By now it’s likely you’ve heard that both FedEx and UPS are revising pricing policies for Ground packages, moving from weight-based to pricing based on package size starting in 2015. Currently, both parcel carriers only apply dimensional weight pricing only to Ground packages measuring three cubic feet (5184 cubic inches) or greater. The elimination of the three cubic foot exception is effective December 29, 2014 for UPS, and January 1, 2015 for FedEx.
FedEx was the first to announce the move to price by package volume—the amount of space a package occupies in relation to its actual weight – on May 3, 2015. Scott Davis, UPS’s chief executive officer recently called the FedEx policy “sensible”, and on June 17, 2014, UPS too eliminated the three cubic foot exception for Ground products.
FedEx justified the change as a way to align the FedEx Ground dimensional weight pricing with FedEx Express. UPS says volume based pricing will enable UPS to more appropriately align rates with costs. E-commerce shipping trends have resulted in a decrease of package density which causes cargo space to be less efficiently utilized, resulting in an increased cost per package.
UPS foresees benefits for shippers as well as the environment. The UPS website states, “as a result of the dimensional weight pricing method, more shippers will seek to optimize their packaging practices. These efforts will reduce excess packaging materials and overall package sizes, leading to related reductions in fuel use, vehicle emissions and transportation costs.”
While arguably true, make no mistake about it. These changes will amount to one of the largest rate increases in the history of the parcel industry. The majority of Ground packages are less than three cubic feet, especially Ground Residential packages. Shipware estimates that 55-65% of ALL Ground packages between FedEx and UPS will be impacted by the new rules.
The table below shows the new dimensional weight calculations applied to the 25 most common box sizes sold in the U.S. The first three box sizes result in a dimensional weight of 1 pound – the absolute minimum weight – and therefore are not impacted by the change. However, the next fifteen box sizes (highlighted in yellow) will be subject to the new dimensional policies in 2015. The remaining seven box sizes – those at or above 5184 cubic inches – are already impacted by the current dimensional rate calculation, and as such are not incrementally impacted by the announced change.
Some shippers are making the mistake of thinking they are not affected because they’ve negotiated non-standard dimensional divisor greater than 166. While many volume shippers have contract dimensional divisors (greater than the standard 166), few have negotiated specific cubic thresholds written into their contracts. A shipper’s carrier contract must specify a three cubic foot (or other such exception), and such exceptions are rare. Shipware estimates that fewer than 5% of parcel pricing agreements for volume shippers include specific cubic threshold exceptions.
Like FedEx, UPS made the announcement several months in advance of the actual increase knowing that their biggest customers will want to negotiate, and that obviously takes time. UPS’s announcement is a significantly more impacting event than FedEx’s, as it does three times the ground volume as FedEx. When fully deployed, Shipware estimates $380 million/year to the upside for UPS, and $180 million/year for FedEx.
Neither carrier will be able to implement the new policy with ALL customers right away. What we’ve been seeing is a multi-year approach to implementation (example: No changes to the 5184 cubic inch DIM exception in Year 1; Year 2 = DIM exception decreases to 4000; Year 3 = 3000; Year 4 = no DIM exception). For 2015, Shipware forecasts the carriers will get about half the potential revenue windfall.
So what can shippers do?
- Understand the impact of these dimensional changes to your business. Shippers should review the table of box sizes above, and conduct a similar analysis using its primary box sizes and actual weights to compare with the new dimensional weight.
- Contact your FedEx and UPS Representatives in an effort to amend the current contract with a customized cubic inch threshold and/or dimensional factor. Both FedEx and UPS know they will not be able to implement volume based pricing with all of its customers. Or at least not right away
- Consider deferred Ground services. FedEx SmartPost packages are NOT affected as that service does not apply a dimensional rule, making SmartPost an even better economic alternative to FedEx Home Delivery for lightweight, non-urgent, residential packages. As far as we know, UPS SurePost will maintain the 1728 DIM exception policy.
- Consider alternative carriers including the USPS and regional parcel carriers. The USPS offers a 194 DIM factor, and some regional carriers do not plan on matching the 2015 increases.
- Seek help. Shipware has established a review and action plan for shippers concerned about this rate change. Interested shippers should email corporate@ShipwareLLC.com to get details.