This article originally appeared in the March/April issue of PARCEL.
With the recent GRI increase and carrier tariff changes that have just become effective, it is a very good time to review your company’s shipping profile and costs. Most people know that their year- over-year shipping costs have increased, but they probably don’t know by how much. This is also complicated by the fact that the annual increases vary by service level, zone, and weight. And, as shippers have figured out over the years, the actual increase is always more than the “average increase” announced by the carriers.
Other than quantifying the GRI, understanding your shipping profile is the first step to effective transportation management. With data and insight, you will do a better job managing your carriers as well as ensuring that your carrier contract is best suited for your unique shipping profile. This knowledge will also give you a great deal of credibility with your carrier reps and level the playing field when you renegotiate your agreements.
There are several simple and effective ways for you to identify and quantify what factors are driving up your costs — without the use of specialized software or outside analysis.
START WITH THE BASICS
Almost all of the information you need is contained in your weekly electronic billing files from the carriers. While FedEx and UPS don’t make their billing formats very user-friendly, there are ways for you to get some valuable insight.
Begin by eliminating as many data fields as possible. This will make it easier to manipulate. At a minimum, the fields you should keep are tracking number, service level, shipment weight, zone, tariff and net shipment cost, incentives, and accessorial costs.
To start, break out the shipment detail by service level and tracking number. This will tell you what services you use the most. Quantify both the shipment count as well as the revenue. Many times you will be surprised that a bigger part of your shipping dollars go to services that you don’t think you use, and these services may have poorer discounts or none altogether. Also, once you summarized the service levels, you can calculate what your average cost per shipment is. This is helpful if you are trying to cover free shipping offers or deciding what your standard shipping charge should be.
DISCOUNTS, ZONES, AND ACCESSORIALS
Another analysis we conduct is to look at actual discounts you receive on a shipment-by-shipment basis. Most carrier invoicing shows both the tariff rate as well as the net rate. By comparing the net rate to the tariff rate, you can determine what discount percentages you actually receive. Many times, shippers discover that they are receiving fewer discounts than they thought. You can take this data and look at your contract incentives to make sure that they match. Since most contracts contain both incentives and thresholds, you want to make sure that you are maximizing all the discounts and incentives in your agreement.
Many of your ground shipments can be affected by the Zone 2, one-pound minimum shipment charge, so it is vital to analyze its impact. This year, it is especially critical as FedEx and UPS will have different minimums for the first time. Once you have established your net shipment cost, sort the charges and look for shipments costing $7.25 (FedEx) or $7.32 (UPS). For a lot of shippers, more than 50% of their shipments are impacted by this minimum charge. Essentially, because of the minimums, these shipments go out undiscounted. If this is the case for you, it is probably more important for you to ask your carrier for a minimum reduction than it is to negotiate higher discounts.
Once you have established your base shipping charges, it is important to look at your accessorial costs. These add-on charges can easily exceed 20% of your total shipping expenditures or more. These add-on charges are also part of the General Rate Increase each year and usually go up more than the tariff shipment rates. Typically they are also not covered by most GRI caps, so you are subjected to full market increases. The two most common surcharges, Delivery Area Surcharge and Residential Delivery Surcharge, went up 6.5% and 6.2%, respectively, this year with FedEx. Also, for the first time, the carriers will be calculating the fuel surcharge on a weekly, not monthly, basis.
Most carrier invoicing will break out each accessorial charge. Sort and subtotal these charges to find out the additional cost per shipment and which surcharges are impacting your expenditures the most. Like your base shipping charges, these surcharges can and should be discounted depending on your volume.
If you ship oversized packages, it is particularly important for you to understand your shipping characteristics and box sizes. Over the last two years, the dimensional rules and costs have changed dramatically. Some surcharges, like the Additional Handling Fee, have seen double digit increases. Now, all package sizes are subject to dimensional pricing, and the dim factor continues to go lower (it’s now at 139). These changes mean that your shipment weight and costs have gone up.
The first analysis you should perform is to look at the entered weight and then the billed weight column. Subtract the difference on a shipment-by-shipment basis to see how much more the package billed weight is. If your invoicing does populate with your L x H x W dimensions, multiply it out and then divide by your dim factor. Doing these calculations will also allow you to perhaps get a customized dimensional factor where the shipment weight and billed weight are more equal.
Knowing your dimensional/billed weight for your shipments may also become a factor in deciding whether or not to look at different services like UPS SurePost and FedEx SmartPost which have different thresholds and dimensional factors. Your shipment costs will go down because of the different rate structure and a lower billable weight.
We have found that for most shippers, there are many disconnects between usage and these agreements. For those shippers that commit the time and resources to understand and evaluate their shipping profiles, they will lower their shipping costs considerably and obtain much better carrier agreements going forward. Good luck!
Tim Sailor is the founder of Navigo Consulting Group, which specializes in contract optimization, distribution analytics, and strategic sourcing. Since 1995, Navigo has reduced its clients’ shipping costs by 20%-30%. Tim has been recognized as a Distinguished Logistics Professional by the American Society of Transportation and Logistics, Inc. and has contributed to the transportation industry for over 30 years. You can reach Tim at 562.621.0830 or Tim@NavigoInc.com.