WANTED: Paradigm Shift, Not Tactical Shipping Rate Increases

Among the myriad of supply chain articles, posts and blogs regarding the UPS and FedEx rate increases for 2017 is the fact that residential and delivery area surcharges, as well as large package surcharges, are increasing more than the freight rates. Of particular impact is the recently announced change in FedEx’s dimensional weight divisor which has the potential impact of increasing billable weight by as much as 19% or more and the change in oversize rules.

Large, low density packages, residential and rural deliveries are the most inefficient segments of carriers’ volume.  With more consumers purchasing household staples and oversize items online, this segment is growing.  The September 11, 2016 article in the Wall Street Journal, Ecommerce Is a Boom for Rural America but it Comes with a Price”, cites an example of a UPS driver in Oklahoma who…” delivers dog food, fruit snacks and Kleenex, among other things. His business has increased 30% during the past couple of years”.  To handle this growth, FedEx and UPS have provided incremental improvements in service, but is it enough to handle the rising tide of e-commerce?

The carriers’ rate increases are a tactical response to this trend. FedEx’s dimensional weight divisor change reflects the impact of increasing large packages on vehicle utilization. The oversize change was prompted by the increase in oversize items purchased online that cannot be handled by automated conveyor systems but instead must be handled manually at a much higher cost. These increases put pressure on merchants who are compelled to offer free shipping to their customers which in turn requires them to subsidize these higher carrier costs.

FedEx and UPS have invested in route optimization technology and improved delivery interface through programs such as FedEx Delivery Manager and MyUPS wherein customers may schedule alternate delivery times or locations. These offerings are intended to not only make deliveries more convenient for customers but reduce costs for the carriers by eliminating repeat delivery attempts. While this technology has strategic importance, the implementation of these offerings is quite tactical and fall short of the needed strategic leverage. In fact, both FedEx Delivery Manager and MyUPS which provide notification of impending deliveries, entail additional cost to the recipient to alter or tailor the delivery window.

Both carriers have addressed low density, dispersed delivery routes by handing packages off to the US Postal Service for lower cost delivery through FedEx SmartPost and UPS SurePost (tactic #3). Again, while this is an incremental improvement in cost, it cedes some shipment visibility and control and is not appropriate for larger items.

Both UPS and FedEx are expert operators and each has devoted significant resources to analyzing and engineering solutions for their respective operations. They clearly understand that the parcel industry has changed due to the rapid growth of e-commerce but they have offered no paradigm shifting moves to date.  The question is, “can they?” For all their efforts, there remains a great deal of opportunity for improving the service to the consumer. Consider the numerous companies vying for a share of the last mile delivery space. Some of these approaches may have a legitimate chance for success but many will fail as they control an insufficient segment of the value chain.

What comes about in the next several years in supply chain optimization will be of great interest. Will incremental improvements really work, or will either FedEx or UPS make paradigm-shifting moves to sustain and grow business? Will the Amazon paradigm shift already underway begin to dampen their growth?  Or something else entirely? Let me know what you think.