Parcel shippers are facing a triple whammy in price increases this year against the backdrop of heady market growth. Industry innovators like Amazon continue to change the playing field while consumers enjoy more power than ever in a buying cycle that now operates around-the-clock.
What does all this mean for parcel shipping? Simply put, getting packages to your customers in 2015 is more challenging than ever. Following are some issues that may keep you awake at night, but also included are some ideas on mitigating the impact to help you experience a more peaceful slumber.
Weighty Price Changes
Parcel shippers must navigate three pricing land mines in 2015:
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The carriers’ general rate increase (GRI);
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The shift by FedEx and UPS to dimensional weight (DIM) billing on all parcel shipping; and
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UPS’s intent to assess a special surcharge on residential deliveries during peak periods.
Of course, fuel surcharges are always a consideration, particularly now that fuel prices are on the rise again.
Both UPS and FedEx announced a 4.9% increase for ground and air services. A closer look reveals a greater impact to lightweight shippers. The average increase for UPS and FedEx residential ground packages weighing one to five pounds is 6.36% while the increase for six to 10 pound packages is 5.96%. As always, the impact also varies by zone.
Couple the GRI with the shift to DIM to determine the billable weight for all packages and the result greatly impacts business-to-consumer (B2C) e-Commerce and omnichannel retailers.
Instead of relying solely on a package’s weight, the new rate formula measures a ground package’s external dimensions (length x width x height) and divides the total by a DIM factor of 166. (Shipments to Canada use the international divisor of 139 resulting in an even greater increase.)
For example, the DIM weight of a one-cubic foot package is calculated: 12x12x12= 1728 inches divided by 166 equals 10.4 pounds. Under the DIM pricing formula, if the actual weight of the package is 10 pounds or fewer, the billable DIM weight is now rounded up to 11 pounds. Let’s say the package weighs four pounds. Combine the GRI with the DIM calculation and the cost of shipping that four-pound package to Zone 2 is $9.40 for 2015, a 32% increase over 2014 prices.
If the GRI and DIM weight changes aren’t enough to cause concern, consider this. UPS’s average daily package volume in the U.S. increased 6.6% during the fourth quarter last year, but that wasn’t enough revenue growth for the carrier to justify the costs incurred delivering the packages. Consequently, UPS plans to implement surcharges for residential deliveries during peak periods like the holiday season. This special surcharge rate has not yet been disclosed.
Mitigating The Rise In Rates
The triple whammy creates the potential for double-digit rate increases. What can you do to alleviate such a significant increase?
For starters, conduct a rate increase analysis pronto. If you don’t have the time or resources, hire a consulting firm to assist and instruct them to analyze your company’s shipping scenarios across multiple carriers.
Once you have a handle on how the rates impact your transportation costs, you have a few choices. You can renegotiate with your primary carrier, adding an addendum to your contract. You can also evaluate and/or implement a multi-carrier approach if you don’t already have one. Regional carriers can often be a cost-effective part of your transportation mix as can the U.S. Postal Service (USPS). The USPS uses DIM only in Zones 5 to 8 and doesn’t assess accessorials or fuel surcharges. Finally, omnichannel retailers can review their in-store pickup operation to determine if increasing in-store pickups is a viable option.
Whatever actions you take should be geared toward lowering your net transportation costs which will automatically lower your fuel surcharges as those are based on net, not gross, transportation costs.
The Amazon Effect
Whether or not you compete directly with Amazon, the e-Commerce behemoth affects your retail business. When Amazon blinks, the world, including your CEO — pays attention. As an innovative market leader, Amazon sets consumer expectation and that includes your customers. What exactly is Amazon doing that needs to be on your radar? Three Amazon activities merit your attention: Loyalty memberships, delivery alternatives and warehouse automation.
Delivery Impacts Customer Experience
With as many as 60 million subscribers, Amazon’s uber-successful customer loyalty program, Prime, provides subsidized (free) two-day shipping as well as a free returns program. How do your subsidized shipping efforts compare? Have you taken a hard look at your online returns program?
Drones aside, Amazon continues to pursue alternative delivery options, including Sunday delivery via an agreement inked with the USPS. Prime members in certain cities can also enjoy same-day delivery.
What are or should you be doing? Omnichannel retailers are recasting the in-store experience so that consumers can shop online and pickup in-store. Retailers with tightly integrated online and offline experiences are winning by leveraging their digital investments in-store to provide the ultimate user experience. This includes shipping-from-store initiatives that open up inventory visibility or get closer to customers for quicker delivery. Setting up your stores as small fulfillment centers may give you just the leg up you need to get more products to more consumers.
The Automation Game
Pure eTailers like Amazon are keeping warehouses closer than ever to buying hubs to ensure faster, cheaper and more convenient delivery. Automation is essential. In 2012, Amazon spent $775 million to acquire Kiva Systems, a warehouse robot and software company. Up to 15,000 robots are now deployed across 10 of Amazon’s 50 domestic fulfillment centers.
While this type of technology investment isn’t possible, or even warranted, by most retailers, other warehouse automation is. If you haven’t taken a recent, critical look at how to streamline your order fulfillment processes, 2015 is the year to do so.
Serving A Hyper-Empowered Customer 24/7
Retail sales worldwide will hit a whopping $24 trillion with Internet sales composing $1.6 trillion of that total, according to eMarketer. U.S. e-Commerce sales will grow 14.2% to $349.1 billion.
The customer has always been king. With more shopping and shipping options than ever, your customer has even more power. When you’re selling products online, you’re open for business around-the-clock and customers from Kalamazoo to Timbuktu can find you. That means major challenges accompany the 24/7 sales opportunity.
You have to ask yourself repeatedly if your supply chain, fulfillment operation and customer service can respond to your around-the-clock buyers. Carriers are supporting extended pickup and delivery times at a price and both delivery and fulfillment services will soon be seven days per week to match consumer demand and expectations. How do you stack up? On the shipping front, now is a good time to review your carrier(s) time-in-transit promises. Keep in mind that the USPS is often an economical alternative when shipping to residential customers as the Postal Service can get to more of the country faster than the other national carriers.
Know Thy Customer
Use every means available to understand your customers’ expectations. Will your buyer accept a discount in exchange for a longer delivery time? How important is providing a subsidized returns process to your customers? Is deferred delivery top-of-mind? Do drop shipments make sense?
To capitalize on this year’s significant market opportunity, use that customer knowledge to transform your logistics capabilities from on-demand, streamlined fulfillment, to flexible shipping options. Flexibility is essential in serving hyper-empowered customers expecting a high degree of personalization.
Ken Wacker joined BirdDog Solutions as President and General Manager in 2013. Prior to BirdDog, Wacker’s executive tenure at Iron Mountain, gives him a unique perspective to understand how consultative solutions, business intelligence and outsourced process services help drive growth for Fortune 1000 organizations. In addition, Wacker has also worked with top performing organizations including Marriott Corporation and Pitney Bowes.
