The parcel industry continues to be as unpredictable as ever. Uncertainty is a consistent theme among parcel shippers and navigating through it is becoming increasingly challenging. I recently attended the Parcel Forum in Chicago this October and took the opportunity to ask many of the shippers and carriers present to share with me their concerns about uncertainty within the parcel climate as we approach peak season and a new year in 2016. Common thoughts revolved around challenges I anticipated and have written about in the past couple years.
Meeting Consumer Expectations
In speaking with an e-commerce retailer, meeting consumer expectations through peak season was a large concern. I can imagine he wasn’t the only retailer in the room with this thought. Primarily on his mind was the uncertainty that his 400 vendor partners would be able to keep up with his firm’s service commitments to its customers and maintaining visibility to issues that could arise among so many vendors. I’ve been hearing about managing vendor fulfillment more and more lately as a growing concern. Vendor fulfillment is tough to manage. It’s characterized by decentralized fulfillment execution and thus parcel managers lack a degree of control. During peak season, service issues from one key product vendor could destroy a successful fourth quarter for many a retailer. Compliance is also an issue among some vendors, from both a cost and service perspective. Examples of compliance areas to monitor include product presentation, carton utilization, and carrier/service routing choices. As a result, parcel managers need to ensure they have audits and the visibility solutions for their vendors’ activities, compliance levels, and cost performance in order to manage them appropriately.
The Issue of Carrier Air Capacity
Another peak season concern mentioned by a larger retailer is the issue of carrier air capacity. While we often hear that the carriers are concerned about the accuracy of retailers’ forecasts, it is interesting to hear that shippers in turn are concerned if the carriers have properly planned capacity requirements and can fully execute them. The uncertainty of winter weather only adds to the sleepless nights these managers may endure! The capacity concern is a driver for shippers to implement risk mitigation and alternative carrier strategies. Should a carrier fail to deliver in the extreme peak days of Black Friday, Cyber Monday, and Christmas Eve, parcel managers will want alternatives in place. Of course, there are potential technology, infrastructure, and contract constraints that require parcel managers to allow time to plan and address these issues proactively.
Unplanned Rate Increases
Almost every shipper I spoke with discussed their concern regarding the trend of unplanned rate increases introduced both FedEx and UPS in the 2015. Certainly, two fuel index changes that resulted in increases in fuel cost expectations have frustrated shippers. Falling fuel prices have been the only saving grace for parcel managers to achieve some year-over-year expense reduction, yet everyone I spoke with was upset that some of those savings where swept away by the carriers due to surcharge increases in the fuel indexes. Complicating matters even more for shippers, UPS also announced new “non-standard” pricing and service alterations, including a 2.5% surcharge on third-party billed shipments and transit time increases for Ground and 2 Day Air shipping over the holiday period starting in late November.
Furthermore, other shippers were concerned with the impact of dimensional weight on their costs this peak season, considering this will be the first holiday period impacted by the removal of the three cubic foot Ground threshold. Short term contract relief provided by the carriers from the threshold removal will begin to terminate for some shippers, and many are concerned they haven’t done enough to mitigate the impact themselves. A few shippers indicated that they were making strides to improve carton utilization and packing practices, yet in the midst of a chaotic and high volume shipping period like Cyber Monday, packaging best practices could get easily over looked! Of course, peak surcharges were also a concern. While not rolled out universally, some retailers will be impacted by additional peak season fees on top of the universal increases.
Looking ahead to 2016, both FedEx and UPS introduced their general rate increases to base rates and surcharges. Most of the surcharge increases were the customary ones shippers are accustomed to absorbing each year. However, a 100% increase for the postal insertion Delivery Area Surcharge fee has e-commerce shippers reexamining their 2016 budgets. Shippers have been increasing volume to postal insertion services to minimize expense for promotional “free delivery” of residential shipments, but it’s no longer a safe haven from high shipping expenses with increases such as this. Most frustrating to shippers is that this $1.00 fee didn’t exist just a few years ago! Summing up all the carrier increases slated for 2016, many retailers may be paying 5% to 10% more in 2016 than they expected just a few months ago! One major retailer stated to me they are concerned how aggressive their carrier has been in pricing changes and the potential future negative impacts it will have on the retail industry.
I also spoke with a regional carrier about his concerns as well. Of course he too was concerned about shippers’ forecasting accuracy and executing upon potential variances. But interestingly, I also found that the recent pricing actions from UPS and FedEx impact the smaller carriers as well. For one, the national carrier actions may create momentum for these carriers to evaluate jumping on the profitability improvement bandwagon. In an industry with little competition and capacity limitations, the option to adjust pricing higher is possibly likely. And perhaps it’s the only alternative, given FedEx and UPS are attempting to be compensated for high cost activities and packages, and certainly other carriers would have the same cost constraints if treated by shippers as a relief valve for the major carriers’ “unprofitable” packages.
Creating Competitive Solutions and Strategies
Lastly, another major retailer stated his focus for the coming year will be to stay ahead of his competition in implementing parcel delivery solutions designed to improve their customers’ experiences and meet their escalating expectations. In the case for this retailer, many complexities from their product assortment to criticalness of delivery make this a complex solution to develop. Plus there is the added element of technology and carrier requirements to understand in order to execute the solution. Many brick and mortar retailers are also focused on refining their ship-from-store fulfillment model. They are reexamining everything from strategy to daily processes to drive down expense and improve the profitably of this model.
Based on these conversations, one can conclude that the job of a parcel manager is increasingly complex. The role has become extremely difficult and the appropriate skill set for this role is limited but in high demand. The parcel industry continues to evolve into unprecedented waters. Shippers and carriers alike are navigating unchartered waters, and that’s concerning. Cost and profitability management is the largest struggle for the carriers and shippers alike, both struggling to share the load in the face of demanding consumers. Observing at how the industry is progressing, something has to eventually give because maintaining an environment of uncertainty appears unsustainable.