At the beginning of every year all the main parcel carriers release their General Rate Increase (GRIs). The duopoly that is UPS and FedEx seemingly follow each other in lockstep, whether it is a matching rate increase such as 4.9% or 5.9% or new made up accessorial charges to help maximize their profits. The average shipper just assumes this is business as usual and takes the increases without paying much attention to the details. I can’t begin to tell you how important it is to really dig deep to understand these increased fees. Almost always, there is more than meets the eye.
The Dirty Truth About GRIs:
In November 2019, UPS announced a GRI of 4.9% on all Domestic products for 2020. You say to yourself, “So if my base rate is $8.00, I’ll be paying roughly $8.40 next year.” If only it was that simple. These annual GRIs are averages. Some weight breaks and zones have rates lower than 4.9% and some are higher than 4.9%. So, if your package was going to a neighboring state it may cost $8.35, but if it is going cross country it may be $8.50. Therefore, unless you are consistently doing analysis every year you will not know what your exact increase will be. You need to know your package distribution across weights and zones to be able to drill down to expected increase for the new year.
Okay, so now that you know the GRIs are variable it is important to know all the details. UPS, FedEx, and other carriers have all the macro shipping data. They know exactly what they are doing by using “averages.” They are weighting the highest volume shipping weights and zones with more expensive GRIs and the lower volumes shipping weights and zones see less of an increase. When in doubt, lean towards the thought process that the carriers are always trying to increase profits and are not in this to help shippers. Here is a helpful table from parcelindustry.com:
Let’s look at UPS Ground in the table above. If you are a shipper that is shipping 1-5lb Ground, then your base rates would go up an average of 4.2%. However, both 6-10 and 11-20lbs ranges will go up 5.1%. Then, the “blended average” for 1-150lb is the 4.9% announced GRI. Those are rolled up numbers, however. If you drill down further into the zone level, you will see a more realistic look at what to expect by zone and service. Not quite the 4.9% announced GRI!
How to Better Manage GRIs:
There are three main things you need to do to get better predictability of your forecasted rate increases:
1) Know Your Data – Whether you have an internal analysis team or use a 3rd party like Lessgistics, it is critical that you know the distribution of your shipments across service levels, weight breaks, and zones.
2) Negotiate GRI Caps – At any time in the negotiation process with a carrier you can institute hard GRI caps into your contracts. For example, say you are negotiating a two-year contract with UPS. You could try and negotiate to have a 2% GRI cap in Year 1 and a 2.5% GRI cap in Year 2.
3) Negotiate Custom Rate Tables – This one is a little more difficult but can be wildly impactful if you can get your carrier rep and pricing team to sign off. Essentially, with this approach you are taking the control out of the carrier’s hands. Instead of having to worry about new published rate tables at the beginning of each year you will collectively agree to have customized rate tables which will be that year’s published rates less your contracted discounts. Then, when a new year rolls around you will only take your GRI across all services, weight breaks and zones. There will be no variability. In the past decade, carriers have started to move away from this approach as it costs them margin and requires manual manipulation on the pricing team’s part.
Understanding GRIs is critical to your business. Transportation continues to be one of the fastest growing cost centers in any type of business and all shippers should be trying to lower the impact. It is crucial you know your data inside and out (because the carrier already does) as it will help you make educated negotiations during your Request for Quotes (RFQs). Having predictability with a smartly negotiated contract can make a world of difference.