Economic Development

Get the Air Out

FedEx sent a message to shippers, and UPS has followed — improve density or pay the price

August 1, 2014
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There’s an adage that is probably as old as commercial shipping itself — don’t ship air.

Chainalytics noted recently in an unpublished position paper on dimensional weight pricing that “FedEx and UPS have shown their hand and are forcing retailers to cut out the unwanted space in their packaging or pay the price.”

By expanding dimensional weight pricing, FedEx will charge for the space a package requires, not just by its weight. Satish Jindal, president of SJ Consulting Group Inc. and ShipMatrix Inc., offers a striking example. Amazon has said it wants to ship staples to consumers, so Jindal shows what the new dimensional weight (dim weight) pricing could mean for a consumer pack of 30 rolls of toilet paper. Under current pricing, the shipment is billed for its five-pound weight. Under dim weight pricing, it will pay for its cube, which is the equivalent of the current 20-pound rate. That doesn’t mean the shipping cost actually quadruples, Jindal is quick to point out — it actually goes up by 60 to 70 percent. But that is substantial for any shipper, and especially for large volume shippers. And for consumers, it means that in many cases the cost of transportation is approaching the value of the item.

Weighing the Consequences

There are a plethora of consequences to this move — both intended and unintended. The reality for UPS, FedEx, and the U.S. Postal Service (USPS) is that the increasing size of the parcels they handle is reducing their ability to optimize capacity. Instead of 2,000 parcels fitting into a trailer, says Jindal, they can now handle only 1,600. This means the cost of line haul goes up.

Dim weight pricing will force shippers who are paying attention to reduce packaging, according to Jindal. “There are a lot of packages that are being shipped with bubble wrap and peanuts thrown into them because the shippers are making decisions on how to ship based on minimizing their cost,” Jindal told a group of industry executives at the annual SMC3 Connections conference. If a shipper has 12 different sizes of boxes to use for all of the products it ships to e-commerce customers, adding four more box sizes increases the shipper’s cost. But if the shipper didn’t have to pay for those larger dimension boxes, it was passing the cost on to the carrier. That was because the weight did not increase substantially with the increased cube. “Now, I can’t ignore it,” says Jindal.

He tells shippers to do cubic scans and start pulling out the bubble wrap and reducing the size of the packages. Do cubic scans, he says, and mine the data. He has, and the data indicate that if shippers don’t change their shipping habits, FedEx stands to make an additional $180 million by charging for the space those lightweight packages take up. For UPS, Jindal estimates the impact could be $350 million — and all of that goes to the bottom line.

The course is clear for the parcel side, but could this change lead to a change in less-than-truckload (LTL) pricing as well? Jindal acknowledges that the LTL industry handles many more sizes and shapes than the parcel side. Still, most LTL trailers, even on the linehaul, are filling 80 to 85 percent of their cubic space.

Chainalytics agrees, stating, “If the retail industry needed a catalyst for change — one that nearly mandates more efficient and sustainable packaging practices — FedEx has provided it.”

Jindal points to retailers and consumer behavior, echoing some of the Chainalytics sentiments when he says that retailers have fostered an expectation for free shipping, and when consumers do online price comparisons and then see shipping and handling charges, they abandon their shopping cart. He adds, “92 percent of customers shopping online will abandon the cart if they don’t get free shipping.”

Consumers have also come to expect overnight delivery (and retailers are now starting to promise same-day delivery). This, says Jindal, was part of the problem with the holiday shopping season in 2013. With e-commerce rising at 15 percent per year, it is a rousing success. For the 2013 holiday, the parcel industry delivered 76 million packages on one day, December 23. USPS did most of that, but UPS, which delivers 16 million packages on an average day, planned for 29 million. It was swamped with 31 million. The volume was complicated by training issues which were a result of the 85,000 temporary workers UPS had added. Shipments weren’t handled according to UPS protocols, says Jindal. For example, shipments that should have bypassed the UPS Louisville, Ky., hub and gone directly to a regional hub went to Louisville and choked the system — at least enough to cause delays and late deliveries.

Jindal puts part of the blame on retailers who promised one-day or two-day delivery for free and part of the blame on consumers who procrastinated based on their belief that the retailer could keep its promise. Instead, it was up to the parcel carriers to keep the retailers’ promises, and that clearly did not happen.

Adding to a long discussion of why the current system is unsustainable, Jindal states simply, “Like other parts of the industry, I think they will have a peak period surcharge. And they should.”

Is LTL Next?

Jindal has long been outspoken in calling for the LTL industry to change its pricing model. “I don’t think there is any industry living in the prehistoric era of pricing like LTL,” he says. “There is no reason the industry allows all of the assessorial charges to be waived. It allows customers to tender an [automobile] transmission on a pallet without putting a crate around it so they can save the cost of the freight. They impose the cost on you [carriers] because you can’t load anything on top of it,” he told carriers in the audience.

“As a reference point,” he continues, “UPS and FedEx have dimensioning machines in their hubs mounted on top of the conveyor where they are capturing dimensions of 20 million packages that move every day. That doesn’t require any extra labor,” he points out. The parcel giants then mine that data — which is how they determined it was time to move on dim weight pricing. “Even when LTL carriers have dimensioners, they have to have a guy take the pallet over and scan it. But the LTL industry should move forward, and the carriers should take a leap because the two carriers that have not done a good job are UPS and FedEx,” Jindal comments. “They spent $1 billion a year in technology, and they have not done enough to leverage that on the LTL side. So the other LTL carriers can step in.”

Referring to other presentations that highlighted tight capacity and other market factors that give carriers potential pricing leverage, Jindal says, “This is the perfect time to bring discipline into your LTL pricing.”

The battle, he points out, is in the carrier companies and with their leadership. He points to Saia. They put in dimensioning equipment and then went back to shippers and said, “This is not what you said.”

Even without dimensioning equipment, carriers can check the weight of shipments. “The parcel carriers charge for more than the weight of the shipment [with dim weight pricing] and you [LTL carriers] charge for less. Start charging for the actual weight.”

Chainalytics offers a positive final note for shippers. Dimensional weight pricing will drive smarter packaging and massive improvements in “getting the air out” for retail supply chains across the globe, says Chainalytics The potential for lasting, long-term financial savings will be found in improving robustness of the design of the product itself, reduced material costs, negotiation of better shipping rates, and all with a lovely side-effect of sustainability which comes gratis with smartly designed, efficiently run supply chains.

Unfinished Business

 This is really only the beginning of a much larger discussion of disruptive change that will almost certainly take place in more areas of pricing than e-commerce and parcel shipping. As shippers prepare for the changes in their parcel pricing, it is a good time to look at how to drive benefit into other areas of the supply chain through operations changes, packaging reduction and other changes. This is a rare moment for the industry when enough drivers are aligned to push for some dramatic structural changes. A wider use of dim weight pricing may be just one of those changes.  

Recent Articles by Perry Trunick

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