Why shippers like zoneskipping

For starters, it saves both time and money. The only hitch is that users must meet certain minimum parcel weight and volume criteria, but consolidators are hoping they can help.

By Toby B. Gooley, Senior Editor -- Logistics Management, 2/1/2001

L.L. Bean does it. Lillian Vernon does it. Fingerhut does it. Miles Kimball does it. So do the Home Shopping Network, Victoria's Secret, and QVC.

What are these and other mail-order specialists doing? They're all shipping thousands of parcels each week, and they've all found a way to save money doing it.

Their "secret" is a money-saving practice known as "zoneskipping." Zoneskipping, in essence, is the technique of moving parcels part way across the country by truck or air and then inserting them into the U.S. Postal Service (USPS) units closest to their destinations. This saves the USPS a significant amount of money, and some of those savings are passed on to the shippers and consolidators.

Recent changes in Postal Service policies and a rise in the number of parcel shipments are making zoneskipping an increasingly popular choice for shippers. What follows is a look at how zoneskipping works, what benefits it offers, and the industry and economic trends that are driving its growth.

The Closer It Is, the Cheaper It Is

Parcel consolidation (also called parcel expediting) is often referred to as zoneskipping because the parcels "skip" over some of the eight geographical zones established by the Postal Service for pricing purposes. How many zones a parcel "touches" determines its shipping rate: A parcel that travels through the postal system from Boston to California, for example, would cross eight zones and therefore would be charged the highest rate.

With zoneskipping, parcel consolidators and large shippers that have sufficient volumes and weight can instead truck or fly parcels directly to USPS distribution centers closer to the destination, so that packages only touch four or fewer zones within the postal system. That saves the USPS money on transportation and labor. In return, consolidators and shippers get faster delivery at a lower cost, because they are piggybacking on the Postal Service's ability to deliver to every household in the United States.

The USPS encourages zoneskipping through its "Parcel Select" program. Parcels can be inserted into the postal system at one of three levels: the 21 regional bulk mail facilities (BMCs), 467 sectional center facilities (SCFs), and more than 40,000 destination delivery units (DDUs) or neighborhood post offices. BMCs generally serve two to four states. SCFs serve addresses within a radius of several hundred miles, and DDUs generally serve all or part of an individual town or city, explains Larry Wood, associate vice president, e-business for the U.S. Postal Service in Roswell, Ga.

Parcel Select has only been available since January 1999. The Postal Service had allowed drop-shipped deliveries to BMCs for many years but did not allow customers to insert packages any deeper into the system. Some companies, meanwhile, were zoneskipping using United Parcel Service, but the package carrier stopped accepting that business from consolidators in the early 1990s. (According to a representative, UPS does allow shippers to zoneskip, but the service is not widely used.) In the late' 90s, the USPS, recognizing that parcel volumes - and thus handling costs - were soaring, changed its policies to encourage consolidations.

The potential savings are impressive. For example, shipping costs for a six-pound package that is delivered to a BMC so that it crosses just five zones would run $5.22. The price drops with the number of zones: If it travels through four zones, the rate is $4.05; through three zones, the rate is $3.68; and for Zones 1 and 2, the rate is $2.84. Take that package to an SCF, and the rate falls to $2.12. At the DDU level, it's a mere $1.41. (Rate tables for Parcel Select, including the Jan. 7 rate increase, are available in pdf format at www.usps.com .)

Consolidators Come On Strong

Those rates are not available to just anyone, however. Parcel Select customers must meet certain minimum weight and volume criteria, and sort packages according to specified procedures in order to participate. Although Wood says he does not consider the rules to be onerous, others disagree. The high volumes needed to qualify for reduced rates mean that few shippers can get those discounts on their own, says Satish Jindel, a former RPS executive and now a parcel-industry consultant in Pittsburgh.

That's where parcel consolidators come into the picture. Because they consolidate packages from many shippers, they have the volumes needed to qualify for delivery to SCFs and DDUs. Jindel estimates that consolidators handle almost all of the 800,000 daily parcel shipments. About three-fourths of that, he estimates, comes from a single company: R.R. Donnelly Logistics, which recently absorbed the "king" of the parcel consolidation business, CTC Distribution Direct.

Chicago-based Donnelly and its main competitor, Quad/Graphics subsidiary Parcel/Direct in New Berlin, Wis., grew out of existing mail-oriented businesses. Their parent companies are printers of catalogs, magazines, and other direct-mail items, which gives them several advantages in the parcel-consolidation game, company executives say. They have decades of experience in drop-shipping printed matter into the postal system, and because they already handle delivery of catalogs to consumers, they're a natural for handling the catalogers' parcel business, too. And their ability to combine their parcel traffic with shipments of printed matter allows them to get the best rates nationwide. "We handle more than 100 million parcels a year ... and four billion pounds - 20 billion pieces - of printed matter annually," notes R.R. Donnelly Logistics Senior Vice President Matt Bernstein. "That tremendous volume allows us to reach more DDUs more frequently than anyone else," he says. Similarly, Parcel/Direct takes advantage of Quad/Graphics' 20 million weekly mail pieces to create more efficient loads, minimize accumulation time, and make fewer stops en route to the destinations, says Steve DeFilippis, vice president of sales and marketing.

Their shipment volumes give giants like R.R. Donnelly and Parcel/Direct a clear advantage. But they are not the only players in the game. Other consolidators, including Drop Ship Express of Long Lake, Minn.; West Coast specialist PaQFast Inc. (PFI); Reno, Nev.-based Regional Mail Express - number 233 on last year's Inc. 500 list of the country's fastest-growing companies - and even Airborne Express's "Airborne@home" and Emery Worldwide's "Parcel@Home" services, are experiencing rapid growth.

What's fueling growth for the mid-sized regional as well as the national players? The explosion in online retailing, strong catalog/mail-order sales, and direct marketing through television are all contributing to an increase in parcel shipments. By one estimate, the number of parcel shipments in the United States will double over the next five years. As a result, parcel consolidators are targeting these retailers, particularly the dot-com and television marketers, says Frans Nelson, president of Regional Mail Express (RMX). Direct TV marketers, who sell through infomercials, have been a big growth area for his company, Nelson adds.

Nelson predicts that some of the e-tail business that has been funneled through overnight services will shift to parcel consolidators. "Right now, e-commerce companies are focusing on how to get products to the consumer the quickest way rather than at the lowest cost," he observes. "But people will soon be looking for alternative ways to deliver." Bernstein of R.R. Donnelly agrees. He believes that the capital squeeze that is forcing e-tailers to focus on cost cutting and becoming profitable will lead more of them to look at parcel consolidation.

As express companies like FedEx and UPS continue to raise their rates, adds DeFilippis of Parcel/Direct, consumers will be less willing to pay for overnight services. "With the cost of overnight and priority shipping sometimes totaling more than the items themselves, consumers are comfortable waiting an extra day or two for their orders," he says. "This opens the door for consolidators who do not have the ability to provide overnight service."

Expanded Service at a Lower Cost

Consolidators believe their business will continue to grow not only because they save shippers money, but also because they provide many of the same services and benefits that the traditional express carriers do at a lower cost. Says Jindel: "For the business-to-consumer model, they offer a very good proposition."

First and foremost, they say, zoneskipping lets them deliver packages very quickly. According to Wood of the U.S. Postal Service, his organization's goal is to deliver parcels received at BMCs to the end customer within three days, from SCFs within two days, and from DDUs, within one day after receipt.

Consolidators also offer tracking systems that follow shipments up to the point of insertion into the postal system. Shippers that choose to pay for delivery confirmation by the USPS can track shipments from door to door because most consolidators have integrated the Postal Service's tracking information into their own systems.

Shippers also benefit from the consolidators' years of experience in working within the postal system. They are experts at complying with Postal Service regulations and documentation requirements, and they meet regularly with USPS officials to keep current on developments and solve any service problems.

Finally, shippers can take advantage of the consolidators' fee-based value-added services. Just a few of the many examples: RMX can provide call-center capabilities, electronic order processing, returns management, and custom packaging services for direct marketers. R.R. Donnelly Logistics offers "virtual distribution" in which it takes products directly from the manufacturer and routes them to one of its own distribution centers, where they are labeled and prepared for shipment. Drop Ship Express lets customers warehouse products and printed matter in its distribution centers. Shippers can electronically transmit address label files when a shipment is needed. And Parcel/Direct offers a package of services it calls "Dock Door to Doorstep," where the consolidator will manage every step from inbound receipt to final consumer delivery.

The Consolidators Consolidate

The future would appear to be bright indeed for parcel consolidators. Nelson, for one, believes that the USPS eventually will outsource virtually all parcel handling to consolidators.

But there are some potentially troubling trends in sight - particularly if shipping volumes drop as the U.S. economy slows and more dot-coms close their doors. Volume growth is critical to the future of parcel consolidators, explains Don Berry, vice president of sales and marketing for Drop Ship Express, which handles more than one million pieces of mail and parcels weekly. "This is a volume business," he says. "If you don't have the volume, then you can't get the sorts. If you can't get the sorts, then you can't get the pricing you need. Volume is one big barrier to entry into this market segment."

In fact, Paxis, a joint venture of GATX Logistics and Lockheed Martin, shut down last November largely because of insufficient package volumes, says a former company executive who asked not to be named. Paxis had spent millions of dollars on automated processing facilities that used Lockheed Martin's technology, but "we just ran out of runway with the investors" after less than two years in business, he says. "That's the Catch-22 - you have to have the volumes to have economical deliveries, and you have to have economical deliveries to stay in business."

Ultimately, consolidation among the consolidators themselves seems inevitable. R.R. Donnelly's acquisition of CTC Direct early last year made it by far the largest in this industry segment. And Bernstein believes that further industry consolidation is unavoidable. "The consolidation will be driven by what the national catalogers need. They are migrating toward companies that are growing, are financially stable, and offer national coverage," he says. Consultant Jindel agrees that there could be a showdown on the national scene: "I think you'll see some of the smaller guys closing down," he says. "Nationally there is only room for about three big guys."

Yet those "smaller guys" say they can be very successful without going national. "I think we'll see more selective marketing in niche markets," says RMX's Nelson, whose own company targets specific types of shippers and distribution channels. Regional and commodity specialists will come under increasing pressure, he predicts. "They'll do quite well in their niche markets, but they're going to have to withstand pressure from the big national guys that want to buy them."

The Logistics of Zoneskipping

Although parcel consolidators use the U.S. Postal Service's infrastructure for delivering parcels, they must all make significant investments in parcel processing and distribution centers. At these distribution centers, they typically manage the pickup of packages from their customers; sorting by destination; transportation to the appropriate BMC, SCF, or DDU; and value-added services like labeling and warehousing.