Tuesday, December 15, 2015

End of an Era?

Supply chain guru calls for ending parcel delivery guarantees.

On-time delivery guarantees have existed for more than 30 years for express and 17 years for ground service, but the time has come for parcel carriers to put an end to them, said supply chain consultant Satish Jindal, writing in the Journal of Commerce. Those on the front lines at shippers and even carriers would welcome such a move, he said.

In 1982, Federal Express was charging $12.50 to transport an overnight letter just blocks from where it was picked up (compared with 20 cents for first-class postage) and generating huge margins to support such a guarantee. The guarantee also was a great marketing move to gain shipper confidence for FedEx’s superior on-time performance, achieved by a dedicated hub-and-spoke air network compared to UPS’s dependence on passenger airlines.

For shippers, the guarantee was such a compelling value proposition that UPS and Airborne Express also had to offer it. But the carriers knew shippers had limited opportunity to seek refunds for service failure, because there was practically no visibility into deliveries that didn’t arrive on time. As a result, carriers experienced minimal cost for refunds.

Then the internet took over the world, making the status of a parcel delivery readily available via carrier websites. On-time service was about 95 percent for UPS and FedEx Ground. With ground service volume many times larger, it quickly became more appealing for shippers to seek refunds for service failures.

Facing the cost of providing refunds, carriers have improved on-time performance for ground service, which is now about 99 percent. Another not-so-friendly approach the carriers have taken to reduce cost of service failures includes denial of refunds using hundreds of exceptions. The number of codes for excluding parcels from service failure refunds has tripled to 450 in 2015 from 150 in 2000.

With the simplified refund-filing process, and with costs of processing those requests increasing, the parcel carriers started to seek waivers in contracts from the guaranteed provision of the service. This approach appealed to shippers, many of whom have waived the guarantee in exchange for slightly lower rates. As such, more than 70 percent of parcel volume now is exempt from the service failure refund.

Shippers’ lack of need for guarantee is further evidenced by their willingness to switch from the carriers’ guaranteed ground service to non-guaranteed hybrid services such as FedEx SmartPost and UPS SurePost. This realization isn’t lost on the world’s largest parcel shippers. Amazon ships about 4 million parcels a day using multiple carriers, yet almost all of its deliveries are made without having a guaranteed delivery commitment.

The time has come for the parcel industry to eliminate its money-back guarantee for express, deferred and ground service, said Jindal, or just offer shipper-friendly automatic refunds for failures.  

Kirk Shearer

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