This article originally appeared in the November/December, 2017 issue of PARCEL.
I often find myself explaining the importance of separating various cost reduction strategies. It is common for shippers to reference one or two cost reduction strategies and insinuate or assume that such initiatives will remove all excess costs from their total shipping budget. This is simply not the case, as there are multiple approaches to effectively reducing the shipping expense as a line item within an organization’s budget. If the mission is to reduce shipping costs, then shippers should separate the various approaches into two distinguished strategies: operational improvements and rate improvements, also referred to as carrier contract negotiations. I believe the misunderstanding in the marketplace is due to representatives from the carriers proposing operational improvements while trying to sidestep contractual rate improvements during a contract negotiation. The two strategies are not mutually exclusive; both are relevant, both have merit, and both should be pursued. Understanding the differences will empower shippers to keep their carrier(s) focused on bottom-line results generated from contract or pricing improvements while also dedicating separate discussions to operational strategies.
Top Operational Improvements
Operational improvements that can deliver a positive impact on your shipping budget include:
Package Optimization: Eliminating as much dead space from packaging as possible is becoming increasingly important as the carriers continue to alter their dimensional billing policies. At the beginning of 2017, the national parcel carriers lowered the standard DIM Factor from 166 to 139 (method by which the carriers bill for package dimensions), meaning higher billed weight, which translates to an increased net charge per shipment. If a shipper can reduce overall package dimensions by eliminating dead space, then they will have a greater chance of avoiding an upcharge due to dimensional billing policies. In summary, shipping air can be costly.
Zone Skipping: This entails consolidating or loading hundreds of parcel packages in to an LTL or TL freight shipment and line-hauling to a sorting hub that exists much closer to the end destination for all packages. The objective with this method is to remove the higher cost of outer-zone (zone 7 and 8, which is 1,401+ miles) shipments by replacing them with less expensive inner-zone (less than 600 miles, which is zone 4; or less than 300 miles, which is zone 3) shipments. So while a shipper will be effectively reducing their net charge per shipment, they are also incurring a freight (LTL or TL) charge; therefore, this strategy requires some intelligent analysis to ensure a positive net impact.
Adding Another Fulfillment Location: This strategy employs the same concept as above; however, instead of incurring a freight charge, the shipper is incurring the cost to either: 1) build/lease a building space, hire/train employees, etc.; or 2) utilize a 3PL for warehousing and/or pick, pack, and ship. Again, to ensure the net impact is positive, this would require modeling analytics to properly evaluate.
Omnichannel Fulfillment: This strategy is most often explored or implemented by shippers that have a significant brick and mortar footprint. Many retail locations can act as smaller fulfillment locations, consequently reducing the costly outer-zone shipments because the shipper can fulfill orders to the customer from the closest retail location. The most significant challenge with this strategy is the proper management of inventory across dozens, if not hundreds, of locations. Order and inventory management need to be highly integrated for this to be an effective cost-reduction strategy.
Least-Cost Routing Rules: This is a technology-based cost reduction strategy that will automatically choose the least expensive service category to deliver a shipment based upon time in transit (days to deliver) requirements. This technology is most commonly employed when there are multiple carriers involved. For example, the current list rates for UPS three-day service is, on average, 17% cheaper than FedEx's equivalent service. Therefore, a superior FedEx discount on three-day service doesn’t mean that it will be the least expensive method when compared against UPS.
Proper Service Selection: With the right transportation intelligence reporting, it is relatively easy to spot opportunities to optimize service selection based upon transit time. For example, express shipments being delivered to zones 2 or 3 (less than 300 miles) could be routed to ground delivery at a fraction of the cost with similar transit time. When a shipper pays for an express shipment designated to be delivered to zone 2 (within 150 miles) the shipper is paying for the package to be delivered via air; however, this package will never see the inside of an airplane. This package will be delivered via the ground network on a truck. Therefore, it is possible to reduce shipping costs by utilizing the less expensive ground service over the express service for all inner zone shipments. This is just one of many routing optimizations that can have a major impact towards reducing shipping costs.
The Parameters of a Carrier Contract
Understanding proper parameters of how a carrier contract can be improved to reduce shipping costs is an essential first step. Assuming these parameters are understood, the strategies below will help shippers effectively navigate the contract negotiation process.
State of Mind: Surprisingly, many large shippers will walk on eggshells around their parcel carrier, almost as if the parcel carrier was their customer. As a high-volume shipper, remember that you are the customer and your business can easily find a home with the incumbent’s competitor.
Competition: Involve them in the bid process. Sustaining competitive pricing is difficult when the incumbent carrier doesn’t feel threatened by its competitors. Make a strong effort to switch carriers every three to six years. Remaining with the same carrier for years on end can lull the carrier to complacency that results in less than competitive pricing. After all, why would they be motivated to reduce their own pricing if retention risk is perceived as a hollow threat?
Invoice Data: Analyze it. Unique shipping characteristics can be uncovered in weekly invoice data. These specific shipping characteristics will affect the carrier’s margins and, in turn, impact how the carriers propose their margin-based pricing. These critical components include service usage mix, weight distribution, zones frequently used, pick-up and delivery density, package weight and dimensions, and more. Therefore, every shipper has different criteria and a unique set of priorities when pursuing contract pricing improvements.
Minimum Charge: Don’t just focus on a better discount per each category. Know which service categories are material to your shipping profile. This will surface from proper analysis of invoice data. While pursuing an improved discount, it’s important to understand what relief is needed on the minimum charge to take full advantage of the negotiated discount. Otherwise, the discount will be reduced significantly from what is listed in the carrier contract.
Accessorials: Apply the 80/20 rule. Don’t assume the two most common accessorials (residential surcharge and delivery area surcharge) are automatically the most significant area of focus. It’s common that at least 80% of all financial surcharge impact is derived from less than 20% of all the incurred accessorial categories. Refer to a comprehensive analysis to identify the most serious offenders. Pursue discounts and relief in each of these categories with the incumbent carrier as well as with the incumbent’s competitor.
Dimensional Billing: Be aware of ann increase in the net parcel charge because of the dimensional calculation formula. Dimensional billing can have a significant impact on shippers and can be mitigated with operational improvements (see above) as well as contract improvements. The dimensional billing policy takes total cubic inches (length x width x height) divided by a DIM factor (recently changed to a more punitive number of 139); if this calculation results in a higher number than the entered weight, then the shipper is billed at a higher weight and incurs the associated increase. A higher DIM factor results in a lower calculated number, which means the shipper is less likely to incur a charge increase. A thorough analysis of package dimensions and the actual weight of packages will offer insight to the ideal DIM factor.
Business Case: Answer the WHY. Draft a message detailing why the carriers should respond to your pricing requests. There are specific and particular messages that will compel the carrier’s revenue management team to respond appropriately to pricing requests. Draft a business case so revenue management understands why, and is therefore motivated to respond with competitive pricing. Finally, make sure the few dozen pricing requests being issued are competitively appropriate. If a concession request is too high, the request will be ignored or declined by the carrier; and if too low, then money was left on the table.
ConclusionHopefully the delineation between operational improvements and carrier contract improvements will help focus initiatives to reduce shipping costs. It is also important for shippers to understand the relationship between operational improvement and pricing improvements. It is worth noting operational improvements will change the characteristics of an organizations shipping profile. A positive change in shipping profile will warrant positive change in carrier pricing. Both strategies can be pursued simultaneously. However, both processes should be aware of the others impact. There is a synergistic impact when pursuing both strategies together, where the combined results are greater than the sum of each separate process.
Trevor Outman, MBA, is Co-Founder & President of Shipware, an innovative audit and consulting firm focused on helping companies reduce their parcel and LTL costs 10-30%. After starting Shipware well over a decade ago, Trevor leverages years of experience analyzing volumes of parcel data and hundreds of carrier contracts to be an effective advocate for high-volume shippers. Trevor’s expertise has positioned him as a coveted consultant in the parcel industry. He welcomes questions and comments, and can be reached at: 858.879.2020 x117 or email@example.com.