Should You Pursue Operational or Rate Improvements? Do Both

There are multiple approaches to effectively reducing the shipping expense within your organization's budget.

Trevor Outman headshot 59c02e765e89f

It's common for shippers to employ one or maybe two cost-reduction strategies and call it a day. They assume that such initiatives will remove all excess costs from their total shipping budget. But this isn't really the case — in fact, there are multiple approaches to effectively reducing the shipping expense within your organization's budget.

If your mission is to reduce shipping costs, you must first bucket the various approaches into two distinct categories: operational improvements and rate improvements (also known as carrier contract negotiations). The two strategies are not mutually exclusive — yet many shippers are under the impression they must pursue one or the other. This is largely due to carrier representatives proposing operational improvements while sidestepping contractual rate improvements.

In reality, you need to dedicate separate discussions to both strategies. Understanding the differences between operational and rate improvements will empower you to keep your carriers focused on bottom-line results generated from contract improvements.

Operational Improvements That Minimize Shipping Costs

Here are six operational improvements that can deliver a positive impact on your shipping budget:

1) Package optimization: Eliminate as much dead space from packaging as possible. This is becoming increasingly important as carriers continue to alter their dimensional billing policies.

At the beginning of 2017, the national parcel carriers lowered the standard dimensional weight factor from 166 to 139, which translates to an increased net charge per shipment. You can reduce overall package dimensions by eliminating dead space; then, you'll have a greater chance of avoiding a surcharge due to dimensional billing policies. The takeaway: Shipping air can be costly.

2) Zone skipping: Consolidate or load parcel packages into a less than truckload (LTL) or truckload (TL) freight shipment and line-haul them to a sorting hub close to the final destination. By doing so, you remove the higher cost of outer-zone shipments by replacing them with less expensive inner-zone shipments. So while you'll be effectively reducing your net charge per shipment, you'll also incur a freight (LTL or TL) charge. Therefore, this strategy requires some intensive analysis to ensure the net impact is positive.

3) Adding another fulfillment location: This strategy employs the same concept as above. However, instead of incurring a freight charge, you'll incur the cost to either secure a space and hire/train employees or to utilize a third-party logistics provider for warehousing or pick, pack and ship. To properly evaluate and ensure the net impact is positive, you need modeling analytics.

4) Omnichannel fulfillment: This strategy is most often explored by shippers who have a significant brick-and-mortar footprint. Many retail locations can act as smaller fulfillment sites, which reduces the costly outer-zone shipments, because you can fulfill customer orders from the closest location.

The challenge with this strategy, however, is ensuring proper management of inventory across various locations. You need to integrate order and inventory management for this to be an effective cost-reduction strategy.

5) Least-cost routing rules: This tech-based cost-reduction strategy will automatically choose the least expensive service to deliver a shipment based upon time-in-transit requirements. It is most commonly employed when multiple carriers are involved. For example, on average, the current list rates for UPS' three-day service are 17 percent cheaper than Fed Ex's equivalent service. So a superior Fed Ex discount on three-day service doesn’t necessarily mean it will be the least expensive method when compared to UPS.

6) Proper service selection: With the right transportation intelligence reporting, it's easy to spot opportunities to optimize service selection based on transit time. For example, express shipments being delivered to zones two or three could be routed to ground delivery at a fraction the cost with similar transit time. When you pay for an express shipment designated to be delivered to zone two (within 150 miles), you're paying for the package to be delivered via air when, in reality, the parcel will never see the inside of an airplane. It's possible to reduce shipping costs by utilizing less expensive ground services over the express service for all inner-zone shipments.

How to Navigate the Negotiation Process

Understanding the proper parameters of how a carrier contract can be improved is an essential first step in reducing your costs. Assuming these parameters are understood, the strategies below will help you effectively navigate the contract negotiation process.

  • Adopt a customer mindset. Surprisingly, many large shippers walk on eggshells around their parcel carriers — almost as if carriers are their customer. As a high-volume shipper, remember your business can easily find a home with your current carrier's competitors.
  • Involve the incumbent carrier in the bidding process. This will help sustain competitive pricing, which is difficult when your current carrier doesn’t feel threatened by competitors. Make a strong effort to switch carriers every three to six years. Remaining with the same carrier for years on end can lull your carrier into complacency that results in less than competitive pricing. After all, why would your carrier be motivated to reduce its pricing if leaving is perceived as a hollow threat?
  • Analyze weekly invoice data. Particular shipping characteristics can be uncovered that will affect the carrier’s margins and, in turn, impact how the carrier proposes its margin-based pricing. These critical components include: service usage mix, weight distribution, frequently used zones, pickup and delivery density, package weight and dimensions, and more. Every shipper has a unique set of priorities when pursuing contract pricing improvements.
  • Don’t just focus on a better discount per category. Know which services are material to your shipping profile, which will surface after you properly analyze your invoice data. When you're pursuing an improved discount, it's important to understand what relief is needed on the minimum charge in order to capitalize on the negotiated discount. Otherwise, the discount will be reduced significantly from what's listed in the carrier contract.
  • Apply the 80/20 rule. Don’t assume the two most common accessorial categories — residential surcharge and delivery area surcharge — are automatically the most significant area of focus. At least 80 percent of all financial surcharge impact is derived from less than 20 percent of all the incurred accessorial categories. Refer to a comprehensive analysis to identify the most serious offenders. Pursue discounts and relief in each category with both your current carrier and competitors.
  • Determine your ideal DIM factor. Dimensional billing can have a significant impact on shippers, but its impact can be mitigated with operational and contract improvements. The dimensional billing policy takes total cubic inches divided by a DIM factor. If this calculation results in a higher number than the entered weight, you're billed at a higher weight and incur the associated increase. A higher DIM factor results in a lower calculated number, meaning you're less likely to incur a charge increase.
  • Establish the why. Draft a message detailing why the carrier should respond to your pricing requests. Specific messages will compel the carrier’s revenue management team to respond appropriately. Draft a business case so revenue management understands the why and is, therefore, motivated to respond with competitive pricing. Finally, ensure your pricing requests are competitively appropriate. If a concession request is too high, the carrier will ignore or decline it, and if it's too low, then you'll just end up leaving money on the table.

It's also important for you to understand the relationship between operational and pricing improvements — noting that operational improvements can create a positive change in your shipping profile, which will warrant improved carrier pricing. There's a synergistic impact when pursuing both strategies simultaneously. However, both processes should be aware of the other's impact. The combined results are greater than the sum of each separate process.

By understanding the difference between operational improvements and carrier contract improvements — as well as how they work in tandem — you can focus initiatives to slash shipping costs and boost your bottom line.