Why a 4.9% Increase May Have a Bigger Impact Than You Think
During a recent conversation with a coworker, we discussed the difficulties companies are facing with ever-increasing shipping costs, so I decided to test his knowledge. I was curious what others understood to be true about shipping rates. So I simply asked, “Do you know what the 2016 General Rate Increase (GRI) is for FedEx® and UPS®?” My coworker quickly, and triumphantly, proclaimed “4.9%!” Being as sharp and talented as he is, he was right. But not completely…
With my background in medical and data sciences, it has been drilled into my brain that numbers without units ultimately have no meaning. So my follow-up question is reflexive: “4.9% of what?” When I asked him this, my coworker’s response was exactly what I was afraid of: “I don’t know.”
The answer is “4.9% Net Average.” When he heard that, he paused for a second, his eyes lit up, and he said “tell me more.” This conversation, as seemingly minuscule as it was, raised a bigger question: how many people truly understand the GRI and the potential impact it has on theirbusiness?
Each year, FedEx and UPS both roll out their General Rate Increase (GRI). For the last 10 years, the carriers’ GRI has managed to outpace the rate of inflation, and there is no sign of that slowing down. For 2016, both carriers announced a net average increase of 4.9% for their ground services. FedEx Express™, which includes their air service, had a matching average rate increase of 4.9%. UPS, as well, announced their average increase for air and international services would be 5.2%.
As I’m sure you have noticed, this article has been littered with the word “Average”—I assure you, this was not by accident. This is because the carriers have not uniformly increased their rates across the board. Some of the service increases are less than 4.9%, but many services have increased by much more. In fact, the average rate increase for packages, 1-15 pounds shipped to zones 2-8, is in the neighborhood of 5.3%. In an economy that has had sluggish growth over the last decade, coming up with an additional 4.9% in order to continue business could be difficult. So to anyone reading this article, the question becomes, “what does the GRI mean to me?” Unfortunately, the answer to that question is a resounding “It depends.”
A quick glance at the numbers might make you believe you have to cover an additional 4.9%. For simplicity’s sake, we are going to limit the examples in this conversation to base charges. This means the average $1 million shipper has to shell out an additional $49,000 to maintain the same service they were receiving the previous year; however, 4.9% might not be enough to cover the effects the GRI has on your business. Take, for example, a one-pound package shipped to zone 6 using ground service. The base price for that package increased 5.7% from 2015 to 2016. This 0.8% difference might not seem like a big number, but in the above example our $1 million shipper, who originally needed an additional $49,000, actually needs $57,000. This trend is even more prevalent when looking at FedEx Express rates.
Remember earlier when I mentioned that FedEx Express also announced a 4.9% net average rate increase? Well, just like the ground services, many of the rates increased significantly more. Let’s take our same $1 million shipper, and we will send that same one-pound package to zone 6. This time we are going to ship that package via the most economical FedEx Express service type, Express Saver™. The 2016 rate for this service type increased 7.32% over the 2015 rate. In this example, our $1 million shipper, who originally needed an extra $49,000, is now going to need to find an additional $24,200 to cover their expenses. If you are a company that likes to add the cost of shipping into the advertised price of your products, your projected revenue could end up falling woefully short. I wish I could tell you this is where it stops, but unfortunately it’s not.
Up to this point, I have used simple, straight-forward examples to demonstrate how the GRI can impact your company well beyond the 4.9%. In order to further illustrate the hidden impacts, we have to dive a little deeper, and look at the most hidden impact of them all: fuel. This is not a new fee by any means, but it needs to be taken into consideration. Fuel surcharges are assessed for every package shipped, and it is important to know that the fuel surcharge is not a flat fee, but rather a percentage. The surcharge percentage is calculated from a rolling index that adjusts according to the average cost of fuel. For ground service, that would be the average “On-Highway” cost of diesel ($/Gal), and for air service, that would be the average U.S. Gulf Coast jet fuel spot price ($/Gal). The fuel index is adjusted monthly, and the new surcharge is effective the first Monday of every month. Effective February 1, 2016 the UPS fuel surcharge for ground services is 5.00% and 3.00% for air services. The corresponding FedEx fuel Surcharges are 3.75% for ground services and 0.75% for air services. So how does this tie in to the picture I’ve been painting?
Once again the answer is “It depends.” The more your utilized service type increases, the more you will feel the compounding impact. In a very simplistic example, you will pay an additional 5 cents for every dollar with UPS Ground®, and 4 cents with FedEx Ground®. The same goes for air services, and the respective fuel surcharges associated with them. Since the rate increases are not even across all weights and zones, and also based on percentages, the exact impact will be determined by the characteristics of your individual shipping profile. At this scale the impact doesn’t sound overly significant, but remember the impact compounds with every dollar you spend.
The best way to guard your business against the impacts of rate increases is to:
- Thoroughly educate yourself on the FedEx and UPS changes
- Regularly review your carrier contract
- Aggressively negotiate your carrier contract
Since you can’t account for what you don’t know, you need to be sure you have detailed visibility into your shipping profile. If you don’t, partnering with an industry expert is a great way to help you understand your shipping profile and level the playing field. In an era of big data, failing to interpret and adjust to what your data is telling you could be the difference between your head rolling, or staying firmly attached to your shoulders. I don’t know about you, but if I had my way, I’d do my best to avoid the latter.