UPS may charge retailers who fail to meet peak volume commitments in 2017 for their shortfalls.
How can you prevent this?
Parcel shippers, be accurate with your forecasts because you’re going to be paying for that volume whether you ship the packages or not. UPS wants to be compensated because it relies on retailers’ projections and volume commitments to employ extra workers and account for surplus space on trucks or in distribution hubs.
To incentivize retailers to meet their forecasts and prevent increased costs in the future, UPS will maintain the right to charge retailers who reserve shipping capacity and don’t fulfill their e-commerce targets.
If you’re thinking that switching to FedEx is the answer to avoid being charged, you might be wrong. If UPS finds this profitable, I wouldn’t be surprised to see FedEx do the same as soon as next year (if they don’t do it this year). And, be aware – don’t assume that this is the only holiday season surprise in store. Based on the “Peak Season Surcharges” last year, it wouldn’t be unprecedented for the carriers to announce a rate increase or new surcharge that will go into effect before the holidays.
As a reminder, to ensure their revenue numbers remain robust, UPS and FedEx already institute a Money Back Guarantee (MBG) Blackout period during the holiday season to address network capacity issues. And both carriers, but especially FedEx, include MBG waivers within new contracts as standard language. The MBG waiver provides the carrier flexibility and leniency within their network while avoiding the service delivery commitment that shippers are paying for when selecting a premium service.
Carriers Learn From the Past
UPS and FedEx have 2013 burned into their memory. That year, pre-Christmas e-commerce activity overwhelmed their forecast during the week before Christmas. That, coupled with harsh winter weather, adversely affected package delivery. While FedEx performed better, both carriers struggled to get all holiday packages to customers in time for Christmas.
To prevent a repeat of the 2013 holiday season experience, in 2014 UPS committed to avoiding the same fiasco and successfully delivered e-commerce packages in time for Christmas. But UPS ended up with too much capacity, lowering productivity and earnings. Keeping capacity in line with holiday demand is an ongoing challenge for UPS.
For the past two years, UPS and FedEx have tried to fine-tune an equilibrium between spending too much money to assure that packages arrive on time and having too little capacity. The amount of effort both companies put into perfecting this balance is overwhelming, and yet they haven’t succeeded in finding the sweet spot. There are two reasons for this:
- E-commerce retailers fail to accurately predict how many packages they plan to ship (especially the week before Christmas).
- Residential delivery costs more than commercial delivery.
For carriers, how can these issues be resolved? Through pricing changes.
UPS is taking steps to do just that; the carrier already is charging retailers more if they surpass their estimated peak-period volume (which forces UPS to rush to add capacity). Hence, UPS’ decision to charge retailers who fail to use the capacity they ordered.
For parcel shippers like you, though, this situation might be an opportunity to negotiate. UPS most likely isn’t applying this change to everyone, and we don’t think that the penalty is going to be standard.
VeriShip can help you (with your previous year’s invoice data and your current contract) to model predicted volume and negotiate favorable thresholds.
No one likes year-end surprises, especially when they are delivered as a penalty from the carrier. Make sure you are using the data to protect your bottom line. Work with your carrier rep – and VeriShip – to mitigate the potential impact of this change.