We’re several weeks into what for many shippers is a very new and somewhat unfriendly parcel rating environment. Changes in parcel rating logic have been fast and furious in the past several months. We’ve seen a stiff general rate increase (GRI), increases to the carriers’ fuel surcharges indices, and probably most importantly, a radical change to the way Dimensional Weight (DIM Weight) logic is applied to Ground packages.
DIM weighting is the practice of calculating a package’s billable weight as the maximum of the actual weight or the DIM weight. The DIM weight is calculated as the package’s cube (length x width x height) divided by the DIM Divisor. For domestic packages, the Service Guide divisor is 166, but many shippers have negotiated higher divisors. Prior to the 2015 GRI, Ground DIM weighting applied only to packages whose volume exceeded three cubic feet. However, this “DIM Threshold” was removed by both UPS and FedEx with the 2015 GRIs.
So who pays the price? Some shippers will notice little if any increase due to the DIM changes. If you ship printed matter, hardware, or any other products with high density, you may not be impacted at all. But most e-commerce shippers aren’t so lucky. Shippers of apparel, footwear, housewares, gifts, etc. will be hard hit. We have seen some shippers who are staring down the barrel of increases as high as 18% when considering the GRI, the DIM changes, and the Fuel Surcharge (FSC) index changes combined. It’s easy to see that shippers will not be able to simply absorb increases of this magnitude into their margins.
The biggest challenge shippers faced as the 2015 GRIs approached was the lack of transparency. Both UPS and FedEx transmit package dimensions in their invoice data, but only for packages where the DIM weight is used as the billable weight (unless the shipper manifests dimensions). This means that the critical data element needed to analyze the impact of the DIM logic changes was the one piece of data the shippers didn’t have. Shippers were forced to use imperfect methodologies to estimate the impact, using average package densities, carton utilization, or unreliable transportation management system (TMS) data to try to estimate the coming increase. Unsurprisingly, these methods led to imperfect analyses, and as a result, imperfect strategies.
Now it’s time for some good news. We’re now over a month into the new logic. That means shippers now have access to several weeks of parcel data which does contain the package dimensions needed. Shippers can now apply sophisticated analytics to pinpoint not only the cost impact of the logic change, but also develop and assess strategies to mitigate the change. So long as you have the necessary data elements, the toolsets, and the experience, any scenario can be modeled and the associated cost impacts assessed.
What might some of those strategies be? Essentially there are three paths, and all should be explored: strategies that can be executed inside the four walls; negotiated pricing agreement solutions; and alternative carriers.
The “four walls” strategies are strategies that should be considered regardless of the impact to the DIM weight, as all other things being equal, smaller denser packages are more profitable for the carriers and thus can allow them to offer deeper discounts without negatively impacting margins. Performing packaging studies to ensure that you are using an optimum box mix given your order metrics is always a good idea. Whether using the carriers’ packaging engineers or a third party, the cost is usually low, and the ROI attractive, particularly for low-density shippers. Examine your fill utilization. If you’re using a lot fill per package, this is a clue that carton mix is off. Also, over-boxing opportunities should be explored. Historically this has not been an attractive strategy for most shippers, as exceeding the three cubic foot rule came with its own costs. But now that that threshold has been removed, over-boxing becomes a more viable option. This is still not a practical solution, particularly for shippers that may be filling orders from multiple ship-from locations, but it is at least worth considering through a cost/benefit analysis.
Negotiated solutions are more interesting and are usually more impactful. There are really only two negotiation points to consider: the DIM divisor and DIM thresholds. Negotiating a higher DIM divisor results in a lower DIM weight. How high should your divisor be? Only careful analysis can tell you. Best practice suggests that you should analyze a large data set. Twelve months is ideal, but in this case we will have significantly less than that to work with. You should then analyze the cost impact of DIM weighting at various divisor levels. You will find a sweet spot where much of the cost is offset and where a higher DIM results in diminishing returns. However, this analysis must be tempered by an understanding of what is achievable in the market. Not every shipper is going to be able to negotiate a 300 DIM divisor, and those that can may find that their negotiating capital is better spent elsewhere. The other negotiable item associated with DIM logic is DIM threshold. Yes, UPS and FedEx removed the three cubic foot threshold. But their rating systems still support threshold logic. We have been able to negotiate DIM thresholds for shippers. Again, the level of threshold you are able to achieve depends on the carrier’s realized margin, your negotiation capital and leverage, and the competitive environment.
Finally, we come to alternative carriers. The potential value of this option will be different for every shipper and every shipper’s network. And like the “four wall” options, these options should be explored regardless of their effect on DIM weighting. However, you should be aware that UPS and FedEx took this step alone. The United States Postal Service (USPS) and regional carriers, such as OnTrac, Eastern Connection, Lasership, and many other regional and niche carriers, have not mirrored the big-two’s DIM logic (many also have a higher standard DIM divisor), and could provide an advantage to the astute shipper.
The change isn’t coming; it’s here. If you haven’t assessed what this change will mean to your parcel costs, if you’re still trying to find ways to mitigate these costs, I urge you to consider the options listed above.
Joe Wilkinson is Director of Transportation Solutions Consulting at enVista. He has over fifteen years of experience across all modes of transportation including parcel, LTL, truckload/intermodal, rail, ocean and air freight. He works with clients to advance profitability and corporate objectives, optimize and increase efficiencies of transportation and logistics activities, and communicate financial and strategic concepts across the organization. He is a leading expert in parcel shipping and pricing practices and has negotiated literally hundreds of parcel agreements from both sides of the table; both carrier and shipper. His areas of expertise include transportation rating and analysis, shipping best practices, parcel market trends and developments, mode optimization, and transportation network and practice optimization. Wilkinson is a frequent speaker at industry events on transportation savings and negotiation topics.