All the parcel carriers will complete their 2008 pricing announcements in the next few weeks. Given the size of the increases announced so far, multichannel companies need to look at all options open to them and develop short and long-term strategies to reduce the impact.
United Parcel Service will be increasing Ground delivery rates by 4.9% in 2008, which is equal to last year. (FedEx will most likely match the UPS Ground increase, but that information has not yet been released.) Under new rates, the Ground commercial zone 2, 1-lb. rate has increased 5.0% over last year—overall, a 16% increase over three years, from $3.62 in 2005 to $4.20 in 2008. But if the majority of your shipments are in zones 4 or 5, as is often the case, the increase is about 5.16%.
Meanwhile, the Ground residential minimum charge increased to $6.15, a combination of the base rate for zone 2 and the Ground residential surcharge. In a quick survey of shipping tables of 66 multichannel companies, we found that 71% of the tables were lower than this $6.15 minimum charge.
As AFMS Logistics Management Group’s Managing Director Rick Collins points out, “The announced rate increases of 4.9% for Ground and 6.9% for Air from FedEx and UPS masks the true impact for many shippers. The base rates may average the announced increases across the board; however higher zone express shippers could experience increases in the 9%-10% range. Additionally, surcharges are increasing up to 20% in some cases. Surcharges for irregular and large packages are up 8.3% to 12.5%. Commercial remote add-ons are increasing 7.1% and residential fees are up 5.4% for Ground.”
With the continual increases in the cost of oil and shipping, multichannel merchants need to assess both short and longer-term strategies. Here are 15 short- and long-term options to investigate:
- Renegotiate your contract.
- Look for ways to use USPS to your advantage.
- Make sure you are using best-way rate shopping.
- Consider package weighing, and take out inserts when they push the package into a higher bracket.
- Try to leverage economies of scale using the same carriers for inbound and outbound freight.
- Investigate the economics of a second warehouse to reduce the distance and cost to ship to the customer.
- Reassess your shipping and handling table in light of the changes.
- If you’re going to use free shipping, re-assess the minimum dollar order value and its effects on your transportation costs—you may need to increase it.
- Review whether you should use by-item shipping charges in your Web and catalog copy for heavy and oversize products.
- Make use of package consolidators and zone skipping?
- Assess your total operation and determine if other costs can be reduced to help offset these increases.
- Improve your inventory forecasting and systems to improve inventory position and decrease the cost of back orders; keep in mind the $6.15 Ground residential minimum charge.
- From marketing and merchandising perspectives, try to increase the average order value so that shipping cost is not such a large percent of the average or small order.
- Review your policies for giving away free freight to return merchandise.
- Look into using an experienced transportation consulting company to help you get savings. If you’re big enough, it may be time to hire an internal specialist to continually assess and hopefully lower your costs?
Contract renegotiation is your No.1 weapon. How much can be saved will depend on a number of factors: how well prepared you are in terms of knowing your package shipping profile; knowledge of carrier pricing and what can be discounted and negotiated; the 70+ accessorial charges and how they make up your total costs, etc. An increase in the carrier’s list rates does not necessarily translate to higher shipping costs.
Another factor to consider is how important your account is to the depot or hub. We’ve learned that sometimes smaller accounts are much more important than management might realize, given the outbound volume.
The most nimble multichannel companies will determine how to offset these foreboding continual increases in the costs of getting goods to customers. We believe it will take all the weapons—both short-term tactics and longer-term strategies—to keep profitability from eroding.
Curt Barry is president of F. Curtis Barry & Co. (www.fcbco.com), a consultancy specializing in multichannel operations and fulfillment including freight cost reduction. Contact 804-740-8743, firstname.lastname@example.org.