Reducing Transportation costs: Dimensional pricing

January 27, 2016 Pieter Kinds

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In 2015, parcel carriers UPS and FedEx changed to dimensional (DIM) weight pricing for ALL packages. In this blog we take a look at the implications of this change in pricing for shippers and share tips to keep transportation costs low for less-than-truckload (LTL) freight.

But first things first, what happened exactly?

In September 2014, two major global logistics player, FedEx and UPS, released a statement announcing the price change in North America for all packages, starting from 2015. This change implicated that shipping charges on all shipments will be determined by greater of the actual weight and dimensional weight of a package. Dimensional pricing replaces the “class” of an item with a focus on its height, width, depth, and most likely weight. With that in mind, you’ll be seeing references to “density pricing” and “dimensional pricing.

The major reason for the introduction of the dimensional (DIM) weight pricing is the rising e-commerce market, challenging shippers that transport lightweight products and packages. Shipping costs have historically been calculated on the basis of gross weight in kilograms or pounds. By charging only by weight, lightweight, lightweight packages become unprofitable for logistics service providers because of the amount of space they occupy in proportion to their actual weight.

Freight costs: what changes for shippers?

As less-than-truckload (LTL) contracts are being rebid, many carriers are raising the issue with shipper and third-party logistics provider (3PL) customers of switching to dimensional or density pricing. According to a recent insight article on Logistics Management by Peter Moore, adjunct Professor of Supply Chain at Georgia College and at the University of South Carolina Beaufort, the swift to dimensional weight pricing will affect your company in 2016, in case it didn't already happen. To be more precise, it will mostly likely affect companies shipping lightweight (LTL) residential and commercial packages. These shippers should strongly consider reevaluating their packing process. Packaging - Save money for your shipments

Moore: "The nearly 80 year-old National Motor Freight Classification (NMFC) classification methodology uses several factors including density to classify freight. These include “demonstrated transportation characteristics, including density, stowability, handling and liability” characteristics that are averaged within one of 18 classification ranges."

"The last factors are weight, distance, and competitiveness of the lane that are accounted for in the rate table of the carrier or rate conference. Carriers subscribing to NMFC conference rate tables based upon class, weight, and distance have been approaching 90 percent discounts off of conference published rates. Many are determined to get out of this system by first eliminating the classification references.

With that, class, weight, and distance are being replaced by density and distance. The additional rating factors are averaged for many pricing proposals and these averages will only be visible in individual carrier rules tariffs. With regard to timing, the price is fixed for the length of the contract, therefore averaging season, risk factors, handling, pick up and delivery conditions, day of the week, and time of day."

4 Actions shippers need to make to prepare themselves

According to Moore, there are 4 actions shippers need to undertake in order to be ready for the price swift:

1. Shippers need to learn about pricing models versus rate tables. Pricing models will likely be more complex, but it’s the disaggregation of pricing—beyond just density—where the savings opportunities will be found.

2. Make changes to shipper-controlled processes to enable more flexible shipping and handling options. Work with customers and your own receiving dock to make receiving times more flexible and to turn trucks faster. Determine if you can self -insure to earn lower release values when shipping.

3. Invest in new technology and connectivity to enable API calls to carriers for rates and service metrics. Use the cloud and third-party integrators to reduce the need for internal IT support. Agree to use the carrier’s rate system as the system-of-record to simplify invoicing and auditing and to reduce errors.

4. Learn about collaborative contracting and know which carriers and 3PLs are ready to implement it.

More info:
8 Action Items Shippers Can Take to Minimize the Cost Effects of DIM Pricing for Less-Than-Truckload Shipping

What else do you need to know about the DIM calculation

• Minimize the volume of your packages and make sure you choose the right package for your freight. Use for example Box On Demand-systems which allow you to customize type and size of you boxes. With a handy calculation tool you can predict if this is a profitable solution.

• The higher the DIM factor, the lower the dimensional weight.

• Between the dimensional weight and the actual weight, the highest is the actual billable weight.

• All carriers handle their own DIM factors for both domestic and international freight.

• The international DIM factor from UPS AND FedEx is 139.

• The DIM factor is often negotiable. The higher the DIM factor, the smaller the dimensional weight, and carrier are willing to talk about this factor. A sit-down with your carrier(s) could be beneficial.

• DIM rules are basically for all packages that are shipped via ground and air. Before, the rules applied only to air-shipped packages and ground-shipped packages with a volume of 3 cubic feet or more.

More about reducing freight costs

ControlPay is a highly efficient Freight Audit provider that is driven by cost savings as much by value through perfect logistics data. Our logistics intelligence drives savings, efficiency and value in Logistics, Finance and Operations.

1. How global shippers can reduce parcel freight costs

2. 5 effective ways to reduce parcel shipping costs

3. Visit our hub for daily insights in logistics, transportation and supply chain! ControlPay — Global Transport & Logistics Data Hub

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