The USPS Rate Case: Insider Tips to Control Shipping Costs

Parcel shippers often quip that a postal rate increase every year is as inevitable as death and taxes. But unlike death, which has no gradations, a rate hike can range from minor to exorbitant. As rate increases go, the U.S. Postal Service’s flat 5.4% increase, proposed in the 2006 rate case the USPS filed on April 8, appears to be moderate enough for most shippers to handle. For product distribution and fulfillment operations, dealing with the new rates is less of a budgetary issue than one of scrutinizing relationships with parcel carriers, evaluating and comparing rates more closely, and looking for new ways to streamline shipping processes. This O+F special report brings you unique insights into the rate case and its implications from two prominent experts on shipping, delivery, and rate negotiation.

Consolidate for Savings

According to Kevin Collins, senior vice president of business development for APX Logistics Inc., a third-party logistics provider specializing in small package delivery solutions, the USPS’ current proposal is the first since 1994 to set a flat rate across all mail classes and weights, and it is a lower increase than is traditional for most parcel services. It compares favorably with commercial carriers’ rate hikes, which, although they have been relatively modest, have tacked on so much in surcharges and accessorial costs that the “real” fee the shipper pays is far higher. “Although the commercial carriers’ announced annual rate increases are less than 3%, a closer analysis of 2005 package rates by weight and zone reveals that rates increase more than 5.5% when considering additional surcharges,” Collins points out. Even if these accessorial fees do not apply to all packages, the cost, he says, “can be significant if you have a high percentage of deliveries to residential addresses or to delivery area zips.”

APX is a package partner with the USPS and the largest mailer of packages sent through Parcel Select, a service designed to provide economical ground delivery through three points of entry (BMCs, SCFs, and DDUs) — and thereby three levels of savings — into the USPS system. The closer to its ultimate destination that the package is dropped off, the lower the cost to the Postal Service, and the higher the shipper’s savings. In addition to economies of scale and deeper entry into the postal system, consolidators provide a host of value-added services, including customized rates, pick-up, tracking, delivery confirmation, billing, and specialty retail fulfillment. Consolidators such as APX, says Collins, are less affected by postage increases because only a percentage of their costs are postage-related. To take the example of a five-pound parcel going to Zone 4, the DDU postage rate prior to the increase was $1.43; with the 5.4% increase, the rate becomes $1.51, just 8 cents more for the consolidator to pay. The total delivery rate for this package would go from $4.60 to $4.68, a mere 1.7% increase for the shipper. Therefore, consolidators are cost-effective options for any company with high-volume residential deliveries.

Taylor’s Tips

For small parcel shippers, the U.S. Postal Service still remains a terrific bargain, says Professor Mark Taylor, CEO of Taylor Systems Engineering Corp. and the nation’s leading authority on how to save money in shipping operations. In his view, the USPS rate case will not affect shippers’ niche opportunities. For example, he says, for an eight-ounce First Class package, even at what would be the new rate of $2.21 (the current rate is $2.11), the USPS wins the carrier race hands down; to compete, other carriers would need to offer a 40%-50% discount. Similarly, the forthcoming USPS Priority Mail flat rate of $4.05 for a one-pound package is unbeatable — for UPS to even get close, its discounts would have to be on the order of 19%-29% for residential deliveries and 44%-50% for commercial service. Another important factor to consider is time in transit, which, Taylor says, is “one of the greatest areas in which your business can save money.” Before you shop for carriers, find out when and how your customer wants orders delivered. The answer could save you thousands of dollars. A five-pound USPS Priority Mail parcel reaches its destination within two days 90% of the time, and costs $12.15; a similar package runs $15.01 at FedEx and $16.92 at UPS. And don’t forget the USPS’ Media Mail category, Taylor adds: Provided you are not shipping any advertising material — not permitted under this classification — Media Mail is a highly economical way to send such items as books, manuscripts, film, CDs, videotapes, and binders.

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