This is a two part series talking about the implications of the shift towards dimensional weight pricing. Today’s post will cover more on what is dimensional weight pricing and some tips to know to get prepared for a possible sweeping shift to DIM pricing in less-than-truckload (LTL) shipping. Tomorrow’s post, in the series, will then cover in depth how a shipper may minimize any price increases that could come about from the use of DIM pricing for LTL.
Two Big Logistics Players Kick off the Shift Towards DIM Pricing
UPS announced a major pricing change that will impact the bottom line of shippers everywhere. While all shippers will be impacted, the price increase will most affect companies shipping lightweight residential and commercial packages.
UPS now applies dimensional weight pricing, also known as “DIM” Pricing, to ALL packages as of December 29, 2014. This matched a similar announcement made by FedEx last year on May 2, 2014. Currently, dimensional weight pricing is only applied to packages measuring three cubic feet or greater. DIM weight pricing creates a billable weight based on package volume (the amount of space a package occupies in relation to its actual weight).
Have you noticed how some of your shipping invoices are slightly different from what they use to be? Freight companies have adopted (or are in the process of adopting) a new method of calculating package shipping and it’s going to have significant implications on your shipping costs, especially if you happen to use LTL (less-than-truckload) and ground parcel service regularly.
Expanded use of dimensional weight pricing in ground package shipping will push more less-than-truckload (LTL) carriers to test or offer dimensional pricing as an option to shippers, according to speakers at the SMC3 Connections 2014 conference last June 23-25, 2014.
What is Dimensional Weight Pricing?
Dimensional weight pricing takes into account the space occupied by a package along with its weight, instead of just the latter. So why is this shift towards this new system happening? The National Motor Freight Classification (NMFC) system of rating freight is a relic that dates back to the 1940’s. Since that time, motor carriers have been permitted to collectively determine rates under the Reed-Bulwinkle Act. Specifically, it exempts motor carriers from anti-trust laws when acting collectively and submitting agreements governing their activities to the Interstate Commerce Commission (ICC), and now to the Surface Transportation Board for approval.
The NMFC system does not allow for rate collusion. However, it provides a uniform method of rating freight “by class” that is used by the majority of less-than-truckload (LTL) freight carriers nationwide. As we stated in our LTL Freight Class post, in the freight classification system, rates are configured using density and value (Weight, length, height), stow-ability, handling, and liability.
The problem with the NMFC system is that it is artificially complex. Some would argue that it has been made so intentionally to befuddle shippers. It is somewhat akin to the power wielded by the medical profession that derives from their monopoly on information. That power has been greatly diminished by the likes of Web sites such as WebMD.com.
The system was borrowed from the railroad’s Uniform Freight Classification (UFC) system in 1936, of creating a “simplified” table of classes. In short, the NMFC has outlived its usefulness. International modes of ocean and airfreight transport have long utilized a cube/weight calculation designed to serve the needs both the shipper and the carrier. it is a system that everyone can easily understand.
It is time to switch to a uniform system of freight rating that the general public can easily understand and that does not require a subscription to a service to decipher. That uniform system could be dimensional weight pricing.
Another reason for the shift to the new pricing mechanism is to discourage shippers from shipping large containers that mostly contained air, which is unprofitable to carriers. Since the dimensional weight pricing method uses the actual volume of the package to calculate its billable weight, shippers will naturally find ways to make their containers as small as possible to cut the costs, which allows carriers to accommodate more packages in the limited space available.
The Implication of Dimensional Weight Pricing on Shipping Costs
While the new mechanism is obviously more scientific, it is likely to increase your LTL shipping costs by 20 percent or even more. You must already have noticed that if you have been shipping regularly. Add to that the annual base general rate increase, fuel surcharges, and other fees, your shipping costs can increase by as much as 30 percent. Therefore, you need to find a way to pack the maximum weight into the minimum volume possible to keep your costs down.
How DIM pricing is Calculated
- Dimensional Weight = (Length x Height x Width) / DIM factor
The DIM factor is a constant number considered as the base weight of 1 cubic foot of space and is specific to each carrier. For example, the domestic DIM factor of DHL is 139 and that of UPS and FedEx is 166, while the international DIM factor of both UPS and FedEx is 139. The higher the DIM factor, the lower the dimensional weight and vice versa.
However, it is not enough to calculate the dimensional weight of a package. You must also know its actual weight. This is because whichever is the larger of the two becomes the billable weight.
Here is an example:
Let’s say that your package is 15 inches long, 12 inches wide and 10 inches high. Its volume is 15″ x 12″ x 10″ = 1,800 cubic inches. Now divide that by 166, which is the most common DIM factor. The dimensional weight of your package is 10.84 lbs. If the actual weight of your package is 9.5 lbs, then 10.84 lbs is used to calculate the shipping rate in your bill. If the actual weight is 12.34 lbs, then 12.34 is used.
Keeping the Costs Low in Dimensional Weight Pricing
When the dimensional weight is larger than the actual weight, you may think that the system is unfair to you. After all, it will look like you are paying extra for non-existent weight. It’s important to understand that you can use the system to your advantage as well. If you are shipping high-density materials with low volume, then you will be paying less than what you would have paid if only their weight was taken into account.
If you have great carrier relations, or a 3PL who focuses on building out a carrier relationship program to work with carriers expertly on your behalf, here are a few ways to keep the costs low:
- Make your package as small as possible: The larger the volume of your package, the larger its dimensional weight. Your aim should be to make the dimensional weight smaller than the actual weight. Pack as tightly as you can without making room for empty space. Use packing materials that do not expand or bulge.
- Negotiate for a higher DIM factor: The higher the DIM factor, the smaller the dimensional weight. The most commonly used DIM factor is 166, but there may be carriers that are willing to give a higher figure if you negotiate with them.
- Request a higher cubic threshold: A higher cubic threshold increases the space you can use without increasing the costs.
- As for incentives: You will find carriers willing to give you incentives, such as discounts and added services, if you are persuasive.
- Refuse to ship high-volume, low-weight goods: The dimensional weight of high-volume, low-weight goods are much more than their actual weight. This makes them unprofitable to ship. Therefore, refuse to ship such goods. Instead, concentrate on shipping low-volume goods.
- Pass the cost on to your customers: Most of your customers will pay without a fuss if you explain to them how and why carriers are using the DIM pricing mechanism.
New Rules You Need to Understand around Dimensional Weight Pricing
No new system comes without its own set of rules. So here are the rules about the DIM pricing mechanism:
- Between the dimensional weight and the actual weight, whichever is larger is the billable weight.
- Each carrier has its own DIM factors for domestic and international shipment.
- The higher the DIM factor, the lower the dimensional weight and vice versa.
- If you fail to submit the dimensional information, you will be penalized with an “out of week billing adjustment” as seen appropriate by the carrier.
- Packages with cubic space greater than 130 inches are subject to a large package surcharge. They may also be subject to a minimum billable weight of 90 lbs.
- These rules are applicable to virtually all packages that are shipped via ground and air. Previously, the rules applied only to air-shipped packages and ground-shipped packages with a volume of 3 cubic feet or more.
How have you been handling the shift to dimensional weight pricing? Do you favor DIM pricing over the old freight classification system? Let us know in the comments below and look out for part two tomorrow!