Every business, in one way or another, has felt the effects of the gas price increases. Shipping costs have also been affected by this increase as surcharges have skyrocketed to cover the high prices of fuel for planes and trucks. Whether directly absorbing these costs or passing them on to the customer, this has been affecting business in some way. Shipping costs may not be avoidable, but they can be reduced by learning what actions make a difference.
In September, I had the opportunity to listen to the leading experts in our industry speak about the latest issues, trends and ideas at the Parcel Shipping & Distribution Forum, which was held in Chicago. Outlined below are the highlights.
First, you can anticipate that the prices for small packages are going to increase and this year, the changes could be significant. As we know, UPS, FedEx and DHL typically raise their rates in January. In May of this year, the U.S. Post Office (USPS) filed with Postal Rate Commission for a rate increase of about 8.5%. Analysis by Jerry Hempstead, the keynote speaker of the conference, showed that the increase will likely be much higher. With Priority Mail, the average increase for packages weighing three pounds or less will be 17%. This is where the majority of small parcel shippers utilize the USPS and where the rates are the most competitive with the other national carriers. The implication is that UPS, FedEx and DHL will most likely increase their rates even higher in these weight and zone brackets because the USPS sets the baseline. By the time this is published, we may know the numbers; my bet is that we will see a substantial increase that is higher than it has averaged over the past several years. My conclusion from this is that the price increases are going to hit the business to consumer (B2C) shippers even more significantly. Since the USPS does not have residential surcharges, it was the shipper of choice for low-volume B2C shippers with lightweight packages.
The second highlight was that most businesses can do better to reduce their shipping costs. David Ross and John Larken, financial analysts for Stifel, Nicolaus & Company, also attended the conference, and they concluded that shippers still have a lot to learn but definitely have opportunities to improve service and reduce costs. Small package shippers are still fairly uneducated when it comes to rate negotiations and alternative shipping options and fairly unsophisticated with respect to technology, though there are a lot of firms in the business of helping these folks. While getting better, shipping is still largely a business based on relationships. If more shippers put their freight out to bid more often, carriers would not have quite as much pricing power as they do now, and the less efficient carriers would likely suffer. My advice is not to become resigned that there is nothing that you can do about the upcoming increases. If you are reading this magazine, you are already on a path of learning, and I applaud you.
There is a great opportunity to reduce your costs by renegotiating your carrier contracts and using multiple carriers. No single carrier can serve all the needs of small parcel shippers. In the last issue, we saw the results of the Annual Best Practice Survey conducted by Morgan Stanley. Their survey dispelled a huge myth that shippers are frequently told by their carrier sales representatives that a shipper will lose a large part of their discount if they split their volume with another carrier. The magazine stated, UPS Volume Discounts Dont Vary Much: For shippers giving UPS 90% or more of their ground volume, the average discount is 26%; while those giving less than 50% receive on average, a 25% discount. For companies shipping between 50% and 90%, the discount averages 23%. In other words, it is simply not the best idea to give all your shipping business to a single carrier.
If you have a regional carrier in your area, it may be the best bet to reduce your costs. Some of these carriers can save you up to 50% on packages that qualify. The Morgan Stanley survey went on to say, Regional carriers are becoming viable competition survey respondents reported they give, on average, 1.5% of their next-day volume, 0.02% of their second-day volume and 0.9% of their ground volume to regional carriers. For our survey respondents alone, that represents over two million parcels.
Finally, another way to help minimize the impact of the rate increase is to absolutely, positively take a good look at your air shipments. Another interesting statistic presented by Ted Scherk of the Colography Group is that Thirty percent of all air shipments travel by ground. This means that companies are paying for a specific air service at a rate of two to four times more than ground, and they could have shipped it with a ground service and received delivery on the same day! To cut shipping costs for your company, have each sender note on the package when is the latest date and time it can arrive at its destination. This will help to avoid unnecessary express costs and give the sender leverage in selecting the right service.
Cutting shipping costs is possible with only a few steps. If your business can cut costs on enough packages, there will be a very noticeable difference in your bottom line. So consider some of these ideas, make the appropriate changes and prepare for the increase.