Parcel shipping is the fastest-growing segment of the transportation market, but it can also be a significant expense. Because of this, it's more important than ever for companies to have a comprehensive and effective parcel shipping strategy as a part of their overall logistics approach. With carriers such as FedEx and UPS consistently raising rates and adding new fees, it's essential for organizations to pay close attention to any changes and incorporate regular contract adjustments into their overall logistics strategy.
The industry’s best shippers are actively managing their parcel shipping; it’s not something they can ‘set and forget’ or look at only 1-2 times a year. These organizations take action daily, weekly, monthly, quarterly and annually to ensure continued success. Their actions can be summed up into four major steps: plan, measure, optimize and monitor. Let’s take a deeper look at each.
Step 1: Plan
The first step to successful parcel spend management is to plan. It sounds like common sense, but not enough companies make time for this critically important step. Successful shippers use shipping data during this stage to inform their strategic and tactical decision making. This data includes forecasting, product line profitability and consumer buying preferences.
Key questions to ask your team include:
● How much of an increase in parcel spend should we budget for this year, based on the general rate increase?
● Do we offer free shipping, free beyond a specific order size or pass on the shipping costs to our customers?
● Which product lines are most profitable - and which are candidates for retirement?
● Should we open a new distribution center to cut down on costs, and if so, where?
● Is a multi-carrier solution the right choice for our business?
● Would the R&D time and spend to change packaging have a payback in reduced shipping costs?
● Is our strategy to be the fastest delivery or the cheapest?
● Would zone skipping be a good strategy for our business?
● Should we use a 3PL’s rates or ship on our own agreement?
Step 2: Measure
The second step is to measure. The management guru Peter Drucker famously said, “If you can't measure it, you can't manage it.” The best shippers identify a set of KPIs, measure them regularly and then compare those KPIs against industry best practices to see whether their success matches up to the industry standard.
These KPIs may vary slightly from company to company, but should include variables such as:
- Service Spend - Service spend refers to the total amount a shipper spends on shipping. This includes discounts, surcharges, and everything else factored into costs. By analyzing overhead costs, shippers can get answers to questions around whether they should offer same-day or ground shipping, and how competitive their discounts should be.
- Surcharge Spend - This is exactly what it sounds like: the total amount spent on surcharges. Surcharges are an unfortunate but regular component of the shipping industry. Some are expected, like an oversized charge on an exceptionally large package, but others can come as a shock - such as those that are applied during peak seasons or for delivery to less populous areas. For many businesses, when all added up, surcharges can equal 30–35% of total shipping costs.
- Average Cost Per Shipment - Average cost per shipment refers to the actual cost of each shipment, including all weight/shipping zone considerations and surcharges. Many businesses have a handle on their expected shipping costs, but the actual numbers are a little more complicated. When the actual numbers are known, businesses have a more accurate baseline for their shipping costs. They’ll be able to predict prices better and make more meaningful operational decisions.
- Weight - The weight category is broken down into two categories: average weight and the percentage hitting dimensional (DIM) weight. Average weight refers to the average billed weight of packages. DIM weight, on the other hand, is a fee typically applied to boxes that are large but lightweight. Carriers use a formula to determine a DIM weight and then charge based on the actual weight or the DIM weight - whichever amount is greater. By keeping an eye on average weight, shippers can gain several insights into their operations and future contract negotiations. For example, if you’re mainly shipping heavy items, you can stop arguing for a high DIM divisor in favor of lesser oversized surcharges.
- Minimums: This refers to the percentage of shipments that hit the carrier’s established minimum charges. Minimums are the smallest amount a shipping carrier will charge a company for a shipment - regardless of any variables. This means that no matter how efficient your shipping is, how expertly you negotiate or how many top-tier discounts you secure won’t lower the costs any further. If you see a high percentage of shipments that hit the minimum, it’s a signal to take a closer look at this category during the next round of contract negotiations.
- Average Shipping Zone: Just as it sounds, this means which shipping zone(s) your company ships to most. Zones are another advantage for carriers, enabling them to confuse pricing even further. That said, this one does make some logical sense. You would expect the farther you ship something, the harder it is on the carrier and the more expensive it is for your business. Knowing what your most frequented shipping zones are will help you plan your costs better, and even give you insights for future business expansion.
Step 3: Optimize
Optimizing carrier agreements can be a daunting task, given the complexity of the agreements, each with hundreds of discounts and terms. However, successful shippers use data and peer comparisons to optimize their discounts and compare competing offers from multiple carriers side by side. This requires normalizing and comparing proposals from different carriers, which could take weeks if done manually.
Historically, this exercise would take weeks of consulting time, but fortunately, today’s advanced data science technologies can perform this task in a matter of seconds, enabling a true side-by-side comparison. Technology is available that can create a digital twin of carrier agreements and run simulations based on actual shipments and date ranges, allowing shippers to test out the real spending impact of each proposal.
Step 4: Monitor
Carrier agreements are only optimized on the day they’re signed because businesses don’t remain the same over time; the business world is a dynamic, ever-changing one. Therefore, shippers must monitor their parcel spend on a regular basis to ensure that they continue to receive the best possible rates. KPIs need to be checked and compared to industry benchmarks to identify areas for improvement.
Data analytics should be used to identify trends and outliers. For instance, they may identify an increase in the average cost per shipment or a high percentage of shipments that hit the carrier's established minimum charges. Changes in carrier behavior, expiring discounts, carrier performance errors and instances of fraud and abuse all need to be monitored for. Those that believe shipping agreements only need to be paid attention to once a year couldn’t be more wrong.
Successful shippers typically follow a similar methodology to optimize their shipping operations - one which includes planning, measuring, optimizing and monitoring. By following these four steps, shippers can make data-driven decisions, improving their cost structure, providing stronger service to consumers and remaining competitive in a dynamic market. Advances in data science have made it easy and efficient to do so, without forcing shippers to take time away from managing their core business - something increasingly more critical in today’s economy.