FedEx in mid September announced its intended rate increase for 2010 for “Express Products.” What’s the significance, other than a head’s up on where your rates are going?
FedEx is pre-announcing to United Parcel Service how large the rate increase should be on the air products; FedEx will await the signal from UPS later in the fall as to how large the increase should be on the ground products. (For FedEx, these are the FedEx Ground, FedEx Smartpost and FedEx Home Delivery business units.)
It’s more important to understand how the rate increase is to be constructed rather than focus on the vague “average” increase number tossed out in the press release about the relative size of the rate increase. All this, by the way, is apparently not price fixing and collusion by the carriers under current law — even though the ground base rates for FedEx and UPS sure look identical.
This is not true of the two carriers’ air products, however. So keep that in the back of your mind when negotiating with the carriers. If the base rate is not identical, you can’t compare just the size of discounts, because the largest discount may not yield the lowest net rate to you for your shipment if the base rate is higher.
The FedEx press release claims rates will increase by an average of 5.9%. In all my years of consulting, I have never had a customer manage to have its experienced costs go up by the “average.”
How do the carriers come up with this number? My guess is they must weigh each cell in the tariff as if only one shipment fell in that weight and zone. Then they add them all up and divide by the number of cells.
But the reality is that there are more 1-lb. shipments in the universe than 2-lb., and more 2-lb. shipments than 3-lb., and so on.
The same holds true in the geographic distribution of packages by zone. Package distribution is not linear across all zones.
Let’s look at a real live example of the coming rates: I live in Orlando, FL. Let’s say I want to send a 5-lb. package to the U.K. via FedEx International Express Service. The price is currently $107.85.
On Jan. 4, the price for that package will be $115.56. The increase is $7.71. That divided by my original $107.85 gives me a resulting increase of 7.14%. What happened to the 5.9% in the rate increase press release?
By the way, the current base rate for UPS Express is $108.50, and for DHL it’s $100.70. The kicker is that the U.S. Postal Service Global Express Guaranteed is only $96: I believe if you give a package to the USPS, the piece flies to Europe on the FedEx planes.
The other point to keep in mind is that FedEx and DHL and UPS apply a fuel surcharge to their parcels (7.5% as of press time), but the USPS price is inclusive of fuel. So it’s not easy to compare apples to apples.
The USPS leads on price
In tinkering with the carriers, Express Service Rates, I find this to be the general rule: The USPS is the least expensive, followed by FedEx, while UPS tends to be the highest. All of the major carriers — UPS FedEx, DHL, TNT — with the exception of the USPS have the same effective fuel surcharge, with some nuanced difference of the beginning and ending date of the surcharges application.
Again, it’s apparently legal that shipping companies levy the same fuel surcharge — even though the carriers’ hubs are in different places and the distance traveled by your package from origin to destination will vary. The carriers fly different types of aircraft, so fuel consumption is not comparable either. (For more, see “The real cost of fuel surcharges” on page 38.)
I should point out that the service levels today for international delivery services are so consistent, so reliable and so trackable that it’s my observation that most shippers tend to overbuy the service level they really need. “Just in time” has become “just in case.”
(For more on getting started with shipping overseas, see “Getting your goods across the globe,” March 2008 issue.)
And the carriers do offer less expensive alternatives to get a piece to destination, if you can grant them some additional time to get the piece delivered. For example, let’s take the package going from Florida to the U.K. FedEx has an economy service offering priced at $99.42 and UPS Express Saver would cost $104.50 for that same 5-lb. package. Priority Mail International from the USPS comes in at $39.50 — again with no fuel surcharge.
Unless you enjoy a massive discount from the commercial carriers, you probably can’t beat the value of the international offerings of the USPS. The caveat is that the USPS does significantly trail behind the commercial carriers in scanning, real-time visibility of the transaction’s whereabouts, and in customer service in the event the shipment isn’t delivered.
But most shipments just need transportation from point A to point B. So if your item loses no value if it takes an additional day for delivery, you might want to consider some of these less expensive alternatives.
The deal with discounts
On the topic of discounting, it’s clear that the carriers are in a war for your business. Discounting is at levels not seen in the parcel world since the mid ’80s when there were far more parcel carriers, such as Purolator, Emery Calico, Burlington and so on. Because volume is way off due to the economy, word has gone down to the sales departments that the carriers will significantly discount to win new business. At many carriers, management has warned the pricing departments not to lose accounts over price.
For international packages, DHL remains a viable alternative. If you’re shipping to Canada, you have to remember to invite Purolator to bid.
The USPS has a free box measuring just over 13″ × 11″ × 3″ that’s good up to 20 lbs. via Priority Mail for a flat rate of $41.95 (before the 5% discount for electronic tendering). Just to put that value in perspective, a 20-lb. parcel shipped via FedEx Economy is $172.27, and with UPS Express Saver it would cost $196.70.
I do get some inquiries about benchmarking discounts. How do you know that you have negotiated a discount that’s appropriate for the level of business you’re tendering your carrier?
My observation is that most shippers leave the negotiation of the international discounts to the end and often view them as just gravy in the contract.
I had one client who thought this way because his international shipping was small relative to his domestic ground shipping. He was startled to see that getting the appropriate international discount yielded as much of a savings as the improved discount obtained on his domestic ground. It seems the carrier had been abusing him before the benchmarking exercise.
The carriers will not tell you what they give other shippers of equal or lesser size volumes. And they scare most shippers by putting “confidential and proprietary” on the bottom of the contracts so that you become paranoid about sharing your discounts and comparing notes with other shippers you might know.
But just as your firm likely employs outside legal counsel and probably uses outside accountants to verify your books, you might consider using outside expertise in parcel contracts. Trained third parties will know what discounts are right for your business, and they are familiar with additional services you can obtain for free and/or what accessorial charges you can negotiate or have waived entirely.
To give you some idea of a starting point, you can join the Outdoor Industry organization (Outdoorindustry.org) and get 46% off your FedEx international shipping just for joining. I have my insurance through USAA, and I can sign up for a discount of up to 41% on FedEx international just for being an insured member.
You can get a UPS discount by joining a shipping co-op such as Unishippers or WorldWide Express — their Websites claim 20% savings. Third-party logistics provider Genco Supply Chain Solutions has a tool on its site that can tell you how much savings is generally available on your current contract.
The selection of a parcel carrier is both art and science. You need to be aware of when your shipment really has to be delivered, then given that amount of time, what options you can choose from. And then after all the discounts are subtracted and the additional fees and charges added on, you must determine who provides the optimum combination of price and service for your shipments.
Particularly in this economy, you should be doing a reality check. Your competitors may be taking advantage of the discounts available, and you could be left behind with higher operating costs when the economy begins to turn and the carriers tighten up on the pricing.
Gerard “Jerry” Hempstead is president of Hempstead Consulting (www.hempsteadconsulting.com), a firm that helps companies reduce their transportation costs.
Next Page: The Real Costs of Fuel Surcharges
THE REAL COST OF FUEL SURCHARGES
The major carriers (namely, FedEx and United Parcel Service) have an index for what they add as charges based on averages of what a gallon of kerosene-type jet fuel costs at the pump. For instance, at press time, a gallon of jet fuel was $1.86 to $1.90, so FedEx’s surcharge on Express shipments was 7.5%.
So FedEx’s announcement that its rate increases for 2010 include a 2% reduction in the fuel surcharge is good news, right? Not really, when you consider this is the fifth consecutive year FedEx has imbedded 2% of the fuel surcharge into the base rate. The increases compound the impact of these 2% charges so that it’s now nearly 10.5% come January; the prevailing fuel surcharge is then applied against the inflated base rate.
Why are the carriers imbedding fuel surcharges in the base rates? They are hedging against a drop in fuel, which happened this past April and May. Shippers were no doubt thrilled when fuel prices dropped and the fuel surcharges in essence disappeared. But there was still an 8% fuel surcharge that had been buried in the base rate during the past four years that shippers were charged for international and domestic air packages — even though it did not appear on invoices as an accessorial charge. — GH
INTERNATIONAL SHIPPING RESOURCES
Most of the big parcel carriers provide international delivery options. Here are a few examples:
Canada Post • www.canadapost.ca
DHL • www.dhl-usa.com
FedEx • www.fedex.com
Purolator USA (Canada) • www.purolatorusa.com
TNT • www.tnt.com
United Parcel Service • www.ups.com
U.S. Postal Service • www.usps.com
Some software and other shipping service providers:
Bongo International • www.BongoUS.com
(Mail forwarding and parcel forwarding service)
BorderJump • www.borderjump.us
(International shipping and logistics specializing in Latin America and the Caribbean)
Canada Plus • www.Canadaplus.com
(International parcel logistics for shipments to Canada)
Endicia • www.endicia.com
(Internet postage service that allows users to print complete, prepaid USPS labels)
Logicor • www.logicor.com
(Compliant shipment execution applications for parcels, LTL and TL)
(International mail and package forwarding service)
Precision Software • www.precisionsoftware.com
(Global transportation, parcel and desktop shipping software)
(Shipping software and postage systems for U.S. Postal Service customers)