Recent Articles
Updated: February, 2006

Tackle the 2006 General Rate Increase
Written by Mitch Felts and Gina Myatt of DMG, Inc.

If you are a frequent shipper of small parcels and documents, then you have become accustomed to the annual increase in base rates and accessorial charges by your small parcel carriers. For years, shippers have been lulled into accepting these charges and facing the financial consequence. In addition, carriers have identified the value of such increases and realized that only the most astute of small parcel shippers will truly identify the impact of these increases.

Today’s small parcel carriers have become increasingly creative when it comes to general rate increases, or GRI’s. This creativity is two fold. First, carriers are recognizing less profitable services, weights and zones and applying the largest increases where they will realize the maximum profit margin improvement. Second, carriers have come to realize they can publicize rate increases that “average” a few percentage points. If you have any responsibility for small parcel expenses, you should always be aware of the word “average”. Chances are your “average” increase in 2006 was much greater than the 3.9% advertised when considering base rate increases across all services and new/increased accessorial charges. While the carriers are realizing record setting earnings, the GRI implemented in 2006 was greater than any increase in recent history

There is much more than meets the eye when it comes to determining the impact of 2006’s GRI. For instance, DMG’s analysis of the 2006 GRI proved that the most significant increases targeted lower zones (2 – 5) and lighter weights (1 – 20 lbs.) in Ground Services and higher zones (6 – 8) and lighter weights (1 – 20 lbs.). A residential ground package weighing 5 lbs. delivered within a zone 2, for example, will cost you 7.9% more this year than it did in 2005. Such rating logic will punish those shippers with regional distribution centers (a higher percentage of low zone deliveries) and zone skipping networks (aimed at lowering the average zone via consolidation to carriers’ regional hubs).

Accessorial charges have come to account for over 30% of carrier revenues in some cases. The impact of these accessorials is like throwing fuel on the fire. While these charges will negatively impact your cost per package, they are not recognized when determining your portfolio tier or earned discount incentives. In addition, some carriers do not apply your discount to the cost of the accessorial charge. While your total spending increases, the carriers’ gross revenue (minus accessorials), which is the common calculation for determining revenue threshold and rebate tiers, recognized by your carriers increases minimally.

Small parcel carriers realize that shippers either cannot or will not take the time to calculate the true impact of these GRI’s to their bottom line. Chances are you have noticed that your carrier contracts, invoices, and true cost of service have become increasingly dynamic and difficult to comprehend. This is not a coincidence. Carriers believe that the less you understand your small parcel cost drivers, the more leverage they will have when negotiating your next contract. One thing is for certain, carrier rate increases have greatly outpaced the rate of inflation over the last several years, and the shippers are the ones bearing the expense.

DMG has highlighted a portion of the significant increases realized in the 2006 GRI:

Service/Accessorial Charge	Average	Most Affected	%Increase
Commercial Ground	3.83%	1 lb./Zone 2	4.97%
Residential Ground	5.82%	1 lb./Zone 2	8.40%
Hundredweight	4.84%	1,000 lbs.+/Zone 2	10.32%
Next Day Air	6.18%	17 lbs./Zone 107	10.38%
2 Day Air	3.58%	LTR/Zone 208	8.16%
3 Day Air	5.80%	3 lbs./Zone 308	7.34%
Worldwide Express	5.19%	LTR/Zone 908	7.96%
Worldwide Expedited	5.51%	5 lbs./Zone 71	7.39%
Residential Surcharge - Air	20.00%
Delivery Area Surcharge - Commercial	4.00%
Delivery Area Surcharge - Residential	5.00%
Declared Value Insurance	25.00%
Delivery Confirmation – Signature Req.	12.50%

Tips for Combating the 2006 GRI:

• BEWARE GRI AVERAGES! - The worst mistake most shippers make when evaluating GRI’s and budgeting shipping expenses is using the average rate increase advertised by the carrier or the average increase over an entire service. This method will be extremely misleading. No shipper has “the perfect package distribution”. For instance, if the bulk of your residential ground deliveries fall between 5 – 10 lbs. and Zones 3 – 5, your actual increase will be closer to 7.13% as compared to the 3.9% advertised, or 5.82% for the residential ground service.
• Don’t lose sight of accessorial charges – Accessorials may be making up 20 – 40% of your total parcel expenses. While you may not be concerned with a single digit increase in base rates, many assessorials have increased 30 – 50% over the last two years. In addition, be sure to recognize new accessorials (e.g. the addition of a $20 surcharge for Hundredweight shipments to residential addresses).
• Reevaluate the attractiveness of zone skipping - Given the higher increases in Ground Services in lower zones, the benefit of zone skipping may have diminished over the years.
• Focus on order fulfillment and packaging logic - Beyond the obvious benefits of bundling orders to the same consignee in fewer packages (i.e. one 10 lb. package is much less expensive than two 5 lb. packages), the GRI’s decrease as the weight of the package increases; therefore, changing your weight mix can greatly reduce your expenses. In addition, more of your shipments may qualify for Hundredweight rating.
• Be careful of “overshipping” - While the rate increases are more significant in the Ground Services, the total cost is nowhere near what you will pay for expedited services. Analyze your parcel data to determine if you are expediting packages that would enjoy the same transit time as ground service. Be sure to consider actual transit times versus published transit times.
• If you don’t already, start filing for shipping refunds - As the cost per package continues to increase, so will your refund per package.
• Assess oversized packages - Can you reconfigure packaging to bring you below the OS parameters? Shippers of light, bulky items should also consider dividing multiple products into separate packages if the average weight per OS 1 is 20 lbs. or below (i.e. when considering a Commercial Ground Zone 6 shipment of an OS1 package weighing 20 lbs., the published cost will be $15.35; whereas, two 10 lb. packages will equal $13.66, or 11% less). Just be sure to consider the impact of accessorials.

To request our complete 2006 GRI Analysis by service, weight and zone as well as our highly useful 2006 Carrier Accessorial Comparison (everything you need to know about new and increased accessorials by carrier) please go to the "Contact Us" page of this web site, fill in the required information about yourself, type "2006 GRI Analysis" in the "Comments" field and click "Submit Request".

*Your contact information will be kept highly confidential!

Archived Articles

• Tackle the 2006 General Rate Increase; February, 2006
• Avoid the Nickel and Dime Treatment; March, 2005
• Postal Consolidators - Here today, acquired tomorrow!; October, 2004

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