With 2018 behind us, hopefully you successfully implemented a peak season strategy and your organization survived the holiday madness that always ensues. Online sales once again hit new highs as did online returns. But whether your parcel strategy met your expectations or not, the New Year promises to bring multiple opportunities to make adjustments to your carrier options as far as your parcel operations are concerned.
As is par for the course, carriers announced their general rate increases (GRI) for 2019 during the final months of last year. FedEx and UPS are mostly sticking with a 4.9% increase, but shippers should carefully examine the pricing structure as some delivery zones can expect a double digit percentage increase. Global competitors DHL and Purolator announced similar increases to their American counterparts, with rates increasing 5.4% and 4.9% respectively. This is something shippers can expect to continue YoY as volume across the parcel networks continues to increase with the expansion of global e-commerce.
However, perhaps one of the most opportunistic choices for shippers lies with the United States Postal Services (USPS). While the USPS also announced a variety of rate increases, there are instances where it is competitive from a pricing perspective with similar service levels. In fact, a project that Chainalytics supported last year indicated that a large business can reduce its rates if it is close to the USPS destination delivery unit (DDU). By injecting packages directly into the DDU network, it was estimated the cost savings was 16.1% (partially driven by lower Ground rates with 50 package minimum injected into a DDU and a service type shift from Air/Express to Ground – again injected into a DDU – while still meeting service level expectations).
The USPS 2019 GRI noted that Priority Mail Express on average has increased by 3.9%, Priority Mail by 5.9%, and Parcel Select Ground (Commercial) by 1.3%. In all cases, they have lowered the dimensional factor from 193 to 166 (although this still beats FedEx and UPS with a current DIM factor of 139). In some instances, the USPS has “decreased” rates for shipments in Zone 5 and higher as well as 10+ pounds (depending on service type selected). It appears they are trying to be more competitive in the higher zone and weight category (up to 70 lbs).
From a consumer perspective, I recently shipped a Ground package to New York (at full retail price), and the USPS beat UPS by $0.47 (Zone 5, 6 pounds) or 3.1%, although the delivery window was three days longer. However, when I evaluated using Priority Mail (a medium flat rate box), the cost savings was $1.25 or 8.4%, and the delivery window was similar to a Ground UPS package.
Furthermore, the USPS has been testing a High Throughput Package Sorter (HTPS) and plans on rolling out 30 machines in the next five years. This will be necessary to compete with the “big two” (i.e., UPS and FedEx) in the long-run. They have acquired larger delivery vehicles which can be seen on the road today, invested in dynamic routing, mobile scanners (with near real-time package tracking), and delivery scanning systems. The USPS recognizes the need to improve its network and service offerings and are making the necessary moves to do so.
So as we move full steam into Q1, it’s time for organizations to do a parcel “health check” (a.k.a. a transportation assessment). As manufacturers are evaluating drop ship capabilities and traditional brick and mortar retailers expand online offerings to remain competitive, organizations big and small need to assess the percentage of their transportation budget dedicated to parcel service. Some questions to consider are:
- Has our parcel spend remained consistent or is it eating a larger chunk each year?
- Is another mode decreasing to make to up for budget shifts?
- What carriers do we rely upon, and are they really the best option for us?
- Can we expand our carrier portfolio (e.g., add variety across majors, add opportunities for regionals, etc.) to lower or mitigate costs?
- Do we anticipate larger parcel volumes in 2019, 2020, 2021, etc.?
Once you’ve conducted the assessment, you need to evaluate your current carrier contracts. Do you have contracts in place with carriers that allow you to renegotiate rates and service expectations? If so, are you satisfied with your current setup or have volume increases given your organization reason to draft new terms? Many companies with growing parcel spends don’t realize the opportunity for adding an addendum to mitigate annual rate increases exists and may be leaving significant savings on the table.
Large corporations with significant parcel spends aren’t afraid to approach carriers with the purpose of renegotiating existing terms or implementing an addendum until renewal talks begin. However, many smaller and mid-sized companies may feel they lack the weight needed to employ a similar strategy. But where does that mentality come from? In my opinion, it’s two fold. One, companies aren’t self-evaluating frequently enough to identify the shifts in their parcel needs. Two, companies have never actually asked for new or amended rates and terms, leading them to believe it’s not possible. You don’t know until you ask, so you only know what your current agreement is telling you. So as 2019 looks to bring additional need for parcel optimization, now is the time to explore your options and implement advanced strategies to manage your transportation budget. We’re rethinking parcel, are you?
Chainalytics Sr. Manager Jim Haller leads the firm’s Parcel Spend Optimization offering, which enables multi-level organizations to reduce costs, improve service levels, negotiate better pricing agreements and generate cost savings of 8-15 percent on their parcel spend.