Parcel logistics

FedEx's plan to fully combine its Express and Ground networks adds new complexities to its long-term operational overhaul, but experts say the upsides of the plan are likely to prove worthy of the challenges. 

Today, FedEx Express and Ground have distinct focuses at their parent company. Express delivers time-sensitive packages via its own employees and aircraft fleet. Ground, meanwhile, delivers less urgent packages in the U.S. and Canada by way of independent contractors who employ their own drivers.

Those operational silos will crumble by June 2024, opening the door for $6 billion in savings through the company's "DRIVE" and "Network 2.0" programs. Execution barriers related to DRIVE contributed to FedEx's decision to consolidate Ground, Express and other organizations into one unit, FedEx EVP and Chief Transformation Officer Sriram Krishnasamy said during an investor presentation April 5.

"We are making it organizationally and execution-wise more effective [and] more easy to create, manage and execute this process," Krishnasamy said.

A smooth consolidation process could allow FedEx to more effectively challenge the already integrated UPS and regain its footing in an increasingly competitive U.S. parcel market. However, FedEx's transformation also raises questions about how the change will impact its network capacity, labor classifications of Express and Ground workers and downstream customers.

Combining Express, Ground adds to DRIVE hurdles

While combining companies and cutting costs sounds promising, executing all these measures successfully will likely be very difficult, Anthony DeRuijter, senior analyst at global research firm Third Bridge, said in emailed remarks. Some of FedEx’s top hurdles could include:

• FedEx executing its plan to reduce its Express air cargo capacity further without running the risk of losing landing rights and air slots, which would disrupt volume flows.
• Streamlining its network operations introduces concerns about how much FedEx could benefit from a potential strike at UPS. "Our experts think [FedEx] could take 6-10% of UPS' business under these conditions, but how will they do it if they don't have the network capacity?" DeRuijter said.
• The sheer scale of DRIVE, with hundreds of different initiatives underway, could spur competition within FedEx at a time when it’s bringing companies together. Its approach "sounds like segmentation, with the potential for internal teams to compete for resources, which doesn't sound like integration,” he added.

Executives expressed confidence in the company's transformation plan at the April 5 presentation. Critical key performance indicators FedEx is using to evaluate DRIVE’s success include its impact on service levels, net promoter score and profitability and growth by segment, Krishnasamy said. Additionally, new cloud-based visibility tools make the overhaul more manageable and allow company leaders to more easily track progress, the executive noted.

Labor laws mix as FedEx plans 'hybrid model'

Experts have also raised concerns about how the overhaul will impact the classification of FedEx Express and Ground employees under U.S. labor laws.

U.S. Express employees are covered under the Railway Labor Act, while non-Express workers fall under the National Labor Relations Act. The RLA has a much higher bar for organizing a labor union, and UPS has argued in the past that Express delivery drivers should fall under the NLRA like its unionized drivers do.

In response to an analyst question Wednesday about how combining the two networks would affect employees’ status, FedEx President and CEO Raj Subramaniam said the company has "taken every consideration into account" as it develops its plans. He added that FedEx is planning to deploy a "hybrid model" of Ground contracted service providers and Express employees to make deliveries.

However, combining the two labor forces also introduces complexities that Ground contractors will have to consider for their day-to-day operations.

Delivery providers must ensure their drivers factor in any time-sensitive Express volume that could be introduced to their routes, said Jesse Smith, director of operations training at the Ground contractor consultancy Route Consultant, during a webinar.

Currently, contractors who deliver less urgent home-bound parcels may let drivers begin their routes whenever they're able, whether it's 8 a.m. or 11 a.m. Such flexibility could pose issues with FedEx services like Priority Overnight.

"It's going to change the culture of your team a little bit to make sure that these Express deliveries are getting service," Smith said.

Express-Ground combo poised to help shippers

For FedEx customers, the operational shakeup could introduce some benefits.

Those using both Express and Ground will no longer have to worry about juggling separate pickups or contract terms, ShipScience founder and CEO Anthony Robinson said. Such issues were ones UPS had often leveraged as sales tactics to draw customers from its rival, selling them on a more simplistic operating and contract model.

"For the pickup, the delivery and then the contract side, it is more work for the customer to manage FedEx than it is for them to manage their relationship with UPS," Robinson said.

Although the days of split networks with multiple pickups are coming to an end, customers should still keep an eye on any impacts to transit times, as FedEx ends "direct pulls" to Express- or Ground-specific facilities, Matt Sumowski, team lead for client success at Shipware, said in an email.

Experts don't foresee any noticeable changes to shipping rates due to the consolidation. Since FedEx expects to realize billions of dollars in savings from its transformation efforts, "the market would hope they continue to be aggressive in their overall pricing approach,” Sumowski said. However, in terms of FedEx's pricing structure, customers should see little change.

"Costs will change, discount offerings will change, but the overall model of earned discount tiers, with weight-based incentives, should hold true," Sumowski said.

U.S. parcel delivery demand fell back to earth in 2022, leaving top carriers like FedEx scrambling to cut costs and readjust their networks for an uncertain future.

Data released March 28 from the Pitney Bowes Parcel Shipping Index outlines the extent of these volume declines, along with which delivery providers fared the best in a difficult environment.

Here are five charts based on that data, covering trends such as UPS and Amazon's decoupling, the growth of regional carriers and what lies ahead for the delivery sector.

Parcel volumes fell, but revenues increased

After years of growth, U.S. parcel volumes declined 2.2% from 2021 to 2022, according to the index. Carriers struggled to beat tough year-over-year comparisons as e-commerce demand cooled off following a surge from the COVID-19 pandemic.

Delivery providers' pricing power remained firm despite lower volumes. U.S. parcel revenues grew 6.5% YoY, which Pitney Bowes said was driven by inflation and higher fuel surcharges. Vijay Ramachandran, the company’s vice president of go-to-market enablement and experience, pointed out additional reasons for the divergence between volumes and revenues.

Many consumers with high spending power moved from the cities to suburban and exurban areas, increasing the cost to deliver to them. Additionally, carriers spent heavily to expand their capacity after many networks were overwhelmed by a flood of packages when the pandemic first took hold. Now, they're pushing to recoup their investment and continue to increase rates.

"I think these additional logistics costs are really paying for the investment that happened a couple years ago," Ramachandran said.

FedEx saw the steepest volume drop, Amazon momentum stops

FedEx had the largest percentage jump in U.S. volumes among the top parcel carriers in 2021, and it followed up that performance in 2022 with the sharpest overall decline.

This swing underscores the turbulence Raj Subramaniam has encountered in the beginning of his tenure as FedEx CEO, with plummeting demand driving the company to slash costs to reduce pressure on its bottom line. UPS and the U.S. Postal Service also encountered volume declines in 2022 in a softening demand environment.

Amazon Logistics' volume remained flat, a pronounced slowdown from the blistering pace of growth the e-commerce giant's in-house delivery arm saw the previous six years. The company has closed and canceled dozens of warehouses to reduce the burden of fixed costs while better matching capacity to demand.

UPS charts a separate path from top customer

While UPS fared better than rival FedEx in terms of volume loss last year, it has ceded the most market share among carriers since 2016, per the index. Meanwhile, its top customer Amazon has seen its market share by volume grow significantly during that period.

What changed? The relationship between the two companies, for one.

UPS has prioritized attracting more profitable shipper segments rather than customers like Amazon, which offer plenty of volume but at low margins. Meanwhile, Amazon has built up its own logistics capabilities to deliver more of its customers' orders in-house, reducing its reliance on third-party carriers.

“We’ll continue on a mutually agreed path to glide that business down in 2023,” UPS CFO Brian Newman said of Amazon on a Jan. 31 earnings call.

This gradual shift has resulted in many deliveries that would have originally gone to UPS being completed by Amazon instead.

Smaller carriers continue momentum

After nearly doubling their package volume in 2021, smaller U.S. parcel carriers again saw strong growth in 2022 despite a more challenging environment. Volume and revenue for carriers outside of UPS, FedEx, the Postal Service and Amazon grew by roughly 25% and 29%, respectively, YoY.

Alternatives to the top carriers have seen strong interest from shippers seeking lower delivery rates and insurance against capacity constraints. They have also expanded their coverage areas and leveraged partnerships with software providers and shipping platforms to boost their customer reach.

These delivery providers — including LaserShip/OnTrac, Lone Star Overnight and Spee-Dee Delivery — still have a long way to go to rival FedEx and UPS, as they made up just 2% of market share by volume combined last year. They may also have trouble attracting customers in a challenging economic climate, as volume discounts from national carriers become more appealing.

"[Carrier] diversification is a risk-mitigation strategy, but it may not be a cost-saving strategy," said Pitney Bowes' Ramachandran.

Volume growth expected to slow down

Macroeconomic uncertainty, inflationary pressures and market normalization after COVID-19 are all poised to weigh on U.S. parcel volume growth going forward, according to the index. It forecasts a compound annual growth rate of 5% from 2023 to 2028 as the most likely scenario, down from 10.8% CAGR between 2016 and 2022.

This rate would result in roughly 28 billion parcels in the U.S. market in 2028, although the index projects that volumes could end up being as low as 24 billion or as high as 32 billion. A key factor in the end result will be e-commerce activity, which remains strong even amid the current cooldown, said Ramachandran. Parcel volumes are a full year ahead of the index’s pre-pandemic forecasts.

"What that means is that there is some staying power to online shopping, online penetration, direct-to-consumer shipping and delivery, and it hasn’t reverted back to the mean of where we thought things were going to be," he said.

Postmaster General Louis DeJoy is working to not only bring the U.S. Postal Service to financial stability, but also transform the agency to be competitive with major private carriers including FedEx and UPS. 

DeJoy, in an interview with Supply Chain Dive in September, said he isn't trying to "conquer" the highly competitive package delivery market. But he does want the beleaguered agency to become a leader in the sector, instead of just reacting to market trends.

"The goal is while we're trying to come out of crisis, eventually we will be cost-effective," DeJoy said. "I think we will be the preferred delivery provider in the nation by being very reliable and very affordable. That's the goal."

DeJoy is already neck deep in leading wide-ranging changes at the agency as he works toward that goal. The Postal Service has moved to consolidate its facility footprint and launch a local delivery service to remain competitive with other carriers.

Growing the Postal Service's share of the delivery market would provide a much-needed financial boost to the agency, which saw $87 billion in losses from fiscal years 2007 to 2020. But experts say it's a tall order even for DeJoy, who hasn’t shied from making big changes. 

Carriers that have traditionally relied on the Postal Service for some deliveries are now increasingly shipping in-house. To keep pace with FedEx and UPS, the agency will have to more effectively sell shippers on its network while keeping service levels above the rough patch it hit in 2020.

Not your grandmother's Postal Service

As part of its growth plan, USPS is adjusting its operations and business approach to account for the spike in package demand — and decline in mail. An enhanced focus on package delivery puts the agency in direct competition with UPS, FedEx and other parcel carriers. 

"I think we're still in the early stages, but clearly they're trying to position themselves as an effective competitor against the private carriers," said Michael Plunkett, president and CEO of the Association for Postal Commerce.

Edmund Carley, national president of the United Postmasters and Managers of America, said the business of the Postal Service has changed dramatically over his 23 years at the agency. The internet has reduced the need for mail communication and the days of the agency making most of its money via "grandma sending you a birthday card" are over.

"We moved that mail first because that was our breadwinner," Carley said. "Now, it's the package business. That's part of [DeJoy's] point. In order for us to be viable into the future, we're going to have to change what we do."

Despite shippers’ growing interest in diversifying their carrier mixes as parcel rates climb, the Postal Service has struggled to compete directly with the two delivery giants, said Nate Skiver, founder of LPF Spend Management. Compared to FedEx and UPS, the list of package shippers with direct contracts with the Postal Service is "relatively short."

"The biggest challenge, I think, will actually be effectively engaging package shippers directly to offer services and contract with those shippers and not rely so much on third parties as they have in the past," Skiver said.

DeJoy understands the need to attract more commercial shippers. He said he's pushing for the Postal Service's sales team to position the agency "as more of a solutions provider," adding that an overhaul to its facilities footprint will allow it to demonstrate the strengths of its regional delivery services.
 

“We do have the dominant regional delivery system,” DeJoy said. “It's more than the last mile. It's probably the last 200 miles.”

Still, it will take a significant cultural change for the agency to more effectively sell its services "and not just assume that retailers will come to them," Skiver said.

Accelerating pace of change ahead of peak season

A logistics executive-turned-Postmaster General, DeJoy has ushered in substantial change at the agency at a pace not normally seen within government. A 10-year plan to transform the Postal Service includes a shift in service standards and consolidation of thousands of its delivery units into large-scale facilities across the country.

"I don't feel like I move fast enough, and this is not an organization or an environment that is comfortable moving fast," said DeJoy, former CEO of New Breed Logistics, which was acquired by XPO Logistics in 2014.

Since 2021, the agency has deployed 249 new package processing machines, converted 100,000 part-time employees to full-time positions and signed multi-year leases on facilities that bolster its peak season processing space, according to a news release.

While the Postal Service had deployed plans to improve operational efficiency before DeJoy, the pace of implementation has been much faster than it was under previous leadership, Carley said.

"He looks at [the job] from a much more business-oriented frame of mind," Carley said of DeJoy. "His line is, 'If you build the Postal Service today from scratch, it wouldn't look anything like the network we have.'"

Not all of DeJoy's changes have been entirely welcomed by stakeholders. A move in 2020 to reduce the number of late and extra truck trips from sorting facilities to delivery stations sparked concern it would limit the ability to vote by mail. 

DeJoy said the purpose was to reduce schedule deviations and to improve decision-making regarding extra trips. A report from a USPS watchdog found the initiative, among other operational changes, hurt the speed and reliability of mail delivery. 

Despite the early issues, the agency hopes the fast-paced changes will help position it to handle a surge in demand during the holiday shipping season after being caught flat-footed in 2020. The Postal Service said ahead of the 2022 peak season that it would have the ability to process 60 million packages a day, up from 53 million in 2021.

Package delivery demand has cooled off in 2022, though the agency said in an August report that volume is expected to remain above pre-pandemic levels. In the quarter ending June 30, the agency reported that revenue and volume in its Shipping and Packages category fell by 1.1% and 5%, respectively, YoY.

FedEx and UPS are encountering the same market dynamics, but they have adjusted to pursue more profitable customer segments and leveraged their pricing power to cushion the blow of reduced volume.

Industry-wide trends could benefit the Postal Service's peak season performance, however, as easing demand gives carriers more processing power to better handle demand surges.

DeJoy said he often feels like he's in an antique shop while leading the Postal Service, with a sign on each part of the agency, reading: "Don't touch. Breakable." But opposition to change and other headwinds haven't stopped him from working to make his vision a reality.

"I don't agree with [DeJoy] on everything. But, for better or worse, he has a plan," Carley said. "He can see a path forward for the Postal Service, and by God, he's going to implement it, and we're going to help him do that."

Editor’s note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.

A labor union representing 350,000 UPS workers could strike this summer if a new contract agreement isn't reached on time, threatening the delivery of millions of parcels.

Teamsters leadership has made it clear they are taking a hard-line stance on pay, scheduling and other issues ahead of negotiations for a new labor contract with UPS. The current contract is set to expire July 31.

“Our union is resolved to win the best contract for UPS members and to reset the standards for wages and benefits in this industry by August 1, 2023," Teamsters General President Sean O’Brien said in a statement last year. "We won’t extend negotiations by a single day."

UPS, meanwhile, has stressed the need to reach an agreement, saying it aims to negotiate a contract that benefits all sides. The carrier has been touting its employee benefits and long-standing relationship with the Teamsters.

"Our focus is on reaching an agreement that provides a win-win-win, for our employees and the union, for UPS, and for our customers," the company said in a statement.

Here's what shippers need to know about the state of contract talks, the likelihood of a strike and how to prepare for any supply chain fallout.

Where do negotiations stand?

National contract negotiations don't kick off until April, Teamsters spokesperson Kara Deniz said, but the Teamsters' UPS National Screening Committee has been reviewing various proposals for what should be included in the Master Agreement.

Committee members sorted and compiled more than 11,000 proposals submitted by locals from across the country during a Jan. 9 meeting in Washington, D.C., according to a Teamsters news release. Five screening subcommittees also met to review proposals on areas such as safety and health.

"The screening of proposals will determine what will ultimately be put forth to the company when National Master Agreement negotiations begin," the release said.

What are the top issues UPS and the Teamsters need to address?

The Teamsters union is largely looking to address scheduling issues that have cropped up since the COVID-19 pandemic fueled a surge in package volumes, Deniz said in an interview. Some drivers say that they continue to be forced into working a sixth day or taking "excessive overtime."

A driver works about 9 hours a day on average, but schedules can vary according to customer needs, according to the UPS statement. Still, the carrier recognized the need to find the right balance between serving customers and meeting drivers' desired work hours.

"Last year, UPS met individually with drivers to better understand their unique preferences, and we are making adjustments where possible," the company said.

Deniz said the Teamsters are also looking to eliminate discrepancies in pay and other areas between full-time drivers and 22.4 combination drivers. The latter category, with the number referring to an article in the current contract, covers employees typically making deliveries on a Tuesday-through-Saturday schedule.

"It's the same job for less pay and a slightly different schedule in terms of days on the job," Deniz said of the combination driver positions.

In addition to eliminating pay gaps, the union is also looking to negotiate a member pay increase for both full and part-time employees, but declined to provide a specific amount. Full-time package delivery drivers at UPS have a $95,000 annual average wage, while the average part-time employee earns $20 an hour, according to the company.

How likely is a strike?

Both sides aim to reach an agreement by the July 31 contract expiration. If that effort is unsuccessful, the Teamsters say they are ready to strike.

"We’ll either have a signed agreement that day or be hitting the pavement," O’Brien said last year.

A UPS strike wouldn't be unprecedented ground for the union. In 1997, 185,000 UPS Teamsters halted deliveries for more than two weeks before a new contract agreement was reached.

Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS, said in an interview that he believes the two sides will ultimately come to an agreement, though it won't be easy.

“But I also think the risk of a strike is the highest it's been since 1997, and it's a completely different environment,” Amling added.

This round of bargaining is also likely to be far different from 2018, when the Teamsters ratified a contract despite the majority of participating members voting against it. O'Brien, who will be the face of union negotiations this spring, had won his election for Teamsters general president in 2021 as a vocal critic of how the previous contract agreement went down.

"[The Teamsters] should've went back to the table or struck the employer," O'Brien said of the agreement in a candidate debate prior to his victory. "Unfortunately, that didn't happen and our members got stuck with a contract that they voted down.”

How disruptive would a strike be for shippers?

Out of UPS' roughly 534,000 employees worldwide, 350,000 are represented by the Teamsters, per a recent company report. A strike would create large-scale disruptions in the company's network.

It would also likely create headaches for FedEx and other last mile carriers as shippers attempt to divert their deliveries to alternatives.

"Even though I think UPS will try to maintain limited service in the event of a strike, the capacity being taken out of the market will drive up pricing with other carriers," Amling said.

UPS' U.S. ground delivery network handled more than 17 million packages daily on average in 2021. With that level of activity, the company held a strong position in the parcel delivery sector overall at 24% of market share by volume in 2021, according to the Pitney Bowes Parcel Shipping Index.

Despite concerns over the negotiations, in a July earnings call, CEO Carol Tomé said the company continues to win business with customers who are aware of the upcoming negotiations.

"We are building contingency plans, and we will take care of our customers," Tomé said.

What can shippers do to protect their supply chains?

Amling recommended for business-to-business shippers to have buffer stock on hand in the event of UPS disruptions, while business-to-consumer shippers should be ready to call on alternative carriers.

However, existing contract arrangements can make it difficult for many shippers to divert a large share of their volumes to other delivery providers, said Transportation Insight Chief Strategy Officer John Haber. Volume-based discounts incentivize businesses to rely on one carrier for much of their shipping activity, and minimum volume commitments penalize shippers that don't meet certain thresholds.

"For a lot of shippers, their hands are kind of tied if they move volume, which is dangerous if UPS goes on strike," Haber said.

Ultimately, Haber advised shippers to begin contingency planning as soon as possible, since capacity at other carriers will run out fast.

"If you wait until June, it will be too late," he said.

Editor’s note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.

Even as space frees up within FedEx and UPS' networks, shippers are poised to continue diversifying their parcel carrier mix in 2023, industry experts say.

Adding new last mile carriers emerged as a popular strategy during the pandemic after volume surges limited capacity at the two delivery giants. In recent months, FedEx and UPS have seen service levels rebound and demand normalize, but many shippers continue to keep other delivery options on tap.

If anything, shippers are adding alternative carriers at an even faster rate. The average number of last mile carriers per company account in December was 5.73, up from 4.86 the year before, according to project44 data.

A mix of factors is buoying this ongoing trend, including higher rates and concerns over UPS and the Teamsters' contract negotiations — their current agreement expires July 31. Increased capacity and more robust services from smaller competitors are also driving interest in alternatives.

The result is that last mile carrier mixes are starting to look more like shippers' varied LTL portfolios, said Caleb Nelson, chief growth officer and co-founder at logistics software provider Sifted. Looking forward, diversification isn't expected to slow down, leaving some industry experts wondering if Amazon will capitalize by launching a competing service.

"I think it's going to pick up pace this year, and it's mostly because shippers are a little bit behind and the regional carriers that have stepped in to offer competitive solutions to FedEx and UPS are far more advanced this year than they've ever been before," he said.

Rate hikes, surcharges leave opening for competitors

While a slowing economy is driving down ocean and trucking rates, last mile rates have remained persistently elevated, putting a strain on shippers' finances. The fact that rates in the sector have remained so high for so long is unusual, said Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS.

"In my entire career with UPS, there were only a few years over the 27 years I was there where it was a seller's market — that's not the typical state of things," Amling said. "The typical state of things is a buyer's market and you're creating [market] share and the carriers are really aggressive in how they're courting business."

Despite volumes declining in recent quarters, 2023 is set to be another expensive year for FedEx and UPS shippers due to higher annual rate increases and surcharges. The Cowen/AFS ground parcel index, which measures shipping costs, is expected to reach a record high in Q1.

Both companies have defended their rate increases and surcharges, saying they are needed to keep service levels high and combat inflationary pressures.

"Honestly, we have had very productive customer conversations," FedEx Chief Customer Officer Brie Carere told Supply Chain Dive in October in regards to rising shipping costs. "I think our customers really are very well-informed and they understand the seriousness from an inflation perspective."

While smaller competitors have also raised prices, some have undercut FedEx and UPS's recent 6.9% general rate increase with lower hikes.

"With this added capacity and new competitors, we are going to go back to a buyer's market where there are more alternatives and better opportunities to get lower prices in the market and still maintain service levels," Amling said.

As alternatives expand, is Amazon next?

Since the onset of the COVID-19 pandemic, FedEx and UPS have pursued volume growth in more profitable segments like healthcare and small business while demonstrating a willingness to let go of lower-yielding e-commerce packages from large shippers. UPS, for example, reached an agreement with top customer Amazon that will result in fewer packages from the e-commerce giant inundating its network.

Meanwhile, many alternative carriers have stepped up to fill the gap by gearing their services around delivering online orders. LaserShip/OnTrac, The Frontdoor Collective and Better Trucks are among the last-mile delivery companies set to expand into new markets in 2023 while siphoning volumes from the top carriers.

“Customers are usually coming to us because they are frustrated with service from some of the big players,” Better Trucks co-founder and CEO Andy Whiting told Supply Chain Dive in November. “There’s been challenges with either service or price or a combination of the two, or they’re looking for alternatives.”

Experts say another company could soon enter the parcel carrier fray, placing increased pressure on FedEx and UPS: Amazon. The e-commerce giant aggressively expanded its logistics network to fulfill and deliver in-house orders when the pandemic supercharged demand, and it has since grappled with excess capacity as sales have slowed.

At the same time, Amazon has rolled out new services that make use of its sizable logistics assets. Last year, the company launched long-term inventory storage services at its distribution services for third-party sellers. Amazon said it planned to expand its "Buy with Prime" service to all U.S. merchants by the end of January, connecting their outside websites to Amazon's fulfillment network and delivery capabilities.

"They were all set to launch a third-party service before the pandemic hit, and then they had to pull it back," the University of Tennessee's Amling said of Amazon. "I would not be surprised if they dust off all those plans and execute those in 2023."

Regional delivery companies are growing their presence digitally as much as they are physically, a development that could help them compete with giants like FedEx and UPS.

For smaller firms to gain volume and revenue share in a parcel market dominated by national carriers, upping their appearances on shipping platforms will be just as critical as boosting their capacity and service coverage. A string of partnership announcements between carriers and logistics-focused technology companies in recent months suggests the move is a priority for both.

For software providers and shipping platforms, a wider array of carrier options draws in more users. For delivery providers, greater platform availability gives them a stronger chance at gaining customers based on capabilities as opposed to name recognition.

"A service allowing shippers to try multiple carriers out is valuable to us, because we're winning on merit," said Better Trucks co-founder and CEO Andy Whiting.

Improved tech, changed marketplace fuel diversification

Years ago, shippers lacked quick and easy ways to onboard new carriers and customize their carrier mix. Nowadays, they can leverage software to more easily split their packages between multiple providers.

Shippers using EasyPost, for example, could have their packages delivered by FedEx, UPS and the U.S. Postal Service. But the company, which provides an application programming interface for shipping, also offers users access to smaller carriers such as Hailify, a last-mile delivery service available in multiple metro areas.

"That customization has been something that has been new the last 10 years," Hailify CEO Nick Bhashyam said. "It has really brought about the advancement and growth in the last mile industry altogether."

However, it's not just technology advancements fueling the concurrent rise of regional carriers and the technology companies they partner with.

For Ben Emmrich, the immense pricing power large carriers like FedEx and UPS wielded in the early stages of the COVID-19 pandemic motivated him to launch Tusk Logistics. He's CEO of the company, which offers a platform connecting shippers with regional delivery networks that became publicly available in February.

Emmrich said it would have been possible — albeit more challenging — to create the platform five years ago, but that was before shippers encountered a wave of surcharges and capacity constraints from top carriers.

"The pandemic accelerated a lot of these forces that work in opposite interest of the shippers and, as a result, shippers need more alternatives that put value into their pocket," Emmrich said.

Benefits, risks with adding new carriers

Although regional and national delivery providers share space on many shipping platforms, smaller carriers offer unique advantages over their larger competitors that shippers can more easily leverage with the advent of new technologies.

Shipium co-founder and CEO Jason Murray said regionals typically thrive in terms of specialty shipments — such as big and bulky packages — or providing low prices for fast shipments, as long as they're within their specific service territory.

"They're kind of cheaper if your inventory is in alignment with where your customers are," Murray said of regional carriers.

But shippers still have to effectively implement carrier adjustments within their real-world operations to fully realize diversification's advantages, said Better Trucks' Whiting.

For example, a business may need to expand the dock door count at a warehouse to make space for a new carrier. It may also have to adjust operations to account for carriers that only deliver to certain ZIP codes, as opposed to the national reach of FedEx and UPS, and consider how its current facility footprint factors into that.

"No matter how tech-forward your business is, at the end of the day, you are moving physical goods," Whiting said. "There's dock doors, there's space constraints and there are legitimate workflow, under-the-roof changes that may or may not need to happen."

Tusk Logistics co-founder and CEO Ben Emmrich longs for a day when parcel shipping rates adjust dynamically based on supply and demand.

"It's absurd that our industry hasn't been able to get there yet in a meaningful way," he said.

As Emmrich envisions it, dynamic pricing would benefit both carriers and their customers. If a carrier is under capacity and has extra space in their network, it could lower prices to attract more volume. If capacity is tight, it could increase prices to tamp down demand.

Reaching those capabilities is a tall order for the industry. Today, base shipping rates are a static affair until carriers roll out their annual price hikes.

However, FedEx and UPS have already been making strides toward dynamic pricing over the past year, and they plan to further implement it in their operations going forward.

Delivery giants advance pricing programs

Experts say FedEx and UPS already leverage surcharges to hike prices in a dynamic fashion.

Added fees, like UPS' demand surcharge, have become more prevalent in recent years since the pandemic-fueled home delivery boom strained carriers' networks. While a lot of shipper contracts have limits on how much rates can increase, those caps generally don't apply to surcharges, said Transportation Insight Chief Strategy Officer John Haber.

"COVID hit, and all of a sudden we saw an influx of new charges," Haber said. "You have that annual rate increase, everybody's still doing that, but then there are changes to pricing that are made way more often."

The two delivery giants are now advancing their capabilities beyond tacking on surcharges during high-demand periods.

FedEx, for example, used a dynamic pricing program to help bring in $150 million in profit from home delivery fees during peak season. Its surcharges adjusted weekly based on how much more volume customers shipped versus earlier in the year.

The company isn't stopping there — it aims to launch new dynamic pricing capabilities every ten weeks, Chief Customer Officer Brie Carere said during a June 2022 presentation to investors.

"You can imagine some of the obvious ones would be more day-of-week pricing, more customized in certain hotspots or constraints to work around them from a pricing perspective," said Carere, who is also an executive vice president at the company.

UPS, meanwhile, is progressing toward dynamic pricing after the launch of Deal Manager in 2022. The digital platform aims to make it easier for small and medium-sized businesses to reach shipping deals with UPS, rather than going through a manual pricing process, CEO Carol Tomé said in an April 2022 earnings call.

Deal Manager does this by leveraging pricing science, allowing customers to skip submitting sample data in the quoting process and salespeople to close deals quickly.

"Because this platform uses advanced analytics, the more we use it, the smarter it becomes," Tomé said. "It's a key building block toward dynamic pricing."

The CEO provided an update on Deal Manager in a January earnings call, saying the company's "win rate" in the U.S. with the platform was 22 percentage points higher than its baseline. UPS is pushing to expand Deal Manager access to more than 40 countries this year.

Tomé also noted that UPS recently launched a pilot enabling "systematic day-of-week pricing."

"Early feedback is promising, and we'll share more updates on this pilot on future calls," she said.

Dynamic pricing's next steps — and limitations

The next step in carriers' dynamic pricing journey could have a variable charge based on the street or ZIP code the carrier is delivering in, said Dean Maciuba, managing partner USA at Crossroads Parcel Consulting. He used New York City as an example of a metro area that's difficult to deliver in — FedEx and UPS have dealt with heavy parking fines in the city through the years — and could draw higher pricing as a result.

While Maciuba added that dynamic pricing is unlikely to create significant increases in shipping costs, he believes the practice will benefit carriers in the long run.

"I don't think you're talking 5% or 10% [price increases]," Maciuba said. "I think you're talking 1% to 3% swings. But the key is, if you look at that cost across the U.S., it's significant in terms of the bottom line."

Despite the potential for further advancement, there will be limits to what major carriers will institute in terms of dynamic pricing, said Thomas Andersen, partner and executive vice president of supply chain services at LJM Group.

For example, he doesn't expect shippers will end up having to pay a different price each day for the same service due in part to contractual commitments. Under those circumstances, a shipper may hold onto certain packages until prices drop.

Additionally, Andersen said price changes would be easier to institute across the board rather than making market-by-market adjustments to account for, say, staffing issues at a specific distribution center constraining throughput.

"I think it'd be too limited and too difficult and too much pushback for the reward," Andersen said.