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From SCDigest's On-Target E-Magazine

- Jan. 2, 2012

Logistics News: Does Alleged FedEx Overbilling Reinforce Need for Parcel Freight Bill Auditing?

Case Important One for the Parcel Industry to Watch, Says Jerry Hempstead; Can't Believe FedEx Would Risk Reputation Over Nickle and Dime Issues, As Suit Alleges

SCDigest Editorial Staff

There was interesting news regarding parcel shipping in late December, as documents connected to a lawsuit filed in 2011 alleging FedEx systematically overbilled many shippers for years were unsealed, providing more detail into the allegations.

In addition to clarifying some of the charges included in the class action lawsuit, the new documents beg a couple of questions: (1) how widespread is this problem?; and (2) shouldn't more parcel shippers be conducting audits to find these and other billing errors?

SCDigest Says:

The driver may be hitting the key without any knowledge that when he hits the key it triggers a fee back to the sender for a residential delivery, Hempstead says

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The 2011 suit alleges that FedEx has "known for years that it is unlawfully charging residential delivery surcharges for deliveries to nonresidential addresses." The suit was filed by two law firms affected by the alleged mischarges, who are seeking class action status for the suit so that it can represent multiple shippers.

But just a couple of weeks ago, the court unsealed some of the documents presented as part of the suit, a move FedEx had been trying to block.

"We allege that FedEx has and continues to engage in a pattern of intentionally charging its customers residential delivery fees for deliveries to obviously non-residential addresses such as courthouses, government offices and banks," Steven Rosenwasser, a lawyer for the plaintiffs, recently told Bloomberg.

The FedEx surcharge for residential delivery was about about $2.50 per parcel at the start of the alleged problems, rising to about $3.00 currently, though individual shippers can negotiate a lower rate.

The most damaging document released is an email from FedEx sales executive Alan Elam in Scottsdale, AZ, who sent a message to an unnamed superior that said in part he believed FedEx had been "systematically overcharging our customers for residential delivery fees," adding, "I have brought this to the attention of many people over the past five years, including more than one managing director and no action has been taken to address it."

Later, he added, that "My belief is we are choosing not to fix this issue because it is worth so much money to FedEx. I also believe this is a widely known problem."

"Quite frankly was not aware of this but certainly I understand the gravity of the situation so let me involve Solutions, Customer Service and Billing to see what we are doing to resolve," Daniel Mullally, FedEx senior vice president for sales, responded to Elam. "Thanks for bringing to my attention."

Chris Suhoza, vice president of solutions at FedEx, then responded in an email to both Mullally and Elam that "rest assured your concerns and those of others in this area have not gone unheard. We are working this customer experience issue through..." The rest of this sentence was blacked out in the released document.

The lawsuit claims some of the shipments that were overcharged went to FedEx's own headquarters.

A FedEx spokesperson told the Wall Street Journal that the "documents do not tell the entire story of this case," and that "FedEx will continue to defend these allegations in a court of law."

Among other actions, the lawsuit (filed in a US District Court in Memphis) charges FedEx with breach of contract and wants the court to require FedEx to correct its address database and change policies that might lead to the erroneous surcharges, and in addition seeks triple damages - in other words, FedEx would be required to pay three times the actual amount of the overcharges.

The Issue is Widespread, Expert Says

Jerry Hempstead, a former DHL executive and recognized expert on parcel shipping, tells SCDigest that "The misapplication of the residential fee may be one of the worst kept secrets about accessorial charges" in the parcel shipping industry. He says he has been openly sharing and discussing the topic with audiences at conference presentations for years.

Why is that overcharging on business location deliveries so common? There are several factors, Hempstead says.

The fee is often triggered by a button on the delivering driver's hand held device.

"The driver is instructed that if someone "sleeps there, you hit the button" for residential delivery, Hempstead says, even if it is really a business address.

"My observation also is that on a business-to-business shipment, a driver is normally required to get a signature. So what happens if there is nobody around - say for example the FedEx driver delivering to the Fedex corporate headquarter's mailroom in Memphis - I am sure he feels secure leaving the packages without a signature. However he is required to get one," Hempstead says.

"Well my guess is that if he hits the "resi" button then he can leave without a signature, because on a business-to-consumer shipment the driver may leave a shipment in a safe secure place, away from exposure to the view of the street and protected from the elements, without a signature," he added. "My gut tells me this may be a root cause. - a unintended consequence due to a work around by the driver of the signature rule. It's just an educated guess on my part."

The driver may be hitting the key without any knowledge that when he hits the key it triggers a fee back to the sender for a residential delivery, Hempstead says.

Hempstead says shippers can cause the problem themselves by choosing the residential designator key when they are preparing a shipment, and triggering the wrong fee upon themselves. He noted that the data released to date related to the lawsuit seems to have not looked at whether shippers themselves caused some percent of the wrong charges.

(Transportation Management Article Continued Below)

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SCDigest notes that in higher volume, ecommerce shippers, this designation would likely be created automatically by the system based on addresses, etc., and could contain errors.

"I have been telling audiences for years to always challenge the carrier sales rep on the application of these fees and agree together that there are a number of misapplications, and that because of that the shipper has grounds to negotiate a discount in the resi fee," Hempstead noted.

He adds that "Auditors and consultants have found numerous instances of misapplications of residential fees along the way. It just may be one of those "stuff happens" things and the cure costs more than the illness" for some shippers," Hempstead added - the cure being more detailed parcel audits and other measures.

All that said, "My experience with the most senior leaders at FedEx and UPS is that these are stand up guys , running very mature, profitable, successful companies that are consumer centric. Their models depend on credibility, and veracity, and trust," Hempstead observed. "I just can't fathom a Fred Smith or a Mike Glenn [FedEx executives] or a Kurt Keuhn or Scott Davis [UPS executives] wanting to compromise what they have built over nickel and dime stuff like a misapplication of a resi fees."

Role of Parcel Auditing

As Hempstead notes, parcel freight bill auditing can often find these misapplications of a residential fee, among many other erroneous charges.

Still, the practice in parcel shipping is much less common than for less-than-truckload and full truck load shipping.

Stephen Craig, a principle at supply chain consulting firm enVista, which also provides parcel and trucking freight bill audit services, says in the last few years several very large retailers have just started doing parcel bill auditing - and finding significant errors (either internal or from the carriers) and savings opportunities from the effort.

In one case, Craig says, the audit found a retailer was being charged residential service in parcels being sent to one of its own stores.

His enVista colleague John Stitz says that too often, parcels shippers believe, as Hempstead noted, that the audit process won't be worth the effort and cost - but that they are often mistaken in that perspective.

"The carrier's strategy is usually to get the shipper to waive their right to file for credits on late packages. We call that a GSR waiver in the industry and as a parcel auditor, we have seen many situations where a client is not interested in auditing their invoices because they don't think there is enough savings to be gained," Stitz told SCDigest. "They believe that GSRs make up the majority of the credits."

However, Stitz says, these shippers may be taking their eye off of the ball on auditing rates and incentive opportunities, as well as the audit of the various accessorial charges from the carriers," and that parcel audits often find significant savings beyond just late package claims.

Hempstead notes that it is possible to negotiate a fixed refund per month to compensate a shipper for service failures when giving up the right to audit for late deliveries, perhaps something like one percent of spend, or asking for a lower rate to begin with.

He also says it is possible there will turn out to be billing errors in the application of surcharges related to dimensional weighing, among other potential areas where errors can slip in to parcel rates.

"In the end, I believe this suit will result in a much more accurate billing process on the part of FedEx. They will get focused and put a six sigma team together and do root cause analysis, and they will quickly put this issue behind them," Hempstead says. "The trigger for the resi fee and address correction is often the result of human error."

However, he notes the lawsuit does allege that even if the inappropriate surcharges were the result of human error that FedEx executives knew of the issues and let them persist for years, which is the basis for seeking the triple damages.

"This is going to be an interesting case to watch for all parcel shippers," Hempstead says.

What's your take on these alleged overcharges by FedEx? Should more companies by doing parcel freight bill audits? Let us know your thoughts at the Feedback button (for email) or section (for web form) below.

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