Most companies are aware that it’s imperative to have a solid understanding of their costs, and to make adjustments in their business when costs rise. Failure to adjust for rising costs will lead to erosion of profits.
Companies react differently to rising costs, for example, some may simply increase the prices of their products or services. Others may try to avoid cost increases by adjusting manufacturing processes, or finding new vendors. Either way, when you know that your costs are rising by “X%”, it provides you with some guidance regarding actions that you need to take to protect your profit margins.
However, what happens when you don’t know how much your costs will be rising? Even worse, what happens when you don’t even know that they are rising at all? The answer to this is simple. When this happens, your company will experience what we like to call “Profit Leaks”, the erosion of your profit margins.
Unfortunately, in the Small Parcel shipping world the pricing strategy of the major carriers is leading to more and more Profit Leaks than ever before. We all know by now that the General Rate Increase amounts that the carriers announce each year need to be taken with a grain of salt. Increases in Accessorial rates, and the impact of a shipper’s unique shipment characteristics can drive cost increases much higher than the announced GRI amounts.
Now to make matters worse, we are starting to see parcel carriers make midyear changes that will drive up shipper’s costs. And, these increases are extremely difficult for most companies to quantify.
At the beginning of April, we released a blog that detailed some midyear changes that UPS and FedEx were making to their Delivery Area Surcharge, (DAS) zip codes that could have an impact on costs for shippers. These changes basically increased the number of Zip codes that would be subject to UPS and FedEx’s DAS surcharge, (increasing cost per package by $3.95-$5.85, and even more for Extended DAS Zip codes.) The newly added zip codes were primarily in major metropolitan areas.
When UPS announced these changes back in March, they also made a subtle announcement that “Effective June 17, 2024, the applicable zone will change for certain origin/destination ZIP code pairs.” Since this announcement in March, we have not seen any additional details or specifics offered by UPS regarding what changes would be made. We were not surprised by this at all.
It is important to point out that UPS did make some similar zonal changes when their 2024 rates went into effect back at the end of December. We had released a blog on January 9th, 2024 that detailed some of the changes that we picked up on. We also speculated in that article that we expected that this “sneaky” approach to increasing shipper’s costs would become more commonplace. However, we can tell you, we did not expect that we would see this take place twice in one year.
Without having details of the specific changes, it is difficult for most shippers to determine how this will affect them. So in an effort to assist shippers to understand the implications of these changes to “certain zip code pairs,” ICC Logistics launched a comprehensive analysis to determine potential impacts. We took a look at approximately 70 UPS Zone charts, from origin points around the US. We were sure to include zip codes in which Distribution Centers are typically located in our analysis. Many of the zip codes that we looked at are home to some of the largest 3PL’s in the country. The chart below summarizes some of our findings.
| Number of changes by jump | ||
| Jump | # | % |
| Zone 4 to 5 | 111 | 19.30% |
| Zone 2 to 3 | 105 | 18.26% |
| Zone 3 to 4 | 103 | 17.91% |
| Zone 5 to 6 | 68 | 11.83% |
| Zone 6 to 5 | 35 | 6.09% |
| Zone 5 to 4 | 32 | 5.57% |
| Zone 6 to 7 | 29 | 5.04% |
| Zone 7 to 6 | 28 | 4.87% |
| Zone 7 to 8 | 20 | 3.48% |
| Zone 4 to 3 | 18 | 3.13% |
| Zone 8 to 7 | 15 | 2.61% |
| Zone 3 to 2 | 11 | 1.91% |
| Grand Total | 575 | 100.00% |
There were a total of 575 zone changes from Jan. 2024 charts to Jun. 2024 charts in the zone charts we analyzed. Of these changes, 76% or 436 changed to a higher zone. No surprise here!
When looking at this, one might think that changes only occurred on a small percentage of the zip code pairs that exist. However, the important thing to consider is that it is very possible that the changes that were made were strategic, and included zip code pairs that typically see a lot of volume. Once again, this analysis only included a small percentage of UPS Origin Zips. The only way for a shipper to determine the true impact of the June 17th changes is to perform an analysis of actual shipping activity, or to work with a company like ICC Logistics that can perform this comprehensive analysis for you.
Some folks out there might still be thinking that this may not be a worthwhile exercise given the small percentage of impacted zip code pairs. Maybe they are casting aside the possibility that UPS targeted heavy volume zip code pairs. Ok, that’s fine. But, it’s also important to consider the financial impact of the zone jumps. In the blog we published back in January, we provided the chart below which details the increase in costs driven by zone increases. The table below is based on UPS 2024 Published Ground rates, and helps to demonstrate that an increase in Zone could have a huge impact on cost per package.
| Difference in Cost by Zone Ground | ||||||
| Weight | Cost Increase Zone 3 vs 2 | Cost Increase Zone 4 vs 3 | Cost Increase Zone 5 vs 4 | Cost Increase Zone 6 vs 5 | Cost Increase Zone 7 vs 6 | Cost Increase Zone 8 vs 7 |
| 1 Lbs. | 3.9% | 9.3% | 4.5% | 2.4% | 2.1% | 0.8% |
| 5 | 11.1% | 9.9% | 8.5% | 4.0% | 5.4% | 7.0% |
| 10 | 7.4% | 9.6% | 9.9% | 3.5% | 11.2% | 11.6% |
| 15 | 7.1% | 5.2% | 12.8% | 15.3% | 20.4% | 10.7% |
| 20 | 12.5% | 2.1% | 23.0% | 16.5% | 21.7% | 12.1% |
| 25 | 16.8% | 6.9% | 19.7% | 22.9% | 20.6% | 14.1% |
| 30 | 18.6% | 9.8% | 19.8% | 24.8% | 16.2% | 17.8% |
| 35 | 23.0% | 11.8% | 18.4% | 24.2% | 18.2% | 17.7% |
If this isn’t enough to convince you that you might want to take a deeper dive into potential cost increase impacts, it is important to remember that these zonal changes do not only apply to Ground Zones. We also put together the charts below to demonstrate the impact that Zonal Changes have on Air shipping Costs.
| Difference in Cost by Zone 2nd Day Air | ||||||
| Weight | Cost Increase Zone 203 vs 202 | Cost Increase Zone 204 vs 203 | Cost Increase Zone 205 vs 204 | Cost Increase Zone 206 vs 205 | Cost Increase Zone 207 vs 206 | Cost Increase Zone 208 vs 207 |
| 1 Lbs. | 4.2% | 4.3% | 19.6% | 20.2% | 6.7% | 2.0% |
| 5 | 7.7% | 17.5% | 42.1% | 30.2% | 10.0% | 6.0% |
| 10 | 24.0% | 25.3% | 44.2% | 39.9% | 10.8% | 3.3% |
| 15 | 17.3% | 26.9% | 48.1% | 47.0% | 6.2% | 4.3% |
| 20 | 17.8% | 29.5% | 50.3% | 46.6% | 9.3% | 3.1% |
| 25 | 20.1% | 26.3% | 52.1% | 48.0% | 9.9% | 4.2% |
| 30 | 21.5% | 28.1% | 51.9% | 47.9% | 9.7% | 3.4% |
| 35 | 20.3% | 27.5% | 51.4% | 50.3% | 7.9% | 2.7% |
| Difference in Cost by Zone Next Day Air | ||||||
| Weight | Cost Increase Zone 103 vs 102 | Cost Increase Zone 104 vs 103 | Cost Increase Zone 105 vs 104 | Cost Increase Zone 106 vs 105 | Cost Increase Zone 107 vs 106 | Cost Increase Zone 108 vs 107 |
| 1 Lbs. | 47.3% | 29.4% | 10.6% | 5.3% | 13.6% | 2.7% |
| 5 | 38.9% | 55.9% | 8.5% | 3.7% | 13.4% | 2.9% |
| 10 | 39.9% | 68.1% | 9.1% | 5.2% | 11.5% | 3.6% |
| 15 | 41.6% | 80.9% | 12.2% | 2.0% | 11.6% | 2.0% |
| 20 | 41.5% | 80.4% | 12.2% | 2.1% | 9.0% | 1.8% |
| 25 | 39.8% | 95.2% | 8.0% | 3.9% | 10.0% | 2.0% |
| 30 | 39.9% | 102.4% | 6.0% | 3.4% | 9.2% | 4.3% |
| 35 | 37.5% | 100.2% | 7.8% | 2.6% | 11.1% | 2.0% |
It is also important to point out that base rates are not the only thing impacted by Zonal changes. There are also a couple of Accessorial charges that are Zonal based, (Additional Handling and Large Package Surcharge.) So, if you ship larger packages, your cost increases could also be compounded by these changes as well.
Hopefully by now you get the point of all of this. Although these changes to “certain zonal pairs” appears to be subtle, (just like UPS’s announcement of the changes), some of the increases that these changes will create are not so subtle. Not sure if you caught it, but some of the increases are as much as 100%! Many of the cells on the Ground side are seeing double digit increases.
With increases like this, some shippers are certain to experience Large Profit leaks. For certain shipments, especially Air, it is possible that profit margins could be completely eroded. The important thing to remember is that leaks can actually sink the ship! I can tell you this first hand (which is a whole other story that I would be glad to tell you about when you give me a call.)
The good news is that we are here to help. We would be glad to share the details of the analysis that we prepared, or to discuss how we can help you determine the true impact of these changes, along with others that are sure to come! So, don’t hesitate to reach out to us to schedule a quick call to discuss plans for plugging up those leaks!
to receive our FREE white papers: