The Varying Impact of Rate Increases

Nov 29, 2006 9:29 PM  By

Each winter, the big three parcel carriers—United Parcel Service, FedEx, and DHL—announce an average transportation charge increase of 2% to 6% for the coming year. The net impact of these increases to your parcel expenditure may vary widely within this range, depending on a variety of factors. The carriers will publicize these higher charges as if they are flat increases applied to all services. Therefore, many shippers will remain unaware of the real impact of these higher charges, unless they consider their own shipping characteristics and dig deeper into the new rate hikes.

If you are like many logistics professionals, your budgeting strategy will be based on advertised average price increases along with the impact of last year’s rate increase on your annual transportation expenditure. While this approach can be an effective way to estimate the impact of the carriers’ rate increase, it can often lead to unforeseen cash flow deficits that result from under-budgeting.

In November 2005, UPS announced an average price increase of 3.9% on commercial ground shipments and an average increase of 5.5% on its express and international shipments. These “average” increases are just that-averages. So the question that must be asked is “Are you an average customer?”

A $1 million net UPS shipper in the Northeast saw a 6% increase to its small parcel expenditure between 2005 and 2006. The increase to its commercial ground shipping charges was in line with what UPS advertised, coming in at just under a 3.9% increase. But this shipper used the Next Day Saver service to move 35% of its packages. The cost of this service level for this particular customer increased by just over 6% and accounted for nearly two-thirds of its overall parcel expenditure increase.

This same rate increase resulted in a different outcome for another shipper within the same parcel spending range. Because it ships 96% commercial ground, this company saw an overall increase of just 4.28%. While the shipper did see a dramatic increase in commercial next day air (at a 6.2% rise) and residential ground (at 7.3%), very few packages were shipped using this service level. Because this shipper primarily used one service level that experienced the smallest increase, the impact of the carriers’ transportation charge increase was mitigated.

It’s well known that carriers increase their rates at least once per year. The real story here is the difference between the carrier announcement and the impact rate hikes will have on your parcel expenditure. As a shipper, you should thoroughly consider each individual rate increase in order to fully understand the overall impact it will have on your transportation spend. This not only better prepares you for the next year, it also allows you to make changes to your shipping characteristics that will help soften the blow. Changes such as rerouting packages to service levels that are more economical but deliver on the same day can put significant dollars back into your budget.

Dave Roy is product manager for Andover, MA-based BirdDog Solutions, a parcel shipping optimization services provider.