The COVID-19 pandemic has put a major spotlight on parcel shipments as consumers and businesses have accelerated the shift to online purchases. At the same time, the continued shrinkage in delivery windows as a competitive advantage fostered by Amazon and others has put new pressure on shippers and carriers for improved performance and cost effectiveness. What will this mean for shippers with regards to parcel rates and capacity as we head into 2021? What actions should they take to navigate the road ahead successfully? How can third-party logistics providers help? Those are some of the questions I discussed with Todd Benge, Vice President of Parcel Operations at Transportation Insight, during a recent episode of Talking Logistics.
COVID-19’s Impact on Parcel
The COVID-19 pandemic has impacted supply chain operations in so many ways, especially concerning parcel shipments. I began our discussion by asking Todd to share his thoughts on how parcel shipping has changed.
Todd points out that the huge increases in parcel shipments this year, where virtually anything and everything is being delivered to consumers’ doors, has caused parcel carriers such as UPS and FedEx to reach capacity limits they didn’t think would happen until 2023-24. “As the carriers have rapidly added technology and assets to handle the surge, they have introduced surcharges and increased fees to cover their costs. This has increased shippers’ expenses, all of which they may not be able to pass on to consumers,” Todd says.
Todd notes that this year carriers for the first time are instituting volume-based surcharges for their largest customers based on volume tiers that may range from one to five dollars per residential delivery. In addition, they have stopped guaranteeing delivery times for things like next-day or two-day shipments. “This is causing great consternation among shippers. In essence, peak season for carriers has been going on for the past seven months and now it’s only going to get worse.”
Rates and Capacity for 2021
Given all of the turmoil in the parcel market, what should shippers expect in regards to rates and capacity for 2021? Todd explains that, “UPS and FedEx have already announced rate increases of 4.9%, the fourteenth straight year of 4.9% increases, which has conditioned the market to accept these increases. What has changed is the amount of surcharges and fees added on top of these rate increases. For example, DAS [Delivery Area Surcharge] and DAS Extended have seen a 7.5% to 9.3% rate increase, plus you have additional handling charges based on package dimensions; these fees and surcharges can add up quickly. Companies must take these added charges into account when calculating the cost of goods sold and margins, especially with today’s ‘free shipping’ practices.”
What Shippers Should Do to Prepare
What can shippers do to prepare for the rate and capacity challenges coming in 2021? Todd recommends shippers create operational plans that include regional carriers, couriers and the Post Office to achieve greater diversity in rates and capacity. “Being able to understand how you can use these carriers and the Post Office and coordinate all of that will be key. Understanding your supply chain and which variables drive cost, what carrier levers you can pull, and all of the associated analytics will be critical for success.”
How can Third-Party Logistics Providers Help?
Todd says 3PLs can help in a variety of ways. In their case, for example, they have developed systems that mirror the carriers’ systems so they can do simulations that examine potential scenarios and determine costs and whether the options are even doable given a customer’s supply chain realities and carrier contracts. “For example, if a retailer wants to do buy-online-pickup-in-store (BOPIS), what does that network look like and what are the costs? We have the systems and expertise to do that what-if analysis to augment the customer’s transportation department. 3PLs can also help analyze things such as mode selection and where to move the bar between parcel, LTL and truckload.”
Leveraging Lesson Learned
When I asked Todd what lessons parcel shippers have learned from their experiences this year and what it means going forward, he surprised me with an answer covering the broader supply chain, risk and responding to supply chain shocks. For his insights and advice on that question and more, I recommend that you watch the full episode. Then keep the conversation going by posting your own thoughts and suggestions.