WHY LOWERING SURCHARGES IS CRITICAL TO OVERALL TRANSPORTATION SPEND MANAGEMENT
By now, most shippers are keenly aware of how surcharges are impacting their transportation spend. Accessorial costs keep climbing and can now contribute to, on average, almost 40% of your total carrier expenditures.
Over the last few years, the carriers have been using surcharges as their primary way to increase revenue. Unlike their general rate increase (GRI), which goes into effect every January, surcharges are not included in their overall fixed tariff increase caps and estimates. Typically, the carriers increase their tariff rates by about 4.9% on average, with some variation based on service and weights. However, when it comes to surcharges, the carriers have abandoned any pretense of year over year caps and have increased surcharges by significantly higher percentages than their tariff rates.
Furthermore, the carriers have begun to implement surcharge increases mid-year and have not waited until the January tariff increases. To make matters worse, the carriers have also changed the rules and thresholds to make more and more shipments susceptible to these added charges.
In the past, shippers could count on accessorial charges to cost about 25%of their overall transportation spend, a far cry from today’s 40%.
There is now no shipment that does not get some sort of add-on charge from the carriers. Many years ago, it started with the fuel surcharge. Now, there are residential surcharges, delivery area surcharges, dimensional charges, additional handling fees, oversize fees, and peak season fees — just to name a few. It has come to a point where these add-on charges are now more expensive than the up-front freight cost.
In the past, both FedEx and UPS’s networks were designed for commercial deliveries. However, with the explosive growth of e-commerce, more and more shipments have become residential deliveries. In the last five years, the residential surcharge has increased from $3.10 to $3.80, an increase of almost 23% for Ground and 26% for Express. Furthermore, not only have the surcharges increased, but the carriers have also increased their residential ground tariffs by more than the commercial tariffs.
Another example is the Delivery Area Surcharge. DAS charges have now escalated up to $4.65 per shipment. Not only are the carriers charging a delivery area surcharge, but they have added new categories like Extended DAS. Today, DAS charges are applied to about 57% of all ZIP Codes, with the higher extended charge making up about 46%. Next to the fuel and the residential surcharges, DAS is typically the third highest surcharge for most shippers.
In recent years, carriers have also focused their increases on shippers with large, oversized shipments. Primarily, they have done so through increased oversize and unauthorized package surcharges as well as decreased dimensional factors. Oversize charges have increased 56.5% in the past five years, while Unauthorized charges have increased 1074%. The Unauthorized package surcharge is now $675 with an additional $150 per package during the FedEx peak season. Both of these surcharges additionally qualify these packages to be subject to a 90-lb. minimum billable weight. This change to the billed package weight could easily increase your shipment cost by four times more. Additionally, DIM factors have steadily declined from 194 to 166 (in 2015) to 139 today. These tariff reductions mean that shippers are being charged a higher weight for each shipment. Here is an example:
Another pain point for shippers is the Additional Handling surcharge, which has gone up 58% in the last five years. Not only has the rate gone up, but in 2017, the carriers changed the threshold from 60 inches to 48 inches. This means that more of your packages are getting hit with this surcharge. We had one client whose impacted shipments went from 28% to 49% of all shipments based on this rule change. Furthermore, in 2018, the carriers broke out additional handling surcharge for weight to be a more expensive surcharge. Any package that weighs more than 70 pounds will be charged $23 for additional handling instead of $14.25, increasing this surcharge 61.4% (UPS).
What can shippers do against this tide of rising accessorial costs? The first step is to quantify what your total accessorial costs are and compare this percentage against your overall transportation spend. By knowing this, you can assess if your overall accessorial costs are appropriate for your overall expenditures. If you have any historical shipping data from previous years, compare what your accessorial costs were then and now. I guarantee you would be surprised at the overall impact on your current year costs.
The next step is to break out your accessorial costs by surcharge categories. Quantify your top 10 surcharges so you can identify which carrier surcharges are really hurting your bottom line. Knowing this information will help you in your next round of carrier negotiations and should be a major emphasis when you are looking at new agreements and terms. Accessorial concessions can be more important to driving down total costs than additional shipment incentives.
Finally, it is important to keep up with industry changes and announcements. In recent years, the carriers have not waited until the January GRI to implement new accessorial charges or tariff changes. Look for PARCEL alerts and other industry sources to keep you informed.
In a perfect world, your primary source would be your carrier representative. Good reps will alert you to any accessorial changes and let you know the cost to your business. And, if your account manager is an advocate for your relationship and business, they should be open to offsetting any tariff increases with additional discounts.
As you can see, managing and controlling surcharges is going to become more and more important as the carriers continue to use add-on charges as their primary way to increase revenue and profitability. It will be a challenge for shippers, but one you can overcome with the right data and insight. Good luck!
Tim Sailor is the founder of Navigo Consulting Group, which specializes in contract optimization, distribution analytics, and strategic sourcing. Since 1995, Navigo has reduced its clients shipping costs by more than 30%. As a 13-year speaker at PARCEL Forum, Tim will be presenting “Take Control of Your Accessorial Charges” on Tuesday, October 29 at 11 AM. You can reach Tim at 562.621.0830 or Tim@NavigoInc.com.
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