DC Velocity - October 2016

newsworthy

THE LATEST CHAPTER IN THE MULTIYEAR RATE squeeze applied to parcel shippers by FedEx Corp. and UPS Inc. was written in late September when FedEx changed the formula used to calculate rates for all of its U.S. air and ground deliveries. The narrative, though, will remain the same as in the prior chapters: Large shippers will mostly skate by, while smaller shippers will pay more.

Effective Jan. 2, Memphis, Tenn.-based FedEx will shrink the “volumetric divisor” used to calculate the “dimensional weight,” or dim weight, of the domestic parcels it transports. To arrive at a rate based on a parcel’s dimensions, FedEx multiplies the length, width, and height by inches, and then divides the sum by a divisor. On Jan. 2, the divisor will reset to 139 from the current divisor of 166, which has been in effect since 2011.

The process may sound arcane, and the change may
seem like a tempest in a teapot. But
it is consequential to millions of
parcel shippers. With a divisor of

166, a parcel measuring one cubic foot, or 1,728 cubic inches, would yield a dimensional weight of 11 pounds, rounded off to the next highest weight. The same parcel, with a divisor of 139, would have a dimensional weight of 13 pounds, a near 20-percent increase. Because shippers pay the higher of either the parcel’s dimensional or actual weight, a FedEx parcel that weighs, say, two pounds, would be priced, as of January, as if it weighed 13 pounds.

Yet if history is any guide, the vise will turn not on the big boys, but on smaller businesses that lack sufficient volumes to gain negotiating leverage with the carriers, are not schooled in the ins and outs of dim-weight pricing, or a combination of both. Satish Jindel, founder and president of SJ Consulting Group Inc., said that when the carriers dropped their divisors five years ago to 166 from 194, they effectively gave big companies a pass, even though many of those customers frequently tendered packages with dramatically outsized dimensions.

Not much has changed, Jindel said in an interview. Big
shippers continue to get waivers at the expense of small
firms, which effectively subsidize their larger brethren, he
said.

Jack T. Ampuja, president of consultancy Supply Chain
Optimizers, said in an e-mail that the FedEx move signals
that cost pressures “will just continue to mount on smaller
and medium-sized enterprises,” especially those that ship
lightweight, bulky packages. Ampuja’s firm, along with
Niagara University and DC VELOCITY, recently released
a study examining shippers’ responses to moves made
by both carriers more than 18 months ago to apply dim-
weight pricing to all U.S. ground shipments measuring less
than three cubic feet. Ampuja, who co-wrote the study’s
analysis, stressed the need for shipper education and aware-
ness to mitigate the impact of the changes.

NO NEAR-TERM CHANGE

Jim Haller, program director, transportation services, for consultancy NPI LLC, said in an interview that the high-vol-ume shippers that account for most of FedEx’s traffic may not experience any change in the near term. However, while customers in the midst of multiyear contracts may be granted waivers for their contracts’ duration, they may be hit with an adjustment as a precondition of renewal, he said.

Jerry Hempstead, head of a consultancy that bears his name, said shippers whose parcels have never been subject to dimensional pricing might be in for a shock as the reduced divisor catches more parcels in its net. There is no dimension-related information contained in the bills of shipments that have traditionally been priced on their actual weight, Hempstead said in an e-mail. Shippers now facing dimensional pricing can only determine its impact if they have package dimensions in their files, which is rare, he said.

The FedEx action could have an enormous impact on e-commerce shipping costs, especially if UPS—which transports far more packages than its rival—follows suit as expected. The increases will put even more pressure on merchants that offer free shipping as a way of attracting and retaining customers. Krish Iyer, director of shipping and tracking solutions for consultancy Neopost USA Inc., said the typical e-commerce shipment weighs less than seven pounds, which is the weight threshold where the FedEx change would have the most impact.