Earlier this month, United Parcel Service announced a new variation in surge pricing.  The global parcel carrier wants to charge the top retail shippers for inaccurate forecasting of shipments during peak holiday periods. In other words, if a retailer either floods the system with unplanned shipments, or does not produce expected planned shipments, there will be a surge financial penalty.

According to reports, the charges will apply to the typical peak holiday shopping periods such as the pre-Thanksgiving, Black Friday, Cyber Monday holidays extending thru the Christmas. It could also apply to other peak shipment holidays such as Valentine’s Day or Mother’s Day.

UPS CEO David Abney told reporters that this new surcharge is not meant to be punitive, but part of a broader negotiation with retailers over pricing during peak times. The carrier has cautioned that conversations with retailers have just begun and yet to be finalized. They are an obvious understatement since many competing carriers such as FedEx have not weighed-in on such an approach.

As a supply chain management social media voice, we felt compelled to weigh-in.

We suppose it could be stated that a carrier having the benefit to be compensated for both upside and downside risks is the best of all worlds.

It presents a very slippery slope from several dimensions.

We all get it in that adding augmented capacity and people during peak periods is expensive, but then again, UPS has been aggressive in added prior rate hikes and dimensional package surcharges to boost revenues, especially during peak periods. The carrier has dipped many times into the rate hike well in this new era of online and Omni-channel shopping.

It’s no secret that the traditional hub and spoke networks configured by both UPS and FedEx have been stress tested during the past peak holiday periods, to the extent that changes had to be made to offset obvious choke points.

There is also the presence of the new logistics industry disruptor, which is Amazon, and the new reality of being a logistics and transportation provider as well as a retailer.

The online shopping provider has implemented logistics and customer order fulfillment capabilities that have also exposed the weaknesses of traditional hub and spoke networks. Amazon often delays bulk air shipments of goods to various regional customer fulfilment centers until way after midnight, sometimes flying half-full aircraft if needed, to maintain overall logistics scheduling. Yes, Amazon’s peak volumes currently do not match those of UPS, but the online retailer has found creative ways to address bottlenecks, including fulfilling same-day or hourly delivery even during the height of peak shopping periods. Yes, Amazon partially funds its significant transportation and network costs via individual customer subscriptions to Amazon Prime. Customers however get in-return, many more services than Free or Guaranteed Shipping during the year, including access to other content services and benefits.

Amazon consistently demonstrates that customer agreements imply mutual win-win benefits for both parties. If UPS wants additional compensation for inaccurate planning by retailers, then the parcel carrier should be willing to step-up and commit to insuring its own performance, regardless of volume.

For example, UPS extends some of its stated expected delivery times to customer addresses during peak periods such as the holiday fulfillment quarter.  Coast to coast shipments are extended an extra day or two in customer expected delivery tracking to overcome network bottlenecks. While the customer might believe that the shipment is on-time, it is a longer transit interval than normal periods, and retailers must factor that delivery time in securing the customer’s order.  Likewise, if UPS fails to deliver at the guaranteed time, then retailers should have the ability to have an automatic credit applied to the entire shipment. UPS shields its exposure to guaranteed delivery by dynamically adjusting expected delivery times. If this new surge pricing proposal were to be adopted, UPS would be willing to commit to guaranteed delivery 7 days a week.

Retailers are now more than ever, acutely aware of the increased costs associated with online and Omni-channel online fulfillment.  The notion of a new twist on peak surge pricing adds more cost exposure, and plays right into the hands of ongoing industry disruptors such as Amazon and Alibaba. We do not profess to dictate to large volume retailers such as Wal-Mart, Target, or others, on how to negotiate with the likes of UPS. But something tells us that these negotiations are likely to be tense.

Either way, retailers will have to invest in more accurate surge planning, deeper levels of customer intelligence, augmented third-party logistics and last-mile transportation services including postal delivery.

Brown may be the gorilla in logistics but if one growls too much, one could get smarted by counteracting forces.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.