The Importance of Getting Shipping Right to Your Logistics Strategy

To be successful, you need to crunch the numbers, get the information on your current parcel shipping and then use it to make smarter, more well-informed decisions.

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Never before has the shipping process - and everything tied up in it - been as important to an overall logistics strategy as it is now. The stakes were raised in the last decade by the way the Amazon Effect rewrote expectations around timelines for availability, shipping and delivery. But, since the beginning of the pandemic-driven lockdowns last year, shipping service levels - and the dual expense to your organization and direct connection to your success - have become critical elements of business.

As this has happened, the big two carriers were handling such a volume of shipping and delivery traffic that they were reminded of the position of absolute power they’re in. Rates went up, deals were more expensive and new and different surcharges for all types of shipping came to the forefront.

For companies that deal in low-margin, high-volume goods, every cent counts, which means there’s little margin of error when it comes to getting your shipping plans correct. But, what can be done to achieve shipping success? What should you be paying attention to and what may not be quite as important? How you answer these questions could be the difference between being profitable or not.

Where to start

Decreasing costs and increasing profitability is naturally the goal of any business. When it comes to parcel shipping, there are a wide variety of expenses, metrics and ratios to monitor. However, there are specific areas to concentrate on that can have a bigger impact on what you’re able to achieve. The ones companies should pay the most attention to are total spending, surcharge expenses, cost per shipment, weight, price floors and the domestic zone.

Here’s what these terms mean and why they matter:

●       Total shipping spend. What are you spending on shipping, in total? Some commonly break this number down by spend per service, so they can track how the amount fluctuates over time and be more accurate in their forecasting. Looking at this number as a percentage of your sales is another way to analyze your shipping spend. How much are you spending for each sale?

●        Surcharge amounts. How much are you spending on surcharges, and how large a part of your shipping expenses are spent on surcharges? Has this number been steadily increasing over time? Surcharges are a really easy way for the two largest carriers to hide price increases. Keeping a close eye on this will enable you to challenge unexpected costs, or to have better information in front of you when you negotiate or renegotiate a deal.

●        Cost per shipment. What is the average spent on shipping each individual package? Has it gone up, down or is the current amount sustainable? Analyzing what it costs on average to ship a package is essential for forecasting, modeling and budgeting. One way to get even more granular with your analysis would be to look at the average cost per shipment by service, such as international shipping, express shipping, ground shipping, etc.

●        Weight. Sure, the weight of what you’re shipping might be a constant that you seemingly have little to no control over. Bu,t that’s not always the case. You are able to adjust and improve your dimensional weight, i.e., the length, width and height of a package. One you understand what the average weight per package is, there may be ways to improve your costs by increasing the efficiency of your packaging, or even by negotiating a higher dimensional divisor with your carrier.

●        Price floor. What is the price floor set by your carriers? You can receive all of the discounts in the world, but a carrier will hold tight to a minimum charge or price floor. With that in mind, what percent of your shipments are hitting this price floor? If something hits this floor, then the full discount could be at risk as well. Understanding this number is important when negotiating or renegotiating contracts. If you hit the price floor regularly, then negotiating for a better service discount percentage won’t help reduce overall spend (and you should concentrate on other terms that will).

●        Domestic zone. How far does a package have to travel from its origin? That’s how a domestic zone is determined. Naturally, the longer it has to travel, the larger the price of the shipments. Looking at the average zone and where shipments regularly travel to can help your organization decide whether a distribution center closer to the customer base would be more cost effective. There are many third parties willing to do this for you if you don’t have the capital (or the interest) in running one yourself. Shipping expenses will go down when there’s a distribution center cutting the domestic zone average.

Information is the key

Carriers are happy to work with you, but it’s important to remember that at the end of the day, they’re looking out for No. 1 -- themselves. The past couple of years has only reinforced the power position they find themselves in when it comes to dictating terms around shipping contracts. It’s only natural that companies trying to improve their logistics expenses will turn their eyes to shipping costs. To be successful, however, you need to crunch the numbers, get the information on your current parcel shipping and then use it to make smarter, more well-informed decisions that will improve the bottom line while maintaining the service levels your customers expect.