Reducing shipping costs

Jul 01, 2005 9:30 PM  By

We live in what may be dubbed, to use a cliché, the Information Age. No matter what you’re looking for, whether it’s advice on your love life or products to streamline your operation, you’re likely to find it somewhere, often for free or at very little cost. So when it comes to controlling shipping costs, there are no magic tricks; industry experts say that most probably, you’ve already implemented many of the techniques they recommend. To further push down costs, they advise, you will need to fine-tune these techniques, spend considerable amounts of time researching and comparing vendors, and most important, be constantly on the lookout for new ways to eke out more savings.

This commonsensical approach to shipping cost control will work if implemented properly, says Jeff Kline, president of Kline Management Consulting, an operations and fulfillment consulting firm in Collierville, TN. For instance, although it may seem obvious that selecting a carrier must be done with the utmost care, direct marketers often neglect to do their homework before choosing one, he says. The top three things to look for when evaluating a parcel shipper, according to Kline, are cost, time in transit, and account management capabilities: “Be sure to look at all costs, including accessorial charges. Compare how long the package takes to get to actual destinations from your shipping location. Who will manage your account? Will they be responsive? Will they go to bat for you? This is more qualitative — talk to references.”

Obtaining competitive bids from commercial carriers such as FedEx, United Parcel Service, and DHL is another valuable cost-cutting tool, adds Kline. This involves providing them accurate information about your operation’s shipping volumes and package characteristics, but if you use a consultant to prepare a request for proposal and manage the negotiations, your savings can be significant.

For instance, Kline says, one of his clients, a midwestern business-to-business supplies catalog, saved about 20% through a multicarrier competitive bid process, and thanks to expert negotiations the cataloger didn’t even need to change carriers. Competitive bids enabled a consumer catalog in the Northeast to save 13% and another catalog in the Southeast to save 12% on shipping, making only minor changes or none at all to their existing carrier mix. And much of this rate shopping can be done manually or with standard manifesting systems, Kline points out — there’s no need to invest in expensive software.

Inbound shipping is another area that few direct-commerce companies exploit to their full advantage. Kline says that there are numerous ways to save on the costs of merchandise shipped directly from vendors to the direct marketer’s warehouse. “Make sure your current parcel carrier discounts your inbound collect or third-party shipments,” he warns. “If you don’t ask, sometimes you don’t get. Take charge of your vendors — provide them with specific shipping instructions. Tell them what carrier to use and the maximum weight to ship via your parcel carrier. Larger shipments should be routed less-than-truckload [LTL]. Avoid ‘prepay and add.’ Require vendors to use your small-parcel account number — collect or third party — when shipping to your warehouse or customers. Consider using a professional company to improve control over inbound vendors.”

Going postal

Ironically, the U.S. Postal Service’s 2006 rate case, filed on April 8, may open up a variety of shipping options for direct marketers as they seek to dodge higher costs. As rate hikes go, the across-the-board 5.4% increase appears to be moderate enough for most shippers to handle, but it still involves scrutinizing relationships with parcel carriers, evaluating and comparing rates more closely, and looking for new ways to streamline shipping processes.

According to Kevin Collins, senior vice president of business development for APX Logistics, a third-party logistics provider specializing in small-package delivery solutions, the USPS’s current proposal is the first since 1994 to set a flat rate across all mail classes and weights, and it is a lower increase than is traditional for most parcel services. It compares favorably with commercial carriers’ rate hikes, which, although they have been relatively modest, have tacked on so much in surcharges that the “real” fee the shipper pays is far higher.

“Although the commercial carriers’ announced annual rate increases are less than 3%, a closer analysis of 2005 package rates by weight and zone reveals that rates increase more than 5.5% when considering additional surcharges,” Collins points out. Even if these accessorial fees do not apply to all packages, the cost, he says, “can be significant if you have a high percentage of deliveries to residential addresses” or rural areas.

APX is a package partner with the USPS and the largest mailer of packages sent through Parcel Select, a service designed to provide economical ground delivery through three points of entry (BMCs, SCFs, and DDUs) — and thereby three levels of savings — into the USPS system. The closer to its ultimate destination that the package is dropped off, the lower the cost to the Postal Service, and the higher the shipper’s savings.

Adding value

In addition to economies of scale and deeper entry into the postal system, consolidators provide a host of value-added services, including customized rates, pick-up, tracking, delivery confirmation, billing, and specialty retail fulfillment. Consolidators such as APX, says Collins, are less affected by postage increases because only a percentage of their costs are postage-related. To take the example of a 5-lb. parcel going to Zone 4, the DDU postage rate prior to the increase was $1.43; with the 5.4% increase, the rate becomes $1.51, just $0.08 more for the consolidator to pay. The total delivery rate for this package would go from $4.60 to $4.68, a mere 1.7% increase for the shipper. Therefore, consolidators are cost-effective options for any company with high-volume residential deliveries.

Taylor’s tips

For small-parcel shippers, the U.S. Postal Service still remains a terrific bargain, says Mark Taylor, CEO of Taylor Systems Engineering Corp. and an authority on how to save money in shipping operations. In his view, the USPS rate case will not affect shippers’ niche opportunities. For example, he says, for an eight-ounce First Class package, even at what would be the new rate of $2.21 (the current rate is $2.11), the USPS wins the carrier race hands down; to compete, other carriers would need to offer a 40%-50% discount. Similarly, the forthcoming USPS Priority Mail flat rate of $4.05 for a one-pound package is unbeatable — for UPS to even get close, its discounts would have to be on the order of 19%-29% for residential deliveries and 44%-50% for commercial service.

Like Kline, Taylor believes that time in transit is a critical factor to consider: “It is one of the greatest areas in which your business can save money.” Before you shop for carriers, find out when and how your customer wants orders delivered. The answer could save you thousands of dollars. A 5-lb. USPS Priority Mail parcel reaches its destination within two days 90% of the time and costs $12.15; a similar package runs $15.01 at FedEx and $16.92 at UPS, but the two-day delivery is guaranteed. And don’t forget the USPS’s Media Mail category, Taylor adds: Provided you are not shipping any advertising material — not permitted under this classification — Media Mail is a highly economical way to send such items as books, manuscripts, film, CDs, videotapes, and binders.

Selected UPS Surcharges
Surcharge 2004 rate 2005 rate Difference
Ground Residential $1.40 $1.50 $0.10
Air Residential $1.40 $1.75 $0.35
Ground Fuel 0 2.0% n/a
Delivery Area
Commercial $1.00 $1.25 $0.25
Residential $1.75 $2.00 $0.25
Declared Value $0.35 each add’l.
$100 after first $100
$1.20 min. for $100.01-$300 value; $0.40 for each additional $100 Min. charge and $0.05 increase per $100
Sources: USPS, APX
Surcharge for One-Pound Parcel
Commercial with Delivery Area Surcharge
Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone 7 Zone 8
Zip 48137 26601 62067 66830 79068 85245 95531
USPS $4.05 $4.05 $4.05 $4.05 $4.05 $4.05 $4.05
UPS $4.97 $5.06 $5.18 $5.34 $5.55 $5.61 $5.73
Difference $0.92 $1.01 $1.13 $1.29 $1.50 $1.56 $1.68
Discount needed 19% 20% 22% 24% 27% 28% 29%
Residential with Delivery Area Surcharge
Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone 7 Zone 8
USPS $4.05 $4.05 $4.05 $4.05 $4.05 $4.05 $4.05
UPS $7.27 $7.36 $7.47 $7.63 $7.85 $7.91 $8.02
Difference $3.22 $3.31 $3.42 $3.58 $3.80 $3.86 $3.97
Discount needed 44% 45% 46% 47% 48% 49% 50%
Note: Current USPS one-pound rate is $3.85; proposed rate is $4.05
Source: Taylor Systems Engineering Corp.

Modern Maturity

Peter Gaylord has been working at Burlington, VT-based Gardener’s Supply Co. for 21 years. He manages its fulfillment operations and is responsible for nearly 120,000 sq. ft. of merchandise in two locations. Gaylord is one of four employees at the company who were among the original staff when the cataloger opened for business in the 1980s.

His opinions on the subject of controlling shipping costs are of particular interest as he has helped guide the development of Gardener’s Supply from a struggling start-up to the vigorous multichannel marketer that it has become. Gaylord has faced the issues of shipping cost control from the beginning, and the techniques he uses and the lessons he has learned follow the “curve of maturation” of a growing company. We recently asked him to provide some advice to newcomers, and he offered the following tips:

  1. Share and share alike

    Always make time to speak to salespeople from shipping companies. It is the keenness of the competition that drives costs down. Also, ask your sales reps how to extend their services, as their compensation is usually tied to the productivity of the account. The more of your business that they can capture, the better life gets for them. Share your challenges with them, and let them think of ways to help you.

  2. Test your delivery results often

    For instance, when conducting samplings, Gardener’s Supply uses a bright yellow response card on the outside of its parcels, asking customers to evaluate the service. The response rate on these efforts is surprisingly strong — 12%-14% of the postage-paid cards are filled out and returned. The results are easy to tabulate in a simple spreadsheet. Gathering such data dispels any doubt about how well you are meeting your objectives. This information can often reveal hidden problems that your shipper hasn’t yet discovered.

  3. Study your billing statements carefully

    This simple habit has saved the company many thousands of dollars over the years. Incentive programs are complex, mistakes are easy to make, and special surcharges and fees constantly pop up, sometimes without warning or justification.

  4. Keep database of addresses clean and accurate

    Among non-USPS shippers, address corrections will cost up to $5 each on a ground shipment, $10 each for any kind of expedited delivery. If your customer happens to have four boxes shipped on the same order, the penalties quadruple. Addresses are maddeningly complicated, especially in growing suburbs or cities. The mistaken letter designation for an apartment can easily gut the return out of a sale. Take advantage of the numerous Web-based address correction software programs now available. These can be built into your manifesting system.

  5. Know your own shipping operation

    Train your staff to understand the rules on size, volume discounts, zones, consolidation programs, and time of day. These formulas are complicated and subject to abrupt change. At Gardener’s Supply, the end-of-the-line position of “manifester” is reserved for senior, full-time staffers who have been trained and demonstrate an aptitude for complexity. Warns Gaylord, “Do not hand your seasonal help a scanner and put them at a scale. The damage you can do to yourself gets ugly, quickly.”

    In addition, make sure that exceptions and notices of special circumstances are posted where the manifester can refer to them. “We always keep charts and bulletins at the end of the line. You need to get all the current information in front of the people who use it all the time.”

  6. Separate the responsibilities of inbound and outbound freight management

    Inbound costs are always enmeshed with margin and basic merchandising; shipping costs are always part of cost accounting. Different skill sets are required to manage the two aspects of freight. Since rates are based on volume, it makes sense for direct marketers to “pay” for all inbound shipping costs as part of product pricing.

  7. Be prepared for hidden costs

    Especially when you make a change in shipping providers, understand that it takes a long time to set up a new system with new rules — and that these may come at a price. You may need to modify the rate-shopping software that is built into your shipper-provided manifesting system and scour your operating systems to make sure that old logic is updated to react to new business conditions. “Six months is none too short as a ‘burn in’ time for a new service provider,” says Gaylord. “While you need to remain alert to cost-saving opportunities, you cannot change your partner too frequently without creating opportunities to lose money.”

  8. Cultivate the habit of vigilance

    Developing a watchful mindset is essential, Gaylord says. “I know we are missing something, somewhere, every day. Keep your mind trained to look for fugitive or well-camouflaged opportunities to save money on shipping, and encourage your employees to do the same. You cannot find an opportunity unless you are looking for it.”

  9. Don’t think of your shipping and delivery options as carved in stone

    Your customers may be a lot less demanding than you think. Gaylord, like many of us, grew up waiting six weeks for the delivery of his X-Ray glasses ordered from the back of the cereal box. But even though those days of unacceptable delay are long gone, he remains surprised at how patient his customers actually can be. “We deal with gardeners, so perhaps their innate patience explains why they are so frequently delighted with three-day delivery.”
    RR