Understanding the Components of Carrier Costs | Understanding the Economics of 3PL

Understanding the Components of Carrier Costs | Understanding the Economics of 3PL

Surcharges are the bane of every 3PL operator’s existence. They not only drive up costs but can prove to be an unpredictable factor when calculating expenditures. Shipping rates are constantly in flux, and this complexity can make predicting costs a daunting proposition. 3PLs must be able to manage these costs effectively to ensure they don’t adversely affect their bottom line. The good news is that there are multiple strategies that your 3PL can employ to contain these costs and protect your profits.

Base Rate vs. Accessorial Charges

Understanding the actual cost of shipping can be challenging. Although base rates provide a starting point, they are not enough to give a complete picture. Additional charges, known as accessorial charges, can accumulate quickly, making it vital to comprehend what you are paying for. To manage your outbound shipping expenses, it is essential to understand the additional charges and address them whenever feasible.

What is a Base Rate?

Base rates refer to the basic cost of transporting products from point A to point B, and they are typically negotiated between you and your carrier. 

Accessorial charges, on the other hand, are additional charges that may be tacked on for specialized services like lift gates or residential delivery. 

Additional charges may be temporary and contextual, but your base rate will remain the same depending on your contract agreements.

How Do You Choose the Best Base Rate?

When it comes to selecting the best base rate for shipping, it’s important to consider all options. While it’s true that carriers’ base rates tend to be similar, package specifications can make all the difference in choosing the most cost-effective option.

Take into account package size, weight, and distance, as these will all affect the rate. But don’t forget about accessorials and additional fees, which can significantly increase the overall cost of shipping.

Tools like ShipHero rate shopping will compare base rates from different carriers in real-time, so you will always find the best available shipping rate per order.

What Are Accessorial Charges?

Accessorial charges are described as supplementary fees or surcharges imposed by a carrier for services not included in the basic delivery of a shipment. These services may include loading, unloading, packing, or unpacking. The carrier may also charge fees for waiting time or delays at the loading dock.

Accessorial fees have become a contentious issue in the transportation industry over the last few years, with carriers increasingly relying on surcharges to boost their revenue. According to a recent survey, over three-quarters of carriers view accessorial surcharges as crucial to their financial well-being. 

With this knowledge, you’ll be better equipped to develop shipping cost strategies that work for your 3PL. You’ll also have more information to use when negotiating rates with carriers and shipping partners.

How General Rate Increases (GRI) Affect Base Rate

General Rate Increases are a reality of the shipping industry and have the ability to impact all players involved, including 3PLs. These increases are a direct result of rising costs across the supply chain, such as fuel, insurance, wages, raw materials, and other operational expenses. 

Carriers can pass on these costs to shippers through an increase in rates. These GRIs are typically announced in October-November, providing carriers with time to adjust their base rates accordingly. While these increases may seem small, hovering around 4-6%, they can significantly hike carrier base rates for 3PLs. 

Here are the current increases for the top three carriers:

UPS General Rate Increase 2023

Average GRI increase at UPS: 6.9%

Effective from: December 27, 2022.

FedEx General Rate Increase 2023

Average GRI increase at FedEx: 6.7%

Effective from: January 2nd, 2023

USPS General Rate Increases 2023

Average GRI increase: 5.5%

Effective from: January 22, 2023

Almost everyone underestimates what they're actually paying or what they actually will pay for outbound shipping. -Aaron Rubin

Know What You’re Paying For

As the logistics industry continues to evolve, so do the complexities of managing accessorial charges and other fees. Accessorials can be a significant expense for 3PLs, but there is one advantage to these fees: they are usually negotiable, and the key to successful negotiation is understanding your surcharges. 

You can leverage this information by knowing the percentage of these fees in relation to your total volumes. Carriers are more likely to be receptive to your proposal if you have done your homework and can present a clear case for why the fees should be adjusted. Regularly auditing shipping bills and disputing errors or overcharges can help recover unnecessary costs and improve carrier accountability.

How to Estimate Your Shipping Cost

Our Invoice Analysis tool provides a comprehensive overview of your UPS expenses. By importing your data and using our template, you can quickly identify where your money is being spent. Our tool breaks down charges into a clear and concise format, highlighting the fees that are most impactful to your bottom line. Say goodbye to hidden fees that drain your wallet – click the link above to make more informed decisions.

67 percent of shippers think they're paying the industry standard

Common Surcharges By Carrier

Carriers use surcharges to ensure that their volume remains manageable. Although robots and software have automated certain processes, some aspects of shipping still require manual labor. For example, when carriers must handle large packages that won’t fit into an automated sortation process, they implement oversize charges to offset the additional labor costs.

During peak shipping seasons, carriers also take on seasonal labor to sustain their service standards and manage their increased workload. By understanding the common surcharges shipping carriers impose, you can take proactive measures to minimize your shipping costs. Some common surcharges by carriers are:

USPS Shipping Surcharges:

  • Non-Machinable Surcharge: An additional charge will be applied for packages that require manual sorting beyond the normal automated process.
  • Fuel Surcharge: Similar to other delivery services, a fuel surcharge is incorporated to account for the fluctuations in fuel expenses. This surcharge is calculated as a percentage of the standard shipping fee.

FedEx Shipping Surcharges:

  • International Fuel Surcharges: FedEx fuel surcharge percentage is subject to weekly fluctuations, depending on jet fuel prices.
  • Delivery/Pick-Up Surcharge: It is important to know that shipments that require delivery or pick-up in remote areas will incur an additional fee known as an out-of-pick-up or out-of-delivery area surcharge.
  • Handling Surcharge: FedEx applies additional handling surcharges to packages measuring more than 48 x 29 inches.
  • Oversize Charge: This applies to packages over 96 inches long or 129 inches in combined length and width.

UPS Shipping Surcharges:

  • Fuel Surcharge: UPS utilizes index-based pricing derived from jet fuel costs in the US Gulf Coast.
  • Address Correction: Billed to the shipper for failed delivery due to an incorrect address.
  • Over Maximum Limits Fee: Billed on packages weighing more than 154 pounds or more than 108 inches in length.

ShipHero WMS offers live rate shopping, so you won’t have to spend time figuring out which carrier is the most cost-effective for each shipment. Comparing and selecting carriers based on their rates, transit times, service levels, and surcharges can help reduce your shipping costs. Access to real-time rates will give you the information you need to make the smartest possible shipping decisions every time.

Unless you have a phd in understanding your carrier bills, you're not really going to be able to get into it, but you can summarize and use that to inform your decisions. -Aaron Rubin

Additional Surcharges

DIM Weight

Dimensional weight, or DIM weight, is the formula carriers use to determine shipping costs by factoring in the size of a package. Lightweight and compact packaging can save on dimensional weight charges and transportation costs. But those who ship relatively light items in large boxes may end up paying more than expected due to this pricing model. 

Peak or Demand Surcharge

Peak season and demand surcharges are additional fees carriers add to their base shipping rates to cover the increased operating costs. Typically, these surcharges come in the form of flat fees per package and may last for a fixed period or until further notice. 

These peak season surcharges can hit your P&L twice; once when receiving inventory for the season and two when shipping parcels to customers. One way to avoid extra peak season costs is to use accurate demand planning. Demand planning will help you determine which products you need and where to send them to maximize your distribution strategy and optimize shipping costs. You can avoid peak season charges by ordering your inventory well before the typical peak season time frame (typically October-January). 

Demand forecasting can also help you determine areas in the country where your products are most likely to be shipped – by moving products closer to these destinations, you’ll be able to cut down on transit times, fuel costs, and other transportation expenses, which includes surcharges. 

80 percent of shippers would rather pay higher freight rates upfront than deal with surcharges on the backend

Shipping Cost Strategies

Investigating accessorial charges is crucial to forecast your total shipping expenses accurately. 3PLs should take the following strategies into account:

  • Negotiate fees with your carriers based on the volume of your shipments and their characteristics.
  • Consolidate shipments to minimize the number of individual deliveries.
  • Optimize packaging to reduce dimensional size and weight.
  • Analyze and optimize shipping routes to lower fuel surcharges.
  • Leverage technology to streamline the shipping process and reduce the chances of incurring fees.

By thoroughly understanding and addressing these surcharges, you can better manage your overall shipping expenses and utilize shipping cost strategies to maximize your budget.

71 percent are activly working on reducing accessorial spending with strategic initiatives and a further 26 percent plan to do so soon.

Lessons in Outbound Shipping

As we close our discussion on outbound shipping, it’s vital to understand that it’s not just the base rates determining the overall shipping costs. Here are the key takeaways when you’re estimating your outbound shipping costs. 

#1 – Know All Your Costs, Even the Hidden Ones.

When you begin negotiations, carriers will present any initial rate card with base shipping rates. However, those rates don’t tell the whole story. Ask about accessorial fees and how you can best avoid paying extra. 

#2 – Analyze Your Shipping Invoices on a Regular Basis.

Pull reports that outline all the shipping costs for a set time frame (a quarter or six months) and take a closer look. Analyze these charges and ask your carriers for itemized bills if anything looks off. While this is time-consuming, understanding what you’re paying and why is the only way to ensure you’re not being overcharged. This data can also help you when your shipping contracts come up for renewal.

#3 – Plan Ahead to Avoid Peak Season Surcharges.

It’s important to order your inventory for peak season early. This is the best way to avoid paying peak surcharges twice, once when receiving inventory and again when sending individual orders to customers.

Outbound Shipping Cost Takeaways

Knowing the common surcharges by carrier and utilizing shipping cost strategies can help you save money in the long run. By taking the time to analyze your shipping costs and strategizing ways to reduce expenses, you can ensure that your business is operating as efficiently as possible. 

ShipHero provides a plethora of tools and information to help you find the carrier that is right for you. With the use of our analytics and customized dashboard, you can shop real-time shipping rates to help you comprehend the total summation of your shipping fees, helping you stay informed and maintain complete control over the economics of your 3PL. 

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