For the past 6 months, Supply Chain Matters has advised our readers that structural disruption is underway regarding online and B2B small parcel transportation and logistics, and supply chain and procurement teams, particularly those residing in retail or in small to medium sized businesses need to be prepared for the implications.
Succinct signs of these forces became visible prior to the 2015 holiday fulfillment quarter, as the major parcel carriers FedEx and UPS significantly raised rates and surcharges despite historically low fuel costs, to reap additional revenues and profitability. In an October commentary we reflected on whether the duopoly would together inch closer toward upsetting the “golden goose” of their current growth strategies, that being their ongoing participation in the boom in online B2B/B2C fulfillment. In a January commentary, we called attention to higher shipping charges impacting smaller online as well as B2B businesses.
In just a few short months, events are moving more quickly and the signs have become much more obvious.
This week, adding more arrogance, both FedEx and UPS simultaneously issued announcements indicating that effective June 1st, additional handling surcharges of $10.50 would apply to packages with dimensional measures greater than 48 inches but equal to or less than 108 inches along the longest side. The previous measure to trigger the dimensional surcharge was greater than 60 inches but equal to or less than 108 inches. Both carriers attributed the surcharge increases to increased handling and larger package volume costs.
Such larger-sized packages would generally be routed to LTL (less than truckload) carriers, and indeed, such carriers have experienced a marked increase in online B2C fulfillment package volumes. But alas, as The Wall Street Journal recently reported, such carriers are not really prepared for the impact for sending tractor-trailer rigs within multiple urban and residential neighborhoods to deliver single packages. Operational costs are increasing with driver times eaten up by longer delivery time needs as well as the need for more specialized delivery vehicles. These carriers will have little choice but to increase rates to accommodate added online orders and the fallout will impact general business transport needs.
We along with business media have noted that one of the biggest beneficiaries of the FedEx and UPS rates increases was the United States Postal Service (USPS) as more online fulfillment and B2B package needs are routed through the postal system. The USPS just reported that its revenues rose once again, rising 4.7 percent in the March ending quarter thanks to stronger shipping volume and prior rate increases. Overall volumes rose 1.4 percent fueled by a reported 11 percent increase in first quarter package volumes, which is usually a slower period of retail activity. However, the USPS has its own good news, not so good news challenges. Increasingly becoming the parcel carrier of choice has driven up operational expenses by 7.4 percent. While controllable income rose to $576 million from $313 million a year earlier, overall the USPS reported a loss of just over $2 billion when long-term pension liabilities are factored-in.
The reality, by our lens, is that the USPS is currently not equipped with the same inherent efficiencies and owned transportation assets as either FedEx or UPS. In fact, the service contracts with FedEx for air transport needs. The implication is that continued volume increases will drive-up more USPS operating expenses without additional rate increases or added investments in more efficient transportation assets.
We then turn our attention to the largest online retailers.
Amazon’s strategy for directly controlling more transportation assets continued to unfold with the announced of a second major announcement relative to leasing dedicated air-freight capacity. The online retailer will partner with Atlas Air Worldwide to lease 20 Boeing 767 freighters, an addition to the 20 air freighters leased from ATSG in March. Reports further speculate that Amazon is shopping for its own airport facilities in certain geographies. With an air fleet of upwards of 40 planes, coupled to multiple customer fulfillment and logistics pre-sorting facilities, and a fleet of leased tractor-trailer units, the unfolding strategy is one of Amazon controlling its own logistics and transportation capabilities for Amazon Prime and Fulfilled By Amazon fulfillment needs.
The Wall Street Journal recently reported that Wal-Mart is about to open four additional online customer fulfillment centers, in addition to four existing centers, each spanning a size of than one million square feet housing upwards of 30,000-50,000 items. Today the WSJ amplified that Wal-Mart has begun a new Shipping Pass service, where members get free two-day shipping for $49 per year. The publication cites informed sources as indicating that in February, the retailer invited a number of regional parcel delivery companies to an Atlanta conference to outline a vision for contracting a network of regional delivery firms to support its new shipping service. Wal-Mart is reportedly wooing carriers with promises of predictable shipping volumes and strategic partnerships, and the implication, according to the WSJ report, is a shift away from FedEx which currently handles the bulk of the retailer’s current parcel delivery needs.
Events are indeed moving quickly, and the implications need to be closely monitored. Those shippers locked into longer-term contracts may or may not be impacted whereas shippers who rely on current parcel transportation rate market dynamics are bound to be impacted if they do not pay close attention to the implications of these events. While the large parcel carriers continue to play out a power game of rate increases, alternative options maybe short-lived as market dynamics and opportunistic moves by remaining carriers and by Amazon and Wal-Mart continue to unfold.
Best to seek out technology providers who can provide market intelligence and transportation market knowledge as to which carriers and which modes will provide best short and longer-term cost options.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.