For supply chain executives, reducing shipping costs can seem like a never-ending quest, and FedEx is about to make that journey even more arduous. In September, FedEx announced rate increases for 2018.
According to FedEx’s press release, the average increase for Express, Ground and Home Delivery options will be 4.9 percent, effective Jan. 1, 2018. It might be easy to shrug off an average increase so seemingly small, but the operative word here is average. In other words, most companies will pay much more. That said, it's in your best interest to fully understand what these changes mean and how they will impact your bottom line.
What FedEx Is Really Charging
After evaluating these releases, it’s clear that high-volume shipping organizations will pay much more than a 4.9 percent increase. For example, consider some of these upcoming accessorial increases:
- Oversize charge increases by $7.50 to $80, or 10.34 percent.
- Additional handling surcharge increases to $12, or 9.09 percent.
- Residential surcharge increases to $4.15, or 7.79 percent.
- Address corrections increases to $15, or 7.14 percent.
- Delivery area surcharge—SmartPost increases by 8.33 percent.
- Extended delivery area surcharge—SmartPost increases by 8.82 percent.
Figure 1, shown above, outlines FedEx’s 2018 increases by service and weight, with the red line representing the 4.9 percent advertised increase. Companies need to conduct a thorough analysis to best understand their service and weight usage.
In addition, the announced rate increase includes the elimination of two competitive pricing advantages FedEx has enjoyed over UPS for several years.
First, FedEx will apply dimensional pricing to its SmartPost product, and second, it will be adding a 2.5 percent fee to all third-party billed shipments. Both charges can dramatically inflate shipping costs.
Starting Jan. 22, FedEx will apply a DIM factor of 139 to all SmartPost packages, mirroring the UPS dimensional billing policy of its comparable product. UPS will retain a slightly higher DIM factor for packages under 1,728 cubic inches.
To see the potential impact from these changes, view Figure 2 above. This graphic compares 2017 prices, with no dimensional billing, against the revised policy for 2018. Based on this information, regular shippers could see massive upticks in operating costs next year.
New Fee for Drop Shippers
In January 2016, UPS added a 2.5 percent fee to all third-party shipments, including the associated accessorials. This type of shipment, commonly known as a drop shipment, involves charging someone other than the seller or receiver—often, that means the manufacturer. Drop shipping businesses are a growing segment in today’s supply chain, as many organizations have found it easier to scale using this model.
Because drop shipping eliminates the need to manage inventory on-site, organizations using this practice tend to operate on thin margins. For nearly two years, FedEx has offered a reprieve by not assessing a fee for this, but it will lose that differentiator next year under these rate hikes.
How to Avoid Overpaying for Shipping
The hike in rates is certainly not ideal. However, you can limit your increased shipping costs by following these six strategies:
- Compare rate hikes to your shipping profile. Some companies might get lucky and fall under the average. Unfortunately, most will not. Analyze shipping patterns from the past few years in order to see which frequently used categories will suffer the most extreme rate hikes.
- Ask for discounts. Ask for discounts that offset the anticipated increase.
- Connect with other companies to compare notes. Ask other companies what they are doing to mitigate the extra shipping costs. What concessions were they able to get from FedEx? If nothing else, their experiences will offer you valuable information on what is or is not possible.
- Reach out to industry consultants. These changes will be one of the biggest talking points in the supply chain industry for several months. Ask a supply chain professional to evaluate carrier concessions and analyze your shipping profiles.
- Verify figures. Rather than take their word for it, ask carrier reps to provide details on how the rate will impact costs. Then, verify that information through personal research or professional consultation.
- Implement operational changes. Even if rate increases won’t be disastrous, consider methods to save on shipping by optimizing your operation. Eliminate dead space from packaging, practice zone skipping by shipping packages to sorting hubs or open a new fulfillment center if the price is right.
Don’t be taken off guard when your costs soar next year; follow these six strategies to evaluate your shipping profile and optimize your practices.
Trevor Outman, MBA, is co-founder and president of Shipware, a technology and consulting firm focused on helping companies reduce their parcel & LTL costs 10 to 30 percent. After starting Shipware well over a decade ago; Outman leverages years of experience analyzing volumes of parcel data and hundreds of carrier contracts to be an effective advocate for high-volume shippers. His expertise has positioned him as a coveted consultant in the parcel industry. He welcomes questions and comments, and can be reached at (858)879-2020 x117 or firstname.lastname@example.org.