Through stringent revenue management processes, FedEx and UPS have maintained their leading roles in the global small parcel market in terms of revenue, profit and volume. Annual rate increases averaging 4.9 percent for the past few years have helped offset rising costs. However, these costs are increasing as both companies invest in operations, technologies, new service offerings and acquisitions in order to not only maintain their market role, but to also catch up with changing market requirements.
Perhaps the most significant changes have been the expansion of dimensional weight and the shift in the market from weight-based to dimensional weight-based pricing, resulting in increased costs for larger physical volumes and penalties for wasted space in packaging. When first introduced, the 194 divisor was only applicable to packages more than 3 cubic feet. Since January 2015, the carriers have expanded DIM to all package sizes and reduced DIM factors twice to 166 in 2009 and 139 in 2017. In 2018, FedEx will expand the 139 divisor to SmartPost, matching UPS. The results are a greater negative impact to shippers. As noted by FedEx at the time, "This change better aligns our pricing with our cost to deliver."
The growth in B2C e-commerce has brought forth increases in special handling charges by FedEx and UPS, most notably the Oversize or Large Package surcharges. As e-commerce matures, consumers have become accustomed to ordering such items as appliances, exercise equipment and mattresses online. But these items do not fit neatly into sorting facilities designed for small packages. To offset the special handling required and time in managing the larger items versus moving them into their LTL networks, FedEx and UPS have continued to increase charges. From 2015 to 2018, charges have increased almost 40 percent for both carriers. FedEx will also match UPS and increase the Oversize billable weight to 90 pounds. In addition, UPS plans to increase their charge again in July 2018 for residential deliveries.
A number of other surcharges, such as Peak Season, Residential Delivery, Address Correction, Signature Requirement and Additional Handling, all have increased over the years in the guise of providing compensation for services provided.
Additionally, technology advancements to improve the last-mile process have benefited UPS. Its route optimization system, ORION, ensures UPS vehicles operate efficiently and in the most cost-effective manner possible. The system reportedly has yielded 9 percent more stops per mile, saves the company 100 million miles and 10 million gallons of fuel annually and has resulted in $400m in savings. It also has allowed UPS to deliver more of its SurePost packages itself versus handing them off to the US Postal Service for final-mile delivery, resulting in cost savings and increase to profits.
Through established revenue management processes, FedEx and UPS have not only maintained their global market position but have grown their business. But, the competition for last mile continues to grow and will likely grow to the point in which volumes begin to balance out among all carriers. How this translates into profits remains to be seen. Managing revenue is an important strategy to maintain for all those who compete for the last mile.
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