A DIM Future for Packaging
Trying to wrap your head around Dimensional (DIM)Weight Pricing and how it affects your shipping and logistics operations? Asked and answered! Here's some expert advice on understanding the new models, and how to mitigate the costs.
From the largest corporations to the smallest Etsy e-tailers, the shift to a dimensional weight pricing model is having a drastic effect on the way items are packaged and shipped. Shippers have to be smarter with their packages, or new costs could give them a swift kick to the bank account.
The new pricing model shouldn't come as too much of a surprise. Large parcel shipping companies such as UPS and FedEx have had an eye on dimensional weight pricing for awhile. While the growth of the e-commerce market created unprecedented shipping volumes, costs have also soared for parcel carriers. At the same time, a shortage of drivers and equipment has left them scrambling for capacity. The plan, or at least the hope, is that dimensional weight pricing will relieve some of their pain. But what about shippers?
That's what Inbound Logistics wanted to know, so we asked three shipping experts for guidance. Here is their perspectives on how shippers can get a brighter view of DIM.
It’s a DIM New Year—Now What?
What is Dimensional (DIM) Weight Pricing?
Dimensional Weight Pricing utilizes a formula to calculate the minimum billable weight based on a package's cubic volume. You can calculate DIM for your parcel by multiplying length-in-inches by width by height, and dividing the product by a DIM factor. For FedEx and UPS, that DIM factor is 166 for domestic shipments.
Why should I care?
On Jan. 1, 2015, the major parcel carriers implemented DIM weight pricing on ground packages smaller than three cubic feet. The billable weight for packages is now whichever weight is greater between actual weight and dimensional weight.
Previously, the rate for ground parcels smaller than three cubic feet was based on actual weight, while those larger than three cubic feet were subject to DIM weight. The recent change affects shipping costs because it is estimated that up to 75 percent of the most widely used box sizes are less than three cubic feet. Some industry experts predict an average increase of approximately 30 percent in parcel shipping costs due to DIM, in addition to the recent 4.9-percent annual increase taken for 2015 by the same carriers.
I didn't do anything to prepare. What can I do to catch up?
Don't panic, but don't hesitate. Start with a parcel analysis to see how many of your shipments are smaller than three cubic feet, and concentrate on making changes in that segment. Here are some initial steps to take:
- Be more efficient with your packaging. Train your employees to find the most cost-effective boxes and packaging for each shipment, and have different options on hand. It's no longer "one size fits all."
- Compare and optimize carriers. Shop around, and select carriers that offer the best pricing options for your commonly shipped sizes.
- Track small packages. Where are most of your smaller boxes being delivered? Could you group them into larger shipments to a regional center, and have them delivered by local carriers who charge less?
I sort of made a plan, but how do I know if it's working?
Request transparency from your parcel carriers. They should make billing easy and transparent, enabling you to choose the best options for your business.
Evaluate your cost for small packages shipped in 2014 against what you're spending in 2015. Be sure to compare same-size packages going to the same destination. See if your competitors have increased shipping prices for customers, and by how much. Track your shipping volumes to see if your customers are also shopping around for options.
I have a plan, but how can I make it better?
Keep your plan dynamic—don't let it rest on a shelf. There are many more options than you might think, so keep exploring efficiencies. When was the last time you looked at and updated the sizes and materials you use for packaging? Can you address any factors upstream in the supply chain to improve density before the product is packed for shipping?
I ship in big volumes, so how will DIM affect me?
You can take advantage of the economies of less-than-truckload (LTL) by adopting a consolidation/deconsolidation program that focuses your volume shipments in the most cost-effective mode. One such strategy is zone skipping, where you bypass the parcel carrier's traditional "zones." This is accomplished by utilizing LTL carriers to transport shipments to the parcel carrier's hub in the destination state or region. The parcel carrier then unpacks the load, and delivers the individual parcels to their final destination.
We don't have the in-house expertise to manage all this. So where do we start?
A logistics partner with expertise and success in engineering parcel solutions might be an option. The right partner will have comprehensive analysis resources and tools, a solid grasp of the market from both carrier and shipper perspectives, deep understanding of parcel-pricing models, senior-level relationships with carriers, and robust dashboard and reporting capabilities.
Three Practical Tips for Defeating the DIM Factor in 2015
Dimensional weight pricing isn't new. For years, shippers have paid more to ship low-weight, high-bulk packages measuring three cubic feet or more. And, except for a wild jump in 2010, pricing has made sense relative to carrier capacity. Packaging for items such as pillows and baskets has a large footprint, and it seemed justifiable that carriers should price those shipments accordingly.
What makes the recent changes newsworthy is that the pricing will now be applied to all ground shipments—regardless of package size. Depending on your carrier and packaging, the cost to ship a small kitchen appliance (a blender, for example) may cost 35 percent more under the new pricing structure. Paper products, such as a 32-pack of toilet paper, could cost nearly 40 percent more. It's no wonder shippers are reacting with alarm.
So what's driving this price increase? The past 12 months have challenged the shipping industry, especially larger carriers. Lower-than-expected financial performance in late 2013 and early 2014 put pressure on them to make up the slack. Meanwhile, shippers are opting for less expedited domestic service, and an overall slowdown in demand has occurred for international shipping services. One other constraint is the fallout from 2013's changes to the U.S. Hours-of-Service rules for truck drivers, which increased workforce costs and contributed to a driver shortage.
One bright spot for carriers is capacity, which is tightening for industry leaders as well as smaller regional players. The scales of supply and demand are tipping in the carriers' favor—but it's happening at a time when most have spent the past five years shrinking their fleets to balance fixed asset costs. Smart growth is a challenge for any business, but even more so for carriers that can't expand and contract their infrastructure with ease.
All these factors underscore why dimensional weight pricing has come to the forefront. Carriers see this strategy as a way to motivate shippers to use more efficient packaging to increase the throughput of existing capacity. They also see it as a way to reduce fuel costs, and a tactic to maximize existing driver resources. Some carriers have gone so far as to open their packaging research and testing facilities to help shippers optimize packaging.
But what about shippers who have already fine-tuned packaging? How can they mitigate the cost impact of dimensional weight pricing? For most, it comes down to a practical three-step plan:
- Quantify carrier cost-to-serve. Where is your carrier making excess margin? More than 55 different cost variables or levers dictate whether carrier profits on your company's shipments are in line with fair market value. Examples include package characteristics, whether a carrier is already serving a commercial location and resource utilization for economies of scale, future and current capacity demands, and imbalances across lanes. Understanding how your carrier profits from your unique shipping profile, and determining whether that margin is reasonable, is the first step in mitigating the impact of any major price change.
- Review and re-validate rates and surcharges. A cost-to-serve analysis should provide you with information to optimize ground rates, accessorials, and surcharges. Delivery and residential area surcharges have reached historical highs, while fuel surcharges are on the rise even as diesel prices fall. In areas where the cost-to-serve analysis indicates excess cost, requiring carriers to reduce these surcharges (or increase discounts) will help negate or lessen the impact of other increases, such as DIM. And, beware of ground minimum surcharges. Understand how these fees impact your spend—they often negate even the "best" discounts.
- Move volume to other options…for now. Some experts speculate that more carriers, especially regional, will move to dimensional weight pricing. This may be the case, but for now shippers will find that regional carriers offer more favorable pricing and comparable service levels when compared to large carrier incumbents. Additionally, using hybrid delivery options that combine large carrier offerings with last-mile delivery via the U.S. Postal Service is a cost-effective alternative.
Recent changes to dimensional weight pricing will also be compounded by carriers' annual rate increases, which will undoubtedly push rates even higher in 2015. This double-whammy will impact shipper budgets and margins. Now is the time to minimize—and possibly negate—the impact of rising small parcel costs.
Is Changing Shipping Pricing Methodologies Beneficial for Shippers?
Peak season 2014 is behind us and the New Year brings shippers new challenges. Dimensional weight pricing has shippers paying more for ground packages.
What's driving the changes in parcel pricing methodologies for UPS and FedEx?
According to each carrier, shippers will reap benefits from reduced packaging materials and overall package sizes, which will, in turn, lead to related reductions in fuel use, vehicle emissions, and transportation costs. A much less publicized, but more likely result of the changes is a windfall in new revenue and profits for the carriers themselves, with estimates of hundreds of millions of dollars in annual incremental revenues for both UPS and FedEx predicted.
The U.S. Postal Service (USPS) also utilizes DIM weight pricing, but only for packages moving more than 600 miles and exceeding one cubic foot. In September 2014, the USPS announced it would not implement any further changes to its DIM policies. This is being positioned as a big cost differentiator for USPS, but is likely due, in part, to its lack of infrastructure to accurately measure each shipment.
Many shippers remain unprepared for the changes and are unclear as to how the pricing change will impact them. An estimated 30 percent of all ground shipments will be impacted by the new policy, with per-package costs forecasted to rise as little as five percent on the low end and up to 40 percent on the high end. This ambiguity surrounding the shipping cost impact stems mostly from a lack of understanding of DIM weight pricing.
FedEx and UPS instituted dimensional weight pricing nearly a decade ago for ground parcels measuring at least three cubic feet. DIM weight pricing is likely to spread to other modes such as LTL shipping. The same benefits as those given for ground parcel—reductions in fuel use, vehicle emissions, and transportation costs—are applicable to LTL carriers. Some have been piloting dimensional weight pricing, and installing equipment that can capture the cubic dimension of a pallet or shipment. Rates could increase "significantly" for shippers moving bulky, lightweight items via LTL, according to industry analysts.
Is this the end of "free shipping" for consumers?
Shipping is already one of the largest, most rapidly increasing costs for online retailers. Larger shippers such as Amazon and Walmart will attempt to grandfather in current pricing rules. Smaller retailers have less leverage, and will face challenges in offsetting these costs. One thing is certain: Retailers, both large and small, need to review their shipping profile and carrier contracts to help identify and navigate around the cost increases.
Many shippers will find that absorbing the expected increase in parcel shipment costs is not a viable option. Shippers will face difficulty passing the increases through to customers, especially with customer expectations of "free" shipping.
Ultimately, dimensional weight pricing will become the norm across the majority of transportation modes. While it will indeed help reduce fuel usage, vehicle emissions, and transportation costs, shippers will be negatively impacted by higher shipping costs. How will shippers manage through consumer expectations of "free shipping"? What impact will potential DIM changes have on a trucking industry already facing a shortage of drivers and increased regulations?
As DIM changes fully take hold, shippers will need to evaluate their transportation network, transportation spend, and modal allocations to remain competitive in an ever-changing transportation landscape.