the process.

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