Savings Banked

Nov 01, 2003 10:30 PM  By

Ten years of miracle-managing your DC, and they still expect you to find ways to cut costs! It’s October, the first holiday book has dropped, and you are totally ready. Over the last three miserable years of disappointing profits, you have pulled rabbits out of more hats than California had gubernatorial candidates. Without the capital to invest in fancy equipment or software, you have reconfigured your storage media, built a “fast-fill” system from the ground up, squeezed your payroll, re-slotted your picking area, and instituted a performance-based incentive system. Errors are trending downward, productivity is up, and service levels to your customers have been maintained and actually improved slightly. And still they are after you to find more ways to save.

Every week you look at your cost report, and every week there are slight improvements in every category, except one: shipping costs. If anything, what with postage increases and rate inflation from your overnight shippers, those costs keep rising. And in the face of last year’s “free shipping” craze, these figures stand out as the one immutable cost that is beyond your control.

Or is it? What if you could find a way to take advantage of the pre-sorted volume discounts offered by Parcel Post through the U.S. Postal Service? Sure, you don’t have the volume with your 5,000 parcels a day to sort by all the bulk mail centers nationwide. But man, if you did! Why, you could cut $1.50-$2.00 off the cost of each parcel and drive it straight to your bottom line. Certainly, savings of $7,500-$10,000 per day would get some appreciation at headquarters.

But there’s no point in thinking this one over again. Your volume is too small and you ship to too many addresses to ever hit those delicious targets….

THE OPPORTUNITY

Enter the consolidator. A growing number of new and not-so-new companies have jumped into the business since the 1990s. They collect parcels from a number of distributors and bundle the shipping streams. This allows them to feed off the discounts and split the savings with you so that everybody wins.

Promoting themselves as the “low-cost alternative to private shippers,” these companies have opened up a low-cost shipping option to every fulfillment operation with the right merchandise in the right place. The result allows you to insert your parcels farther downstream through an intermediary that sorts and blends parcels into delivery units like ZIP codes. This allows smaller firms to get into the discounting game with Parcel Post.

A consolidator needs trucks, drivers, his own storage and distribution center, and software sufficient to handle inbound and outbound parcels with a sense of urgency. Oh, and of course, trained labor.

Some of these companies are stand-alones that do only consolidation for their living. Others are offshoots of established businesses that own, and are familiar with, many of the elements required to do this work.

Printers are an example. They already produce vast quantities of bulk mail and know full well how to interface with the USPS in getting pre-sorted mail to its most economical point of insertion. Consolidation is a natural for them, a way to even out the stretches of inactivity between printing jobs. So each consolidator is configured differently, but all thrive by providing the same service to you: cutting your shipping costs.

So is it right for you? The answer may frustrate you. My first boss told me that he was determined to find a one-armed attorney because he was so tired of paying for legal advice that started with the phrase “But, on the other hand…” Conditional answers can quickly come to sound like equivocation, but in this case the answer really is “It depends.”

THE CHALLENGES

Consider the logistical challenge. Once you have processed your merchandise, you put it in your consolidator’s truck. Now your products must undergo an additional iteration of shipping, receiving, holding, sorting, manifesting, and redistribution before they even get back on their way to the Post Office.

Consider the business challenge. You have to negotiate a mutually acceptable savings split with your new “partner,” know where your parcels are at all times, have a tracking system that can handle this additional layer of complexity, and absorb the additional delivery time that goes with all that.

And, perhaps most important, consider the challenge of keeping a new shipment protocol invisible to your customer.

Remember the dirty little secret of the mail order business? Your merchandise can get into the hands of your customer at your cost as long as you are making a profit on your shipping and your list rental. Consolidation follows this line of reasoning. You share the savings with the consolidator, not with your customer.

KNOW THYSELF

So what does it take to choose a consolidator? And who needs to know? First, there are a number of good reasons not to consider consolidation as a cost cutting option for your business. (Please refer to the sidebar below.)

If you’re still interested, prepare to negotiate with multiple candidates who speak a language peculiar to consolidators. Any initial discussion will focus around the concept of the shipping cost of an “average parcel.” You will need to know what your own particular average parcel is. How big? How heavy? How many per day, week, and catalog drop? What are you paying for shipping now? How much time in transit? These are all data points tucked in various parts of your reporting network that you will need to recombine to evaluate the risks and benefits of working with a consolidator.

What you need to create is a “weighted” average that takes into consideration the characteristics of your order profile. This will allow you to compare estimated costs against other alternatives. The table on page 33 is an actual weighted average comparison of a 5,000-parcel-a-day shipper.

KNOW THY CUSTOMER

Using a consolidator will extend your delivery durations. You can expect an increase of roughly one to four days in transit when shipping from the East Coast with a consolidator.

How badly have you spoiled your customer with your current standards? What does he expect as your “standard” delivery time? Once you have separated your exceptions to standard shipping (under 1 lb., overnight, second day, etc.) how long does your product spend in transit? And how much longer can it remain in transit without setting off a “frustration bomb?”

TEST YOUR RELATIONSHIP

The answer to this question lies in a testing program. A typical program will utilize a postage-paid card inserted with your parcel that you ask your customer to fill out and return to you. Ten to twenty percent of them will usually oblige. By asking subtle questions about “timely delivery” and “level of satisfaction,” you should know whether your service is sitting well with your customers. If you are considering increasing delivery times, ask targeted questions before and after instituting a consolidation program and measure the results. Remember, if you don’t measure, you can’t manage.

Using a consolidator will also increase your number of lost packages. Increases can run from a UPS baseline of 2% to a post-consolidation history of 6%-8%. Such an increase is a natural consequence of extra handling and migrating to Parcel Post. Lost packages are a fact of life, but the management of this additional risk is another thing to consider. Is your relationship with your customer elastic enough to reduce service levels and still retain loyalty?

INSURE THYSELF?

If you decide that the savings are worth the risks, are you prepared to re-ship missing or mangled merchandise at your own expense? This is a straight-line calculation of cost of goods versus savings. Consolidators will protect you from losses that can be traced to them. But Parcel Post is an uninsured channel. How many losses a day can you absorb before your savings evaporate? Your customer is already steamed to have to lodge a complaint about a lost package. Is the replacement going to be sent the same way a second time? Can you see how your inventory might be adjusted to account for this kind of leakage? Customer service is also going to be dealing with increases in complaint levels. Are they ready with training and buy-in?

OTHER PEOPLE’S MONEY

The Post Office has a time-honored tradition of not accepting mail of any kind unless the postage is already paid. Well, if you use a consolidator, he will pay for your postage. This usually means establishing a joint bank account with him, and keeping it stocked with slightly more cash than actually charged to keep your parcels moving. Is your finance department ready and willing for one more layer of complexity? Does its effort get charged against your savings? Have you ever met a CFO who enjoyed letting outsiders move his money around?

PACK YOUR OWN PARACHUTE

When the going gets busy, the busy get cranky. If your business involves seasonal peaks that coincide with others’ peak periods, your consolidator is likely to run out of capacity just when you need it most. Most of these service providers do not have the resources to send another truck when you have one extra parcel left on your dock. This could force you to call for help when you are going down for the third time, an awkward moment to be negotiating rates. So arrange for your back-up in advance. In most cases, marrying a consolidator does not mean divorcing everyone else. In the case of shippers, polygamy is a good thing.

TAKE THE PLUNGE

If you decide to engage a consolidator, you will need to test the firm’s performance just the way you should be testing your own. Performance-based agreements will allow you to pull the plug if results vary wildly from what you expect. However, there is no such thing as being “a little committed.”

Remember, in a ham-and-egg breakfast, the chicken is involved, but the pig is committed. If you make an informed decision to test a consolidator, give him all you can from the first day. There is no point trying to put your toe in the water with a sample portion of your parcel business. Unless you commit to as much volume as you can produce for a few months, you will never get an accurate reading of the potential benefits. Go for it, measure it, review the results, and reevaluate your commitment.

THE ANSWER IS …

Should you consider a consolidator? Absolutely!

Should you prepare carefully even to discuss the possibility with your superiors? Absolutely! Remember that a commitment to this type of low-cost distribution will directly affect everybody in your organization (customer service, inventory planning, finance, and operations) as well as your customer.

My first boss also taught me that any complex undertaking has five key actions that must be performed in this order: plan, organize, implement, monitor, and correct. The last two activities need to be conducted continually until it’s time to consider a different solution.

Stephen Harris is a principal of Harris & Harris Consulting, based in Lincoln, VT. He specializes in distribution facility design and construction. He can be reached at harris@together.net.

4 Good Reasons to Not Even THINK About It!

  1. Your merchandise is perishable. Nothing spoils a customer’s loyalty faster than mold.
  2. Your product has a value more than ten times its shipping cost. Jewelry, computers, and pharmaceuticals need not apply.
  3. Your business has no elasticity in your current service standards. Complaints and returns are already unmanageable.
  4. Your shipments cannot go by Parcel Post. When it absolutely, positively needs to be there tomorrow, forget about it.

Cautionary Tales

  1. Consolidation usually requires additional in-house handling and expense in your own DC — a separate dock, another manifesting channel, additional sortation, and possibly more people. Don’t be surprised if and when these costs materialize.
  2. Consolidation must be carefully explained (sold) to everybody in your organization. Nothing will sink your boat faster than customer service representatives explaining to angry customers that their missing package is the result of the “latest stupid idea from the warehouse.”
  3. Consolidation REQUIRES a parcel ID bar code imprinted as you send it along to your partner. When the unthinkable happens and a whole truck goes astray, you need to know what was on it, to whom it was sent, and when.
  4. Remember that shipping is an interrelationship between cost, velocity, and reliability. You cannot change the first element without directly affecting the other two.

Weighted Average Shipping Costs

Ship Method Calculated Weighted Average Rate Differential Adjusted Rate
XYZ Ltd. $3.929
Parcel Post $5.063 $1.134 $5.144
Priority Mail $5.590 $1.661 $5.671
UPS (no surcharge/no discount) $5.154 $1.225 $5.235
UPS (w/surcharge and discount) $5.296 $1.367 $5.377
Best-way Parcel Post vs. UPS $4.482 $0.553 $4.563
Best-way Priority vs. UPS $4.601 $0.672 $4.682