OM in the News: FedEx Jolts E-Commerce Companies

“The joy ride is over,” said the president of a shipment-tracking software company. FedEx is changing the way it charges to ship bulky packages, jolting e-commerce companies with price increases for delivering items as diverse as diapers, shoes and paper towels (The Wall Street Journal –May 7, 2014). Instead of charging by weight alone, all ground packages will now be priced according to size. In effect, that will mean a price increase on more than 1/3 of its U.S. ground shipments. The move will greatly affect bulky but lighter weight items which many people have delivered on a regular basis, as well as Zappos.com shoes, which ship for free, including free returns. Indeed, shoe shoppers are encouraged to buy multiple pairs, keep what fits and return the rest. Avid Web shoppers do the same with sweaters, dresses, and jackets at retailers like J. Crew, Macy’s, and Banana Republic.

Under FedEx Ground’s current pricing, a one-pound square package with 12-inch sides—which might hold several shirts would be priced by weight and cost $6.24 to ship. After the changes, the same box would be priced at $8.83, a 41% increase. If an item is heavier than its “dimensional weight,” the customer will be charged the higher amount.

The change in pricing could dramatically affect both online shoppers and retailers. Someone will have to swallow the estimated hundreds of millions of dollars in extra shipping costs. Shipping is already one of the biggest and most rapidly increasing costs for big online retailers. For FedEx, it comes down to efficiency. Lightweight e-commerce orders take up a lot of room in the truck, and Amazon and other shippers don’t always match the box size to what is inside. (Companies like Zappos do use elaborate algorithms to determine exactly how many items should ship in a box to minimize the cost.)

Classroom discussion questions:

1. How does this decision impact operations managers at online sellers?
2. How will this effect large chains like Wal-Mart and Walgreen?