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Bloomberg: Amazon Testing Rival to FedEx/UPS

Some folks were surprised when Bloomberg News and other news sources reported yesterday that Amazon was experimenting with their own delivery network which could come at the expense of their current business partners UPS and FedEx.  The reality is that Amazon’s move into establishing their own delivery network has been in the works for years now.

The real question that remains to be answered is whether Amazon can and/or is willing to build a complete delivery network here in the US and therefore no longer have a need to use UPS or FedEx for their domestic deliveries.  We doubt that will ever come to pass completely, but we are sure that Amazon will at some point in the future be a major delivery service provider in many of the major metropolitan areas of the US.  They have been building and fortifying those metro delivery networks for years now and will be a strong delivery force in many major metro area’s for sure.

There also remains the possibility that Amazon will compete head to head with both UPS and FedEx for parcel deliveries from other shippers at some point in the future.  We believe that Amazon has felt for quite some time that the costs to deliver parcels through UPS and FedEx are more costly than what Amazon believes they should be.  Perhaps if Amazon does compete head to head with the two parcel giants, they may find out that reducing those costs may not be as easy as it seems.

 

A FedEx truck is parked next to a UPS truck as both drivers make deliveries in downtown San Diego, California March 5, 2013.  REUTERS/Mike Blake

Will FedEx “Me Too” UPS and add Peak Surcharges?

Ever since last week when UPS announced the “Peak Surcharges” they will be applying to various shipment types during the November/December holiday shipping season, many shippers are wondering will FedEx follow suit and add their own peak surcharges.  And, that my friends is a very good question.  Without a crystal ball it’s anyone’s guess but we thought we’d explore this issue to see if we could find any signs that would point to the decision FedEx may or may not ultimately make.

For one thing, FedEx recently reported their fourth quarter earnings and they were spectacular, with a quarterly profit of over $1 Billion; very impressive.  So what drove this huge increase in profits for FedEx; a couple of things.  First and foremost was the reporting of revenues derived from FedEx’ TNT Express acquisition.  This included restructuring charges, and $20 Million in TNT Express intangible asset amortization expenses, as well as $37 Million of integration expenses.  From there FedEx reported increased revenues of 7% on increased package volumes, as well as growth in International Export activity which contributed an additional 5% growth.  FedEx also reported that their higher profits were a direct result of higher base rates.

Higher base rates we believe were achievable through several measures FedEx has taken over the past year or so to shore up its profits, including the reduction in Dimensional Weight Divisors resulting in higher yields per package for dimensional rated parcels.  Also, the elimination of refunds for late delivered packages which had been an integral part of FedEx’ contracts with their shipper customers.  While many shippers still maintain the ability to file claims for refunds for late delivered packages, apparently, many of the new contracts Fedex is implementing contain waivers which prohibit shippers from filing refund claims for these late delivered packages.  Obviously, other cost containment initiatives FedEx has been continually implementing and improving continue to pay off.

So, with these increases in profits, will FedEx opt in on surge pricing, AKA “Peak Surcharges” or will they let UPS be the “bad guys” and try to siphon business from UPS during the peak holiday shipping season?  The reality of the matter in our opinion is that FedEx can ill afford to add significant volumes of packages during the peak holiday season as that would wreak havoc on their operations and potentially jeopardize service to their current large shippers.  In fact we believe that much of the profit FedEx has derived from increased package volume has actually come from the peak holiday periods in late November and December.

So having said that, we believe that FedEx has absolutely nothing to lose by “me tooing” the Peak Surcharges UPS has scheduled to become effective for this coming holiday season.  However, whether they do it or not remains to be seen.  Still waiting for that crystal ball.

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An Early Holiday Present from UPS!

UPS’ New Peak Surcharges and What it Means for You

Actually, the holiday present is for UPS and not for UPS’ customers.  We’ve all heard the rumblings for months and now we know what UPS has been planning regarding the imposition of new surcharges UPS calls “New Peak Charge.”

It’s been obvious for years that UPS’ shipping volumes spike significantly during peak holiday shipping periods.  During those peak shipping periods, UPS, (and FedEx for that matter), continuously flex their systems by adding additional equipment capacity and additional labor to handle the large volumes of additional packages in an effort to ensure on-time delivery of those holiday packages.  Now, UPS is planning to pass part of the cost, or all of those costs, (no one is really sure), on the backs of many of their most loyal customers.

The official word from UPS according to Alan Gershenson, UPS Chief Commercial Officer is that the additional charges are required to allow UPS to “continue to provide best-in-class value to customers while offsetting some of the additional expenses incurred during significant volume surges.”  “We’re focused on helping our customers achieve success during some of their most important selling seasons.”  “Our goal is to help every customer obtain the delivery capacity they need, combined with predictable and timely service they count on from UPS.”  Certainly sounds logical to us; who wouldn’t want those assurances?  However, it’s not the assurances their loyal customers will question, it’s the cost of those assurances that we’re sure is going to irk UPS’ customers.

While we agree with the philosophical aspect of these new surcharges, there may be a large price for UPS to pay.  For one thing, we haven’t heard from FedEx yet as to whether they will implement similar surcharges.  So, will UPS see a dilution of these peak season packages moving to FedEx?  And if so, how successful will FedEx be in delivering these packages on time during the peak holiday season?  After all, their systems are also severely challenged during these heavy shipping periods.  We’re fairly certain that USPS will not implement a similar peak season surcharge, so how many holiday packages will shift to USPS during the peak holiday shipping season; and how many of those packages will remain in the USPS system long after the peak season is over?  Only time will tell.

UPS has announced that they will also be adding additional peak season surcharges for residential delivered packages originating within the 48 contiguous states to destinations within Alaska, Hawaii or Puerto Rico.  These surcharges are due to be published on or before August 1, 2017 according to UPS.

Here is an overview of the new peak season surcharges for each package addressed to a location that is a home, including a business operating out of a home.  Surcharges apply to packages with origin and destination within the 48 contiguous states and packages with Alaska and Hawaii origin.

UPS Ground, Including Ground with Freight Pricing

November 19th through December 2nd, 2017 – $0.27 per package

December 17th through December 23rd, 2017 – $0.27 per package

UPS Next Day Air Early, UPS Next Day Air, UPS Next Day Air Saver

December 17th through December 23rd, 2017 – $0.81 per package

UPS 2nd Day Air AM, UPS 2nd Day Air, UPS 3 Day Select

December 17th through December 23rd, 2017 – $0.97 per package

Peak Surcharge Applied to Large Packages for ALL Service Levels to ALL Domestic Destinations

A Peak Surcharge will apply to packages with length plus girth (2X width + 2X height combined over 130 inches.

November 19th through December 23rd, 2017 – $24.00 per package

Note:  This surcharge is not restricted to residential deliveries

Peak Surcharge Applied to Over Maximum Limits Packages for ALL Service Levels to ALL Domestic Destinations

A Peak Surcharge will apply to packages with an actual weight of more than 150 lbs. or packages that exceed 108 inches in length, or that exceed 165 inches in length plus girth combined.

November 19th through December 23rd 2017 – $249.00 per package

To give you a sense of the magnitude of these new Peak Surcharges for Large Packages and Over Maximum Limit Packages, the following is an example of an actual shipment of carpet under UPS’ current pricing for a large carpet retailer.  We added the “new” costs that will apply once these new Peak Surcharges become applicable.

Dim final final

In the example above, a shipment of one roll of carpet was tendered to UPS as an 11 pound package for a residential delivery. This shipper thankfully has a negotiated Dimensional Weight Divisor of 194.  After UPS received the shipment, a shipping charge correction was issued, because while the shipment’s actual weight was only 11 pounds, under UPS’ Dimensional Weight Pricing provisions, the weight was changed to 321 pounds, changing the shipment charge from $8.91 to an additional $91.12, plus the current $70.00 Large Package Surcharge and $150.00 for Over Maximum Size packages.

Once the new Peak Surcharges become applicable this shipment will also be subject to a Peak Residential Surcharge of $.027; a Peak Large Package Surcharge of $24.00 and a Peak Over Maximum Size Surcharge of $249.00, making the new charges 83% higher than the current shipment cost.  Just think of the impact these new surcharges will have on all businesses that ship Large Packages and Over Maximum Packages.  UPS is counting on these packages shifting to their UPS Freight trucking division and getting them out of the parcel operations all together and these additional fees will certainly make that a reality.

But wait, that’s not all, UPS’ customers who import goods into the US will also be dealing with Peak Surcharges as detailed below.

United States Import Peak Surcharges

Packages imported to the US in designated international lanes will be subject to a Peak Surcharge during specified Peak Periods.  UPS advises they will provide the applicable lanes, Peak Surcharges and Peak Periods which will be published on the UPS website on or before September 1, 2017.  UPS also advises that these import surcharges will be “updated from time to time as applicable lanes, peak periods and/or Peak Surcharges change.”

The message for UPS shippers in so far as imports are concerned is that these Peak Season Surcharges will apparently be changing on a regular basis causing havoc for shippers trying to budget their import freight costs.

Overall UPS’ message to their shipper customers in establishing these new Peak Surcharges is that UPS is no longer willing to bear all of the costs for increased peak shipping volumes.  One question we have is, with the assessment of these additional fees, does UPS expect to be more successful in delivering holiday merchandise on time, or is this just a way of improving their revenues.  We’ll let you be the judge!

UPS’ shipper customers need to understand it’s time to thoroughly analyze the financial impact these surcharges will have on their freight budgets.  We’re sure many shippers are not going to take these increases sitting down.  What impact will these surcharges have on their customer order and delivery commitments of holiday merchandise?  How much product will now be diverted to retail store deliveries for customer pick up to avoid residential deliveries, something UPS would obviously be happy to see as a new and emerging trend.  If you’re a retailer and you haven’t thought about these Peak Surcharge issues yet, it’s time to put your thinking cap on and decide what options are available to mitigate these additional costs.

 

 

 

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UPS’ New Surge Pricing About to Shake Up On-line Retailers

— Retailers Left with More Questions than Answers–

UPS, The nation’s largest package delivery carrier is in the beginning stages of implementing a new pricing concept which in our opinion, could be interpreted as penalizing its largest retail customers.  Here’s how the program would work.  If during the peak shipping season, large retail shippers fail to ship as many packages as they had planned, UPS is looking to charge those retailers for the extra workers it had to hire to handle the anticipated volume and for the surplus space it might have on its delivery vehicles due to the mis-calculations.  One news source put it this way, “UPS wants to get paid for packages it never delivered.”

This new Surge Pricing concept would apparently also penalize UPS’ largest retail shipping customers if the shipping characteristics change, such as the physical size of the boxes are significantly different from what the retailer normally ships within their peak shipping period.  Obviously UPS means the cartons would be larger and take up more space in their delivery vehicles than packages the retail customer “normally” ships during peak season.

While this new Surge Pricing sounds punitive to us, according to UPS Chief Executive, David Abney, it’s not meant to be.  He claims that, “if there are variations to the plan, let’s see what we can do, but we should be compensated accordingly.”

FedEx for their part is not currently contemplating a plan to charge their largest retail shipping customers for failing to meet promised package volumes.  According to Carl Asmus, Senior VP for e-commerce, “the last thing I’d ever want to do or say is I’m going to penalize a customer.”  Sounds to us like FedEx’ approach is at least on the surface, a better customer service approach, especially when dealing with some of your largest shipper customers.  FedEx has not yet announced any plans for a similar Surge Pricing concept.

The challenges faced by both UPS and FedEx are obviously attributed to continuing “Growing Pains” based on how consumers shop now-a-days.  There are a lot less consumers going to brick and mortar stores to do their shopping.  They prefer to order their selections on line and have them delivered directly to their homes.  This “millennial” shopping trend is certainly not going to change any time soon, if ever.  Surge Pricing does appear to be a financial solution for UPS to address the peak season surges that greatly affect package capacity and delivery timeliness from major retailers, but also from other smaller shippers as well.

It is clear that UPS, and FedEx for that matter, will have to find solutions to managing package volume increases during peak season spikes, as well as at other times throughout the year as on-line home delivery shopping gains momentum each and every day.  However, selecting specific large retail customers to bear the brunt of the cost does not seem like it would be a very popular approach to us.  Which leads us to a few questions about how UPS would implement these pricing changes with their large retail customers.

  1. How would UPS decide which retail customers should be charged for Surge Pricing?
  2. What if a retail customer refuses to accept Surge Pricing, would UPS give up the account to a competitor or would UPS simply look to other retail customers to pick up the slack?
  3. What would the Surge Pricing look like;  would it be a charge per carton which is not tendered to UPS compared to the retail customer’s usual projections; how would labor costs be charged?
  4. What supporting documentation would UPS provide, if any to its retail customers to support the additional Surge Pricing?
  5. Would UPS be willing to provide additional incentives to retail customers if their volumes are much greater than they typically ship; but doesn’t that contribute to the problem UPS is trying to solve?
  6. If UPS is successful in implementing Surge Pricing with many of its retail customers, wouldn’t these retail customers be subsidizing other shippers who also ship larger quantities of packages in peak season?

These are just a few questions we see as UPS starts discussing Surge Pricing with its large retail shipping customers.  Only time will tell if this new Surge Pricing approach will be the solution UPS is looking for it to be.  We suspect we will be hearing reaction fairly quickly once these Surge Pricing meetings take place.  Fasten your seatbelt!

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Customer Demand Results in Added Supply

We are all well aware of the theories of supply and demand and its relationship to costs for businesses.  Well customer demand in the package delivery arena has now caused UPS to make a significant service enhancement to their operations by providing Saturday delivery for Ground packages to compete with both the USPS and UPS rival, FedEx Home Delivery.

Retail customers can now receive Ground packages on Saturday and not have to wait until Monday to receive them.  On the other side of the coin, retail shippers can ship packages on Saturday and expect Monday delivery to next day delivery zones.  Another interesting fact is that UPS expects to add 6000 new jobs once this massive change is totally implemented, and that’s great news for the overall economy.

Want more reasons as justification for UPS to make this change; UPS expects that residential deliveries will represent more than half of their delivery business by 2019.  Saturday operations will also allow UPS to flush it’s system over the weekend before the big Monday rush of packages, so overall it’s a good move for UPS.

Expect UPS Saturday Ground delivery to roll out this month in major US cities such as, New York, Chicago and Boston.  This operational change will give on-line shoppers another reason not to go to the mall.  So the only remaining question is, when will we see Sunday deliveries for FedEx and UPS?  We suspect it may not be that far away.

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UPS To Roll Out Saturday Ground Delivery

UPS Saturday Ground Package Delivery Coming to a Home Near You

A recent article in the Wall Street Journal and covered by several other news organizations, reports that UPS is planning to roll out a new package delivery program in April that will see about 50% of the US population receiving Ground packages delivered on Saturdays.  Not only that, but UPS will also be enhancing its pick up service and package sorting operations on Saturday as well.  The package sorting operations on Saturday will surely help UPS relieve the pressure of moving packages when Monday morning rolls around.

These new services are obviously a direct result of the tremendous customer demand who “want their package now!”  And, UPS knows exactly what its customers want so it will make a major investment to implement these services as a way to continue to grow its business, but more importantly to grow it profitably.

And of course, there will be an added cost to shippers for this new Saturday Ground package delivery service, so shipper’s get ready to dig deeper into your pockets.  How much will these Saturday Ground package delivery fees cost; well that remains to be seen but rest assured we will hear what those fees will be shortly.

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