General Rate Increases (GRIs) sound straightforward, but the math and terms are more complex than you might expect. One thing is for certain, GRIs always work in the carrier’s favor. Below, we examine some of the unknown truths about GRIs and how shippers should protect their organizations to minimize transportation costs and retain control over their parcel shipping operations.
Voodoo Fuel Surcharges
When does a 4.9% increase really mean a 6.9% increase? Over the past several years the parcel carriers have been taking some liberties with their announced GRIs. Freight rates are being increased by more than the announced increase, but carriers are reducing the fuel surcharge matrices and considering this an effective offset.
Sounds great, right? Not so much.
As the D.O.T. fuel indices increase, a gap appears between the stated intent of the offset and the actual application of the rating logic. The effect of this logic is a higher effective increase than the stated 4.9%.
While the difference is arguably minimal, it exists, unbeknownst to most shippers. More importantly, should fuel fall below the point where a fuel surcharge is applied to a shipment (granted this is unlikely in today’s environment), the gap skyrockets and though fuel no longer applies, the greater increase to the freight charges will.
It should also be noted that the carriers reserve, and occasionally exercise, the right to adjust the fuel surcharge matrices at their discretion. The mid-year changes carriers can (and do) make to their fuel surcharge matrices are structured differently at different times. As always, the key is being informed, understanding the impact to your unique shipping patterns, and taking appropriate action as warranted.
General Rate Increases Are Not Linear
In recent years the average announced increase has been 3.9%-4.9%. But wait; don’t start filling in next year’s budget quite yet. What isn’t stated in the carriers’ press releases is the fact that the annual GRIs are not linear. Different service levels and different package weights are impacted by a greater or lesser degree. What the carriers announce are average increases.
For example, 2013 Ground rates to Continental US zones will increase by as little as 1.9% or as much as 8.9% depending on the zone and weight. Not surprisingly, the most commonly shipped weights were increased more heavily than less common weights.
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Most carrier agreements peg minimum package charges to the zone 2, 1 lb. list rate for each service. The minimums may be discounted, or not. For shippers of lightweight packages, the impact of the GRI on the zone 2, 1 lb. rate is of critical importance. Increasing minimum package charges can reduce the benefit of the discounts you’ve negotiated so hard to achieve.
By way of example, a 30% discount applied to a $6.00 list rate with no minimum package charge results in an effective discount of 30%. However, when you apply a $5.49 minimum package charge to the equation, the effective discount is reduced to 9%. Increase the minimum package charge to $5.84 and the effective discount falls to 3%.
While minimum package charges always reduce the effective discount for low-weight packages, a large annual increase on the zone 2, 1 lb. list rate can have a dramatic impact on the effectiveness on your discount program.
Accessorials & Surcharges
Not surprisingly, accessorial and surcharge increases outpace transportation charge increases nearly every year. Some shippers are surprised to learn that accessorials and surcharges can make up 30% or more of their total parcel cost. But shippers are generally less vigilant when it comes to these charges. Carriers often encourage this by focusing on transportation charges in negotiations, or by trotting out the old stand-by, “We can’t discount accessorials.”
Regardless of the carriers’ tactics, the fact is that accessorials and surcharges usually increase to a much greater extent than transportation charges, and shippers would do well to become familiar with the impact of these charges, and their associated year over year increases, in relation to their shipping patterns.
Rating Logic Changes
In 2004, the parcel carriers introduced the Delivery Area surcharge, imposing a $1.00 (commercial) to $1.75 (residential) surcharge on packages destined to a large and increasing set of specific zip codes. For e-commerce and other heavily residential shippers these new charges resulted in very large net cost increases.
In 2011, carriers reduced the DIM Divisor for continental U.S. shipments from 194 to 166. While shippers of heavy, dense products were relatively unaffected by this change, shippers of apparel, shoes, consumer soft goods, and other low-density commodities took an enormous hit. Some shippers realized a net cost increase of 18+% year over year.
These are just two examples of changes to rating logic implemented during General Rate Increases. While we have not seen any evidence of such dramatic changes in the 2013 GRI, the carrier Service Guides have not yet been released. Careful scrutiny by experienced eyes is the only way to ensure you are fully aware of the implications surrounding GRIs.
The Fine Print
It is impossible to anticipate every change in Service Guide terms and conditions – the guides are typically over 180 pages. These documents, combined with your carrier agreements and periodic carrier releases, make up the ecosystem in which you operate as a shipper.
While it is unlikely that most shippers will read every word on every page of the carriers’ Service Guides, these documents control your ability to service customers and control costs. It is important to familiarize yourself with these documents, and to take contractual action against any term or condition that materially impacts your operational requirements or cost variables.
As always, the keys to vendor management, including carrier performance, are education, quantitative analysis, and ongoing proactive management. A systematic approach to mitigating the impacts of carrier GRIs, one based on analytics and a firm understanding of the cost drivers, is in every shipper’s best interest.
Let me know how GRIs have impacted your shipping costs. Take a moment to drop me a line via the box below.