For a number of years, firms utilizing FedEx and UPS have experienced fairly modest annual increases of 3 to 5%. LTL increases have been in the same range, and the additional costs usually have been anticipated, begrudgingly accepted, and included in freight budgets. This year however, FedEx announced an additional change that can be somewhat mysterious or even unnoticed unless you are a frequent small package shipper. Effective January 2, 2017, FedEx will begin the use of a new “volumetric divisor” which is used to calculate the dimensional (dim) weight of the packages it handles. Charges will be based on the actual weight or dimensional weight, whichever is greater. So what does that mean exactly?
To arrive at the dim weight, FedEx multiplies the length X width X height of a package in inches, then applies the divisor to determine the final result. The new divisor has been set at 139, down from 166, where it has been for the past five years. Just last week, I received a package and I decided to calculate what this change would mean for that particular box. It measured 12 inches, by 12 inches, by 6 inches, or 864 cubic inches. Using the current divisor of 166, the dim weight was 5.2, which would be rounded up to 6 (864/166). Applying the new divisor of 139, (864/139) this weight increases to 6.2, rounded up to 7, or a significant 17% increase. A one cubic foot box (1728) inches would increase 18% and so on.
This is going to be a significant hit for firms with heavy e-commerce volume of light products, particularly those offering free shipping. I doubt though, we will see these firms absorbing a 17-18% increase in shipping costs. While free shipping may continue, the upcharge almost certainly will be in the price of the product.
At this point, UPS, which handles far more small package volume, has not announced a similar change, so the immediate effect may be diminished somewhat. However, if history repeats itself, UPS will follow suit. The major impact of all this will be on the small shippers who do not have enough volume to negotiate their way around the increase. This of course, will exert even more competition on these companies, as they try to compete with the likes of Amazon and Wal*Mart. For some, a 17% increase in shipping costs could spell disaster when they are trying to match the prices of larger competitors.
With the increase in light, bulky, small package e-commerce shipments, the problem for the carriers is very real, but the change will create some dysfunction in the remainder of the supply chain. For many companies, the best answer will be a major revamping of their package design processes. While this will not be inexpensive, it is probably long overdue and will improve both efficiency and costs. The package I measured held a 3 pound product which utilized about 30% of the space in the box. The remainder held packing materials – always a waste of materials but soon to be a waste of financial resources.
I suspect the impact of this change has escaped the average consumer, but if UPS adopts a similar divisor, they will quickly realize what it is all about.