It felt like only yesterday when a package’s weight was my primary concern… well, it still is, until Dec. 29, courtesy of UPS and FedEx new dimensional weight pricing models… and then your world is cha-cha-cha-changing (to quote David Bowie).
This can be a disaster, or an opportunity, to increase your profitability and move past your competitors. Your actions today will dictate your path.
The first thing to understand is why UPS and FedEx have moved to DIM (dimensional) charges. This is nothing new. The carriers did this in 2011 for packages over 3 pounds. This move is focused on eliminating wasted space in the carrier’s transportation stream. Since weight was the major focus of the under 3 pound orders, retailers were shipping items in larger boxes than necessary. The carrier’s DIM rates now make it costly to ship air.
[RELATED: Review These 7 Technologies for DIM Weight Pricing Shift]
Using the 2014 FedEx Service Guide, Express dimensional weight is calculated by multiplying the Length (L) X Width (W) X Height (H) of each package in inches and dividing the total by 166 (for domestic shipments).
If the dimensional weight exceeds the actual weight, charges may be assessed based on the dimensional weight (DIM). DIM of one-half inch or greater are rounded up to the next whole number; dimensions less than one-half inch are rounded down. The final calculation is rounded up to the next whole pound. Dimensional weight applies per package, or per shipment, for domestic shipments. We can assume the new rules for FedEx Ground dimensional weight rating will match the above calculations.
Here’s an example of a 12 pound order for zone 8 ground home shipment in a 14” x 14” x 14” box. This order has a DIM factor of 166: 14 x 14 x 14=2,744 cubic inches/166=16.5, which then must be rounded up to 17 pounds.
At today’s rates (2014), this package would be billed at the 12 pound rate of $19.67. In 2015, and based on the new costing structure, this package would be billed at the 17 pound rate which is $24.26. This translates to a whopping 23% increase. This 12 pound box is now shipping at the 17 pound rate.
If you negotiated a non-standard dimensional divisor greater than 166, you will likely still be impacted by the new DIM rates. For most negotiated contracts with UPS and FedEx, your contract may have a dimensional divisor that is greater than the standard 166, but not your specific cubic thresholds. Unless you were smart (and lucky enough) to have negotiated a contract that specifies the three cubic foot exception, the new 2015 DIM rates will affect you.
The consensus seems to be that depending on your order profiles, it would be safe to assume the new DIM factors are going to add anywhere from a 25% to 100% increased transportation cost to you and your customers. Financial pundits are saying this move will increase operating income for UPS’ domestic ground unit by at least $350 million. Clearly, you need to have a plan to make sure you aren’t giving as little as possible.
Depending on the level of automation you currently have, your solution will vary. Every business sector and company will have different needs so it’s important to realize that one size will absolutely not fit all to solve this problem.
Negotiate
Open communications with FedEx and UPS, and start negotiating the rates, implementation dates and pick up times. A quick survey conducted by Integrated Systems Design (ISD) found that both FedEx and UPS are ready to negotiate down from their announced rate and start time.
“Your volume, geography, history with the carrier and ability to play hard ball will dictate your exact terms (and they seem to vary greatly),” says Bob Jones, Senior Distribution Manager at ISD. “But no matter how successful the negotiations are, they will be temporary, (in the big picture) and will certainly, increase your transportation costs. So you can stall a bit (which is a good thing), but the inevitable DIM based pricing and additional costs are in your future and you will need to start making arrangements immediately.”
Do an audit
If you currently utilize cubing equipment, populate box dimensions in your WMS and have in motion weigh, label and seal system, it’s just a matter of doing the math on your profile orders. If you don’t have this type of system (and that’s ok, many organizations don’t) the same math needs to be done, but with a lot more elbow grease.
You multiply the box’s length X width X height, and then divide by the weight, to determine the Pounds per Cubic feet (PCF). If the PCF is 10.4 or higher, your impact will be marginal and the speed in which you implement changes for domestic shipping isn’t as critical. But if your PCF is lower than 10.4 on a significant percent of your orders/boxes, it’s time to move.
This may be an opportunity to call in an integrator who is versed with the new shipping requirements, pack station designs and implementations. These firms can provide not only an objective view to the data, but should be able to provide an entire gamut of technologies, solutions and performance guarantees designed to meet your needs.The end goal is to improve efficiencies to not only cover the increased transportation costs, but your overall warehouse costs. These additional savings come from reduced labor, space savings, reduced error rates plus the elimination of excess dunnage, cardboard and inventory.
[RELATED: A Practical Guide to Addressing Dimensional Weight Pricing]
Make sure you and/or your integrator does the return on investment and internal rate of return calculations. With the increase DIM rates, it should take very little time to cost justify and provide a huge savings.
Don’t be a one carrier company
Too many organizations get comfortable and rely on one carrier for the vast majority of their business. The carriers offer free software and often training and implementation help which certainly makes things easier, but locks you in.
Investigate using more than one carrier, include regional, final mile and specialized transportation companies. Find the sweet spot which each organization can provide you and your customers. Exploit it for your bottom line advantage. This strategy will not only improve your negotiation position, but should increase your customer’s satisfaction and your bottom line. You need to balance the lure of free software with the benefits of negotiating and optimizing different carriers.
Ed Romaine is CMO – VP Marketing of Integrated Systems Design (ISD).https://plus.google.com/+EdRomaine