Last month, PARCEL, Traffic World and Navigo Consulting Group conducted a survey of over 660 shippers. The survey addressed how shippers are confronting rising shipping costs and whether or not shipping was a profit center. Additionally, the survey was designed to provide benchmarks for our readers to measure and evaluate your own chargeback methods.
The results demonstrated that shippers are primarily trying to control shipping costs by using different chargeback methods, changing their shipping modes and directly negotiating with their carriers.
Although 78% of shippers stated that they passed on the cost of shipping and handling to their customers, only 51% stated that shipping was a profit center, 26% stated that it was a cost center and 23% indicated that they didn’t know. The majority of our respondents shipped under 500,000 parcels per year and 53% were primarily B2B, while 35% were B2C and 13% were divided equally.
Today’s rapidly rising freight costs have become a challenge for shippers. Not only have the carriers implemented record tariff increases and fuel surcharges, but they are constantly adding new accessorial charges as well. In the last six years, the parcel carriers have added or increased surcharges on 22 occasions, resulting in increased overall accessorial costs of 128%.
While all shippers struggle to make shipping a profit center, it becomes clear that B2C shippers are having a much more difficult time recapturing shipping costs (See Table 2). This is not too surprising as the carriers have consistently increased residential tariff rates, charged higher add-ons for residential shipments and applied more accessorial charges to residential shipments in general. For example, the Delivery Area Surcharge (DAS) fee to a commercial address is $1.50, but 53% higher to residential addresses at $2.30.
Shippers are utilizing a wide array of chargeback methods in their efforts to make shipping a profit center. The most common method was to chargeback using actual carrier costs that included all surcharges as well as a handling fee (29%). Although this may seem like a fail-safe way to create a profit center, fully 20% of these shippers stated that they were still losing money on their shipping.
There are a number of reasons that this could happen. First, it is very difficult to truly know that you are passing along all of your actual carrier costs. Fuel surcharges change monthly and have fluctuated wildly. Also, if you charge back at the point of order entry, you will not capture back-end charges like residential surcharges, dimensional weight, reweighs and address corrections.
The next most popular chargeback method (17%) was to apply actual carrier costs, but without a handling fee. However, with this scenario, 25% of shippers reported their shipping was losing money.
Clearly, chargeback methods affect the profitability of shipping operations. Survey respondents who claimed that shipping was profitable utilized the following three methods: 1) Charging a flat rate (14%), 2) applying published carrier rates (14%) and 3) Charging based on the dollar value of the order (14%).
More importantly, the survey showed that shippers who adjust their shipping and handling more frequently have the best chance of making shipping a profit center. Ninety-five percent of shippers who believed that shipping was a profit center actually reviewed and adjusted their rates annually. The majority of these shippers (52%) made corrections every six months or less.
Despite your chargeback method, there are a number of actions shippers can take to ensure that shipping doesn’t become a cost center. We recommend installing Residential Delivery Indicator (RDI) software on your order entry system to identify higher cost residential shipments on the front end. Typically, the carriers do not extend their deepest discounts for these shipments, and they apply an add-on charge of $1.95 (ground) or $2.30 (air). Another mistake is to rely on the carriers to apply the correct commercial/residential designation. This leads to higher costs and doesn’t allow you to really determine true upfront costs.
If you are an oversize shipper, or have been experiencing carrier re-weighs, it is important to accurately capture shipment characteristics at shipment origin. Invest in accurate scales and cubing equipment so you can precisely determine the billed weight of the shipment. This is one way to ensure that there won’t be any surprises when the carrier invoice arrives.
Depending on your manifesting system, you may or may not capture DAS fees on the front end. This can increase a shipment cost by $1.50 to $2.30. Overall, the carriers apply DAS charges to shipments going to nearly 24,000 ZIP Codes out of approximately 43,000. And, over 25% of the U.S. population lives in a DAS ZIP Code. The carriers can provide tables of DAS ZIP Codes. Download the table to your order entry systems or use the carriers’ APIs for real time rating.
Increasingly, shippers are also trying to utilize carriers’ services to control shipping costs. Thirteen percent of respondents have changed shipping modes, five percent have implemented zone skipping and modal optimization and nine percent have used the USPS’ services. Primarily, accessorial charges like fuel surcharge have motivated shippers to find less costly modes of transportation. There are significant cost differences between air and ground shipments. However, many shippers have also found that there are fewer service differences between air and ground shipments and have been able to take advantage of the carriers’ next day ground guarantee for shorter zones. In addition, the US Postal Service offers many attractively priced products that can reduce your overall your overall shipping costs.
Another approach many shippers have taken is to try and lower shipping costs by renegotiating their contracts with the carriers. Thirty-two percent of shippers have either renegotiated their contracts or have switched carriers. It is an extremely competitive marketplace today, and many shippers have been able to take advantage of these circumstances. Shippers who renegotiated their parcel contracts within the last six months were more likely to report shipping as a profit center, while the shippers who have not renegotiated their contracts within the last 18 months are losing money on shipping.
While it is important to partner with your carriers and to have long-term relationships, you may not be taking advantage of current market conditions and pricing. In today’s tough times, your carrier may be willing to give you rates and concessions that were not previously available.
Where does this leave shippers? It is clear that there are a number of roadblocks as well as opportunities for shipping to become a profit center. For many, recovering your shipping costs from customers must be balanced with the marketing value of low-cost or even free shipping for their customers. Watch your shipping costs closely, constantly engage and partner with your carriers and continually review and evaluate your chargeback methods.
Tim Sailor is the founder of Navigo Consulting Group, which specializes in contract benchmarking, distribution analysis and carrier negotiations. If you would like to discuss these results further, contact Tim at 562-621-0830 or Tsailor@NavigoInc.com. The survey’s full results can be downloaded at www.navigoinc.com.
