Six Steps To Cutting Your Parcel Shipping Costs
Looking to rein in your parcel spending? It may be as easy as making a few minor procedural changes in your own operations.
In the 25 years since he hung out his shingle as a parcel-shipping consultant, there's not much Satish Jindel hasn't seen.
Jindel, founder and president of Pittsburgh-based SJ Consulting Group, has observed otherwise sophisticated companies pay for overnight air service to ship packages from one address in Manhattan to another. He's watched shippers pay for costly rush services that deliver by 7:30 or 8 a.m. only to discover that the consignee doesn't open its doors until 9 o'clock. And he's witnessed frustrated drivers attempt multiple deliveries to the same wrong location because the shipper kept using an incorrect address even after it was notified of the problem.
While these anecdotes might border on the humorous, to the shipper, the carrier, and the consignee they are no laughing matter. Jindel estimates that parcel shipping errors—mostly committed by shippers, though carriers and consignees can hardly be absolved of blame—add 5 to 7 percent in unnecessary costs to a shipper's annual tab. Given that companies collectively spend some $55 billion a year on domestic parcel services, those mistakes translate into serious money.
It's not surprising that shippers might slip up on occasion; parcel shipping is a pretty complicated business these days. The annual service guides published by FedEx Corp. and UPS Inc. run about 140 pages, compared to one and a half pages back when Jindel started his business in 1985. And accessorial charges—the fees carriers tack on to their base rates for services beyond basic pickups and deliveries—now number anywhere from 35 to 40, compared to one or two in the mid-1980s.
Still, there are things shippers can do to avoid the kind of wasteful spending Jindel describes. Consultants and carriers interviewed for this story say that with some modest procedural changes, basic common sense, and better collaboration within their own organizations, shippers can reduce their parcel spend without compromising delivery quality and reliability. What follows are just a few of their suggestions.
1. Take advantage of automation. FedEx and UPS each spend about $1 billion a year on new technology and improvements to existing functionality. They don't do this for charity; the enhancements are designed to make things easier and more efficient for themselves and, by extension, their customers.
But it's not just the carriers that stand to benefit from automation. Shippers, too, can boost efficiency and trim costs by using software and systems that automate the parcel shipping process.
"Shipping technologies exist to help businesses of all sizes automate functions such as simplifying down to a few keystrokes the traditionally complex task of generating commercial invoices on international shipments," says Donna Longino, a UPS spokeswoman.
In some cases, failure to automate may even cost shippers money. For example, while carriers charge as much as $5 to process each paper waybill, they don't charge for the electronic version. For shippers that don't automate, it "could be like [leaving] $5 bills lying around the office," says Jerry Hempstead, head of an Orlando, Fla.-based parcel consultancy that bears his name.
2. Listen to your customers. When customers offer feedback about the service shippers provide, it can pay to listen and learn from them. Mike Regan, chairman and CEO of TranzAct Technologies Inc., an Elmhurst, Ill.-based transportation consultant, tells of a national retail chain's e-commerce division that repeatedly heard from customers that they were receiving product sooner than expected. Eventually, he says, the shipper realized that it was providing better (and more expensive) service than its customers really needed. The company switched from a residential ground delivery service to a less costly parcel-consolidation network that uses the U.S. Postal Service for "last mile" deliveries.
The new service featured longer transit times, but it still provided the required levels of reliability and customer satisfaction. The shipper achieved cost savings in the double-digit percentage range, according to Regan.
3. Choose the right service level. Because they want to provide top-notch customer service, many shippers automatically choose the fastest delivery options. But parcel carriers guarantee next-morning deliveries to only 45 percent of the country's ZIP codes. Hempstead suggests migrating those relatively urgent shipments to next-day service, with delivery in the afternoon, as a way of trimming costs with virtually no service degradation.
Shippers might also consider converting shipments destined for relatively close-by destinations—750 miles or less—from air to ground. "You might find you are using second-day air where ground [delivery] is guaranteed overnight. Or worse, using three-day air where ground is guaranteed overnight," Hempstead tells his clients.
4. Get those addresses right! Despite the availability of address-verification software, shipping to incorrect addresses remains all too common, as Jindel's tale attests. A carrier's repeated trips to the wrong address and subsequent—often futile—efforts to re-ship packages raise everyone's costs … and blood pressure.
"You could be losing shipping dollars and negatively impacting your customer service if your company's database includes incorrect addresses," says Longino, the UPS spokeswoman.
There's more to a good address label than just getting the street and number right, however. One of Jindel's clients, a large Midwestern shipper, couldn't understand why UPS's drivers would only drop off packages at a particular consignee's site if someone was around to receive them, even though the shipper had authorized the drivers to leave packages without getting a signature.
Jindel discovered that the shipper was communicating its instructions to UPS through the carrier's mainframe computers, but that information wasn't being passed on to the drivers. He advised the shipper to have UPS include the instructions on the address labels so the drivers would see them prior to delivery. Problem solved.
5. Talk among yourselves. Many shippers could get a better grip on their parcel shipping costs if they had better communication within their own organizations.
Under the typical scenario, a company's shipping department negotiates carrier agreements, its purchasing department places orders with vendors, and accounting pays the bills, TranzAct's Regan says. Usually that division of labor is effective, but sometimes it backfires. That was the case at one of TranzAct's clients, a wholesale distributor that was receiving multiple, single-piece collect shipments on a weekly basis from the same vendors. The company knew it was missing out on opportunities to cut costs by consolidating some of these shipments, but the accounting, purchasing, and shipping departments were not sharing information or working together to identify them.
Regan suggested the company task a top executive—in this case, it was both the CFO and the vice president of operations—to unify the departments with the goal of improving the cross-functional data flow. Based on the executives' recommendations, the company put new procedures in place, leading to better communication between departments and, subsequently, as much as a 30-percent reduction in some shipping costs, according to Regan.
Better coordination of internal information systems can pay off in other ways. "Look for opportunities to streamline and integrate your shipping with other business processes," Longino recommends. "For example, you can reduce data-entry duplication by integrating your shipping processes with your internal order-entry systems."
6. Design packaging with "dim" weight in mind.** Proper packaging has always been important, but never more so than today. That's because on Jan. 3, FedEx and UPS reduced their "volumetric divisor," which they use to calculate the amount of space allocated to a shipment. The result is that shippers now are allotted less cubic space for the same shipment weight at current prices. Shippers whose packages fall outside the new physical parameters will see rates jump by double-digit percentages.
Under the new formula, a typical 12 x 12 x 18-inch parcel will have a new "dim" (dimensional) weight of 15.6 pounds, compared to 13 pounds under the old calculation, Regan says. This will translate into a shadow rate increase for shippers, he adds.
Simply leaving packaging "as is," then, could end up costing shippers plenty. If it isn't possible to shrink their shipments' cubic dimensions or add more weight, consultants say, then the best solution is to develop more efficient packaging. Hempstead advises shippers to design their packaging so that a shipment's declared weight is equal to or greater than its dimensional weight. If that doesn't work, he advises negotiating with the carrier to accept a higher divisor threshold.