(Dean Maciuba is the partner at 4Front Consulting Group responsible for the transportation and logistics consulting segment of the practice. In addition to providing carrier rate negotiating support, Dean is an expert in the design and implementation of specialty distribution solutions for e-commerce, cross border distribution and cold chain distribution solutions.)
UPS just announced their 2017 parcel rate increase that will average 4.9%. Selected surcharges are also increasing. FedEx should follow suit soon and will probably match the UPS increase penny for penny. The carriers will tell you that the cost of operating global transportation companies keeps going up and that the rate increases are needed to maintain and improve service. However, carrier annual rate increases have been averaging 5%-6% in recent years, more than double the rate of inflation. The carriers call it breakage when a customer pushes back on the annual rate increase. Less than 2% of all customers push back and negotiate a lower than advertised annual rate increase. The following information will help you understand your parcel cost and the annual rate increase process a bit better:
- Pricing Collusion? FedEx and UPS match their annual rate increases almost to the penny and that is legal as long they are not colluding together and agreeing in advance to charge the same rate. There is no evidence that UPS/FedEx collude on the annual rate increase. However, a mild form of price fixing is occurring if one carrier is asking for a copy of competitor discounted rates and then only matching that rate.
- Fuel Surcharge Increases: UPS and FedEx raised their fuel surcharge cost index twice during the past year when the cost of fuel has decreased significantly. They had to do this because both companies had built profit into the fuel surcharges above and beyond the actual cost of fuel. This meant their bottom lines were negatively impacted when the cost of fuel went down and in turn, they collected lower fuel surcharges and less profit. As the cost of fuel goes up, you will be paying more for the fuel surcharge this year than you were prior to the carriers raising the fuel surcharge index. This is a hidden price increase that is legal but not necessarily ethical.
- E-commerce Impact: E-commerce shippers may be bearing the brunt of the rate increase as both service based rate schedules and surcharges that typically apply to e-commerce shipments are also being impacted by the rate increase. Some of the surcharges to see increases that usually accompany an e-commerce shipment include residential, rural, additional handling and the minimum ground shipment rate will increase.
- Uneven Rate Increase Impact: The carriers advertise their annual rate increase by announcing the average rate increase across all services, weights and zones. However, they do not load the increase across all weights and zones evenly. Historically, they have loaded most of the rate increase across the 1-15 lb. weight break and across the lower zones from 2-4 which comprise the most common shipment metrics. Therefore, while the average rate increase might be 4.9%, the actual increase for the typical shipment could be much higher. You have to do the math to calculate your actual increase.
It’s too early to conduct any type of comparative rate analysis between the two carriers because FedEx has not announced their annual increase yet. However, it’s not too early to start thinking about pushing back and not accepting the annual rate increase. Contact us at 4Front Consulting Group and let us help you devise a strategy for not accepting the annual rate increase. Together, we can disrupt this rate increase process and force some breakage that will positively impact your bottom line. You see, it’s not always bad when you break something!
Dean Maciuba (dean.maciuba@4frontcg.com) http://www.4frontcg.com 716-741-2358
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