Dozens, if not hundreds, of articles have been published in PARCEL on contract negotiation: the do’s, the don’ts, benchmarking, cost basis negotiations, and so on.
While these tips are valuable and important (for the most part), many shippers tell me they’ve long followed these prescriptions, but have taken negotiations as far as they can. Universally, they ask me: What else can I do to gain leverage and maximize service and cost reduction?
What I’ve found is that many shippers don’t really understand the pricing and network differences between the two major parcel carriers, and therefore don’t properly leverage those variances to maximize service and cost savings.
While FedEx and UPS have many overlapping products, pricing structures and service parity, shippers that understand the differences between their services can use that knowledge as leverage to improve their negotiation positions. This article seeks to provide an opportunity to identify both carrier pricing and service differences, and more importantly, how to tie those differences into opportunities for improvements.
Let’s start with pricing. FedEx and UPS rates and pricing policies are basically the same, right? Wrong!
In 2017, for the first time in a long time, rates between these two competitors no longer match, accessorials are different, dimensional policies differ, and fuel surcharges don’t match. And while many industry pundits believe FedEx will soon announce a “holiday surcharge” to match UPS, as of this writing, UPS is the only carrier to have published details about its peak surcharge that will raise shipping costs for residential and oversized deliveries this holiday season.
Here is a list of some of the pricing differences by carrier as it relates to which has the most “shipper friendly” advantage.
- Cheaper published rates: While published rates between FedEx and UPS are comparable, FedEx offers slightly less expensive published rates for all domestic Express (except Express Saver, UPS’s 3 Day Air pricing is significantly less expensive) and Ground (under 70 pounds) services.
- Lower Ground minimum charges: At $7.25, FedEx Ground Commercial and FedEx Home Delivery minimum charges are lower than UPS at $7.32.
- Lower fuel surcharges: FedEx customers pay less in fuel surcharges than do UPS customers. The weekly index comparisons for the week of 7/17/17 follow: Domestic Air & International Air Export (4.25% for UPS, 2.5% for FedEx); Ground Surcharge (5.25% for UPS, 4.25% for FedEx)
- No late payment fee: UPS customers are invoiced a late payment fee of 6% of the outstanding balance based upon the negotiated payment terms with UPS. FedEx carries no such fee.
- No Third-Party Billing fee: UPS customers pay a 2.5% premium when selecting Third Party Billing. FedEx carries no such fee.
- Free Saturday delivery for FedEx Home Delivery: Many Ground Residential shippers and customers prefer delivery on Saturdays, as consumers are more likely to be home on weekends as opposed to during the week. Moreover, faster delivery (versus a Monday delivery) means customers receive their ecommerce orders two days earlier, prompting greater customer satisfaction, fewer returns (less time for buyer’s remorse) and many other documented benefits. FedEx Home Delivery is a Tuesday-Saturday delivery solution. UPS has historically delivered all Ground packages Monday-Friday; however, recently UPS modified its Ground Residential service to make Saturday delivery standard to major metropolitan zones. However, the service only covers about half of the U.S. population. Advantage, FedEx.
- FedEx SmartPost does not apply dimensional pricing: Rather, it uses USPS standards including Balloon pricing. By contrast, UPS SurePost applies the same dimension-based pricing as Ground.
- No ‘Peak Season’ surcharge: As of this writing, UPS shippers should leverage the fact that FedEx has not yet adopted any holiday surcharges to negotiate concessions to these new fees.
- 166 DIM first cubic foot: While both carriers modified dimensional pricing in 2017 from a divisor of 166 to 139, UPS customer enjoy the higher 166 divisors for packages up to one cubic foot. FedEx, on the other hand, applies the costlier 139 dimensional divisor to all packages.
- 3 Day Air: Comparing UPS 3 Day Air to the FedEx service equivalent (FedEx Express Saver), averaging all weights and zones 1-150 pounds, UPS is 17.05% cheaper than FedEx. Inner zones (zones 2-4) average 26.37% higher with FedEx Express Saver compared to UPS 3 Day Air.
- Accessorials: Comparing key accessorial charges for 2017, UPS tends to offer more attractive pricing for shippers, as highlighted in Table 1. Where UPS has an advantage, we’ve highlighted that cell brown – as much as 20% cheaper as you can see with DAS fees for Ground Residential packages. The purple cells reflect a couple of areas in which FedEx is cheaper.
- Some accessorials count towards revenue tiers: While both FedEx and UPS generally use revenue tiers to reward customers with higher discounts the more they ship, UPS allows transportation-related surcharges (including DAS, Large Package Surcharge, Residential Surcharge, and others) to contribute to revenue tiers. FedEx typically allows only freight (or transportation) charges – not accessorials charges – to contribute to revenue based incentives (called Earned Discounts).
- Puerto Rico treated as domestic with UPS: As a result, UPS shipments between the U.S. and Puerto Rico are typically less expensive than FedEx.
- Rebates: UPS often provides additional discounts as a “deferred tier thresholds” – or rebates – in which UPS will write your company a quarterly check as a percentage of your overall transportation expenditures. FedEx also offers a rebate program called the Earned Discount Override Program, but it is utilized significantly less than UPS.
If I were a UPS customer, I’d demand they match FedEx fuel surcharges, Ground minimum charges, non-dimensioning of SmartPost, etc. (of course, based on my usage).
As an example, a UPS shipper wanting a discount to the Fuel Surcharge fee would want to know that they are paying a lot more in fuel surcharges than they would as a FedEx shipper.
Similarly, if my UPS invoices included significant charges for Third Party Billing, Late Payment fees, or Peak Surcharges, I’d demand that UPS waive those fees to match the pricing policies of their largest competitor.
And if I shipped with FedEx, I’d demand that FedEx provide some of the pricing advantages of UPS (where most impacting) including a 166 dimensional divisor for the first cubic foot, request that accessorial charges contribute to discount tiers, target FedEx Express Saver and Puerto Rico pricing for improvement, etc.
Apart from pricing differences, there are also significant service and network differences that can be leveraged.
As the largest user of USPS Parcel Select services, FedEx SmartPost enjoys deep discounts from the USPS for packages inducted at the Destination Delivery Unit (DDU, or final mile postal facility), allowing SmartPost a competitive advantage in the marketplace. SmartPost also offers two delivery attempts (versus one for UPS SurePost).
FedEx is also the largest LTL company in the U.S. Shippers that have both parcel and LTL needs can bundle services to enjoy deeper discounts on both services.
Finally, FedEx has invested hundreds of millions upgrading package sort centers and modernizing Ground hubs. As a result, FedEx boasts faster Ground deliveries than UPS in approximately 26% of ZIP to ZIP pairings.
While UPS might not immediately be able to match some of the services or network reach of FedEx, well-informed shippers will get UPS to provide unique services or special pricing to offset any perceived service disadvantage.
Of course, UPS also offers unique service and network distinctions that FedEx customers should leverage. UPS is the only carrier to offer a single, integrated network, providing operational convenience. By contrast, FedEx could demand their customer segregate packages for pickup by their different operating companies like Express, Ground, Home Delivery, etc.
UPS also offers more global “Access Points” – neighborhood stores designed to give online shoppers convenient delivery alternatives. Moreover, over 35 million consumers are now UPS MyChoice users – significantly more than the FedEx alternative (FedEx Delivery Manager) – empowering online shoppers and retailers with greater flexibility on residential delivery options. Again, the point being that while FedEx cannot simply wave a magic wand and get 35 million people to sign up for FedEx Delivery Manager, FedEx e-commerce shippers are wise to bring up some of the service differences with UPS as additional points in their FedEx contract and service negotiations.
In summary, shippers that understand the pricing and network differences between the two major parcel carriers can potentially leverage those variances to improve pricing and maximize services.
Wishing you great success in your carrier negotiations!