In the midst of surging fuel surcharges and carrier rate increases, many online merchants are actively engaged in efforts to reduce shipping costs.
Shipware recently conducted a national survey to identify shipper’s strategies to drive down shipping costs and increase efficiencies. This article addresses the top 5 survey responses by ecommerce shippers when asked, “What steps have you taken over the past 12 months to reduce parcel costs?”
While survey responses vary by shipper size (package volume) and other factors, several common strategies emerged from the study of ecommerce companies. (Figure 1)
Figure 1 – What steps have you taken over the past 12 months to reduce parcel costs (Check all that apply)?
Source: Shipware, LLC “Parcel Pricing & Benchmarking Survey”, September 2011
1. Renegotiate Parcel Pricing Agreement
36% of ecommerce shippers surveyed – more than any other cost savings strategy – renegotiate pricing with their parcel carriers as the primary means to keep costs in check.
So how do you negotiate best-in-class parcel contracts with FedEx, UPS and other parcel carriers?
Before stepping up to the negotiating table, shippers should collect and analyze service usage, expenditures, accessorial charges and other variables. The objective of this analysis is to develop a list of opportunities and priorities to be negotiated in order to generate the greatest cost savings.
Shippers should identify the impact of add-on fees for residential deliveries, extended areas, fuel surcharges, weekly service fees and other handling charges. There are more than 100 of these “accessorial” charges that make up to 30% of overall shipping costs. Quantify which surcharges have the greatest cost impact and target those accessorial charges for waivers or reductions during negotiations.
Small changes to carrier agreements can have a large impact on overall savings. In addition to pursuing lower accessorial charges, of course, try to ameliorate overall discounts as well as contract terms.
If possible, conduct benchmarks to determine what range of discounting is possible and how your rates compare to other shippers of similar size. If you lack the ability to benchmark internally, third party consulting companies can conduct benchmark studies by industry, carrier as well as package volume.
2. Greater Use of the US Postal Service, Regional Carriers and Deferred Shipping Options
30% of ecommerce shippers surveyed have shifted some UPS and FedEx packages to less costly alternatives like the US Postal Service, regional carriers and postal consolidators.
Not surprising, since Priority Mail, First Class Parcel Service and other USPS products can cost up to 70% less than comparable services with FedEx and UPS.
Mary P. Anderson, USPS Manager of Pricing, Sales and Communications for Expedited Shipping feels the Postal Service is a force to be reckoned with in the shipping industry. “We already go to every door every day. Competitors often need to make an additional stop to residences; we just drop them off with the rest of the mail. We’re the only carrier that can put items in mailboxes, P.O. Boxes, or residential mail slots. We offer free package pickup six days a week. We go to every address for the same price whereas our competitors impose ‘extended area’ surcharges. And we have no extra charges for Saturday delivery, residential delivery or fuel surcharges.”
In addition to the USPS, shippers can potentially lower costs by using regional carriers. Like the name connotes, regional carriers serve a specific region within the U.S. and are ideal for shippers with multiple distribution centers, especially if the D.C.’s are aligned to the regionals’ delivery footprint.
Regional carriers like Eastern Connection, Lone Star Overnight, OnTrac, Spee-Dee Delivery, Pitt Ohio and others offer reliable parcel delivery services at rates as much as 40% less than national carriers.
In addition to regional and postal options, consider adding deferred, residential ground alternatives to your website, which may take a day or two longer but at a fraction of the cost. Parcel consolidators specialize in lightweight, low value, residential deliveries at rates often lower than USPS pricing. Other benefits include improved shipment visibility and less handling and damage.
Outdoor apparel and textiles manufacturer Woolrich, Inc. significantly reduced its overall shipping costs by shifting the majority of its Ground residential shipments to deferred ground services using a postal consolidator. Conrad Schlesinger, Woolrich Distribution Manager stated, “Almost 90% of our online orders shifted from UPS Ground Residential to UPS Basic, and the only change we made was moving to the lower cost, deferred ground alternative.”
Companies that offer parcel consolidation service include FedEx SmartPost, UPS (UPS Mail Innovations, UPS Basic and UPS SurePost), Streamlite, Blue Package Delivery, Newgistics, DHL Global Mail, Fairrington Transportation, Kaleidoscope Services, OSM Worldwide, ParcelPool, and SP Express.
Each leverages USPS Parcel Select services and workshare discounts. Consolidators handle pickup, sortation, transportation and induction to the USPS hub. USPS handles the “final mile” delivery. The deeper the induction to the USPS, the greater the workshare discounts enjoyed by the consolidator, and in turn, the greater the cost savings available to shippers.
While the goods being purchased often dictate the shipping method – frozen steaks on dry ice must be shipped for delivery within 2 days – presented with choice, many online shoppers will choose the low cost (or free) delivery option even if it means a longer transit.
3. Pass Along Shipping Costs to the Customer
26% of the survey respondents control costs by simply passing along shipping charges to customers.
However, charging back all costs associated with each shipment can be challenging, as many charges are tacked on long after a shipment has been manifested – as much as 20-25% of total shipping charges. These “backend” charges appear on carrier invoices as separate charges often weeks after the original shipment was charged.
These include FedEx and UPS charges like Address Correction fees ($11 Air/Ground, $50 Freight), residential surcharges ($2.55 Ground, $3.00 Express), Additional Handling Service ($8.50), Large Package Surcharges ($55), Delivery Area Surcharges ($2.00 commercial DAS, $3.00 residential DAS), Invalid Account Number ($11), dimensional adjustments, duties and taxes, and additional Fuel Surcharges.
Many ecommerce companies assess a “handling fee” in an effort to account for some of these backend charges.
How do shippers charge back shipping costs? Results from a 2008 Parcel survey (Figure 2) reveals that 46% of shippers surveyed charge back actual carrier costs including surcharges, with 59% of that group including a handling fee (27% of all survey respondents). Other common charge back methods include flat shipping rates for all orders (13.5%), basing the shipping charges on the order value (11.5%), and charging the customer at the carrier’s published (undiscounted) rates (13%).
Figure 2 – What basis do you charge back shipping costs to customers? Source: Parcel “Creating Shipping Profit Centers Survey”, November 2008
4. Audit Freight Invoices
23% of survey respondents have increased efforts to recover some costs by auditing their weekly carrier invoices.
Each year more than $3 billion in “guaranteed” service claims are not refunded because claims are never filed. Shippers that take the time to audit invoices can tap into this often overlooked source of cost savings.
In addition to late shipments entitled to money back guarantees, audit for missing discounts, overcharges, shipments manifested but never shipped, and other erroneous charges common with parcel invoices.
For companies unable to audit internally, consider outsourcing to audit firms that specialize in parcel spend management. A qualified freight audit firm can produce weekly savings between 1-15% of the total weekly parcel invoice.
5. Zone Skipping and Drop Shipping
17% of survey respondents employ “zone skipping” as a strategy to reduce costs and improve delivery times. Zone skipping, or zone jumping, is usually an option for volume shippers and involves bypassing parts of the initial transportation segment by dropping off packages closer to the final destination within a carrier network.
Bakers Footwear, a retailer of shoes and accessories based in St. Louis, MO successfully zone skips the majority of its store-bound merchandise.
According to Charlie Kantz, VP of Distribution, Bakers Footwear saves an average of $2 per carton by zone jumping. “We hired a logistics consulting company called Lighthouse Consulting to analyze cost savings opportunities. Our warehouse in Carson, CA receives all inbound freight from Asia, and then ships to stores in 36 states. Lighthouse found that by line hauling orders directly into three strategic FedEx Ground hubs in Barrington, NJ, Atlanta, GA and St. Louis, MO, we avoid incurring higher costs that would otherwise be considered Zones 6-8. By zone jumping, approximately 80% of our freight is rated as Zone 2-3, with no loss in transit days,” Mr. Kantz stated.
Another operational strategy to reduce logistics costs is to drop ship orders from vendor locations.
AutoAnything, a San Diego based online retailer of specialized automotive products manages to control logistics costs in part through an extensive vendor drop ship strategy according to David Klein, AutoAnything Co-President. “AutoAnything’s drop ship business model virtually eliminates the need to for warehousing and inventory management. Our vendors manage inventory on over half a million SKU’s, enabling us to maintain shipping costs amongst the lowest in our industry.” Mr. Klein stated.
Of course, there are dozens of other strategies, services and technologies that can help you contain or reduce costs. However, the strategies discussed should point you in the right direction and make you more competitive in your market.