It’s the start of a new year and with that comes a new way of pricing parcels. Are you prepared?
Instead of just grabbing the first box you can find, packing, weighing and then calculating the cost based on the weight, pricing parcels is now much more complicated. Now, the price is determined by the dimensions of the box along with the weight. How you pack and what you pack is now more important than ever.
Dimensional weight pricing is not new to the delivery business. Since 2007, FedEx and UPS have used this technique on ground parcels measuring three cubic feet or greater as well as for air shipments. The United States Postal Service (USPS) also utilizes this method for parcels moving more than 600 miles and exceeding one cubic foot. Several regional parcel delivery companies such as OnTrac, LaserShip and LSO uses this pricing scheme in varying ways as well.
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One difference among these carriers is the DIM weight factor used to calculate the final price. For example, FedEx and UPS use a factor of 166 whereas USPS and regional parcel carriers typically use a factor of 194. The lower the factor the higher the dimensional billed weight. The DIM factor and other variables that carriers use to determine pricing can be an eye-opener for retailers.
Focus: DIM Pricing
Analysis by Spend Management Experts has determined that DIM weight pricing will likely lead to increased shipping costs for most retailers. For example, for one store retailer using FedEx Ground (Example #1), the number of ground packages that qualify for DIM weight will increase from 61,000 packages to almost 260,000 in 2015 — amounting to an increase of over 300%. As a result, the total net freight cost per piece is projected to increase to almost 7.7%, from $7.90 to $8.51.
Example #1 Stores Retailer – Carrier: FDX |
Current |
New1 |
Increase |
# of Ground packages impacted by DIM |
61,180 |
258,563 |
197,383 |
% of volume subject to DIM |
16.1% |
68.07% |
52.0% |
Total Net Freight Cost/Piece |
$7.90 |
$8.51 |
$0.61 |
1. Note: After removal of DIM threshold of 5,184 |
Focus: FedEx SmartPost And UPS SurePost
What about SmartPost and SurePost, the FedEx and UPS hybrid delivery services in partnership with the USPS? FedEx does not have the technology across their SmartPost network to implement the DIM pricing change in January; however we expect them to aggressively implement technology during the year. Meanwhile, UPS’ SurePost has already been incorporated into the DIM pricing scheme as of Dec. 29, 2014.
Spend Management Experts revealed that one online retailer’s cost will indeed increase with UPS SurePost (Example #2). Of its more than 200,000 SurePost packages, an estimated 83,000 packages will be subjected to DIM weight calculation. The resulting impact is projected to increase 2.3% in total net freight cost per piece from $5.25 to $5.37.
Example #2 General Online Retailer – Carrier: UPS |
Current |
New1 |
Increase |
# of SurePost packages impacted by DIM |
0 |
82,951 |
82,951 |
% of volume subject to DIM |
0.0% |
39.3% |
39.3% |
Total Net Freight Cost/Piece |
$5.25 |
$5.37 |
$0.12 |
1. Note: After removal of DIM threshold of 5,184 |
Focus: FedEx Home Delivery Service
FedEx’s Home Delivery service is another area where Spend Management Experts is expecting cost increases. A good example is an online footwear and apparel retailer (Example #3). Spend Management Experts’ analysis showed a staggering 1,600% increase in Home Delivery packages that will incur DIM charges in 2015! The retailer referenced in example #3 will experience an increase in total net freight cost per piece from $6.17 to $6.62, equating to an increase of 7.2%.
Example #3 Footwear/Apparel Online Retailer – Carrier: FDX |
Current |
New1 |
Increase |
# of Home Delivery packages impacted by DIM |
9,626 |
166,033 |
156,407 |
% of volume subject to DIM |
5.5% |
95.4% |
90% |
Total Net Freight Cost/Piece |
$6.17 |
$6.62 |
$0.45 |
1. Note: After removal of DIM threshold of 5,184 |
Key Findings For Retailers
Spend Management Experts’ findings corroborate the forecasts by industry analysts that DIM weight pricing will have a major impact on retailers’ shipping costs. In fact, according to some estimates, up to 32% of all ground packages will be affected by a price increase, with the majority of those weighing less than five pounds.
As one can probably surmise by now, determining DIM weight pricing is an art unto itself. Some carriers such as LSO exempt packages of one cubic foot or smaller from dimensional pricing while others such as FedEx and UPS will round up to the next highest weight.
To help reduce these cost increases, don’t forget about the packaging. As mentioned previously, packaging no longer involves the closest available box. Instead, place more focus on this often ignored aspect of the shipping process. Size now matters. Some retailers ship products in plastic bags, how does DIM apply to them? Will shipping in bags cease or will there be a surge in the use of bags? Not necessarily says OnTrac. These bags are handled just like regular cardboard boxes and containers when scanned in its facilities.
So, what’s a retailer to do as the U.S. parcel industry undergoes one of its most disruptive changes? Will this be the end of free shipping? Will retailers be able to pass along these costs to customers? First and foremost, every shipper needs to review its transportation spend and have it analyzed preferably by a non-biased third party. Perhaps a change in packaging is in order or maybe a change in service level or even carrier(s). Regardless, don’t let DIM catch you off guard.
John Haber is Founder & CEO, Spend Management Experts (SME). Haber is an expert in shipping, freight and transportation spend management. At SME, he provides the vision and the execution know-how that helps companies save 10% to 20% or more in logistics spend. Haber launched the precursor to Spend Management Experts in early 2006 and under his leadership, grew the entity significantly. As a stand-alone services and technology consultancy, SME now serves more than 100 clients including marquee accounts such as GNC, Jockey, Ulta, Canon, Tumi and many more. In addition to managing and leading SME’s team of spend management experts, Haber manages development of the firm’s proprietary supply chain software and analytical tools.