Transportation: Solving the parcel express puzzle

Our pricing expert says that to truly combat rising parcel increases smart shippers must focus on the areas that are within their control and use new methods for controlling costs. Here are five tools to help get the job done.

By Jeff Haushalter, Chicago Consulting -- Logistics Management, 5/1/2008

This year is shaping up to be a dismal time for parcel shippers. New across-the-board tariff increases, ever expanding accessorial charges, and skyrocketing fuel surcharges have shippers of all sizes scrambling to control or simply contain rising costs.

And while smaller shippers typically bear the full brunt of these cost increases, larger shippers are certainly not immune. Many large shippers have structured multi-year discounts and negotiated cost escalators based on these published base rates.

Traditional cost control methods such as renegotiation, rate shopping, and zone skipping mitigate costs but, in a rising rate environment, are ineffective at reversing price increases. Also, because many shippers use these techniques, they no longer provide a competitive or incremental advantage.

This year, shippers will attempt to counter these increases by adjusting budgets, passing on costs to customers, or renegotiating or capping existing contracts. These reactive methods do provide more cash to pay the bills, but they don’t address the root cause of these price increases—they simply throw more gasoline on the fire.

Hidden among all this noise is the fact that shippers can do something to manage these costs that doesn’t require renegotiating or even talking with your carriers. New transformational small package tools allow manufacturers, distributors, catalog merchants, and direct sellers to deliver more material at lower cost.

First, put everything on the table

As a first defense, shippers need to calculate the magnitude of any 2008 price changes. For each service type, shippers should model the new 2008 carrier rates against actual volumes on a weight-zone basis. Doing so will quantify the bottom line of these price increases and isolate areas that need critical attention. (See Figure 1.)

Shippers need to adopt a total cost approach to mitigating these parcel increases. Companies should expand their view to account for the fact that total shipping costs boil down to the combination of package count, mode, distance, weight, packaging, and void fill. If we optimize these components we reduce our freight bill.

As proof of this, roll up your parcel spend into a summary of four major costs: ground, expedited, fuel surcharge, and accessorials. All four are entirely within your organization’s control.

Here is a quick example of the thought process used for reducing the expedited freight spend. Expedited shipments have higher perceived customer urgency than ground shipments and thus warrant higher delivery cost. If customer expectations could be changed we can save money by shifting a shipment mode from faster delivery to slower delivery. Making these changes also capitalizes on lower ground versus expedited fuel surcharge rates.

But what if we can’t change customer commitments? For many expedited modes, the value of a couple hours of in-transit time can translate to parcel savings over 50 percent. Perhaps there are also alternatives within our company to make up this valuable time. Could we deliver directly to their end customer? Do we have lags in our order entry system? What is our warehouse order cycle time from release to ship?

To bring costs down, shippers need to recognize that controlling total freight cost is a function of organizational synergy. Streamlining operational silos (sales, procurement, warehousing fulfillment, inventory management, forecasting, wave planning, releasing, and shipping) are the true levers in managing total parcel cost.

Deliver more at lower cost

My organization realized at the end of last year that there was a dearth of new thinking in reducing parcel costs. Spurred by this need for innovation, we developed a new set of 10 small package tools and techniques that are designed to weed out waste and inefficiency.
We are sharing five of these 10 techniques and their corresponding savings with the readers of Logistics Management. Each technique is a low risk, high return, “quick win” initiative that could be fully implemented in a matter of weeks. These tools are also unique in that they are carrier independent and generate incremental savings even in the midst of multi-year contracts.

The effectiveness of each tool is largely dependent on a shipper’s package profile. Companies who ship a single item as part of an order will have less flexibility in using all these tools. However, large companies who ship multiple boxes to fulfill a single customer order can piggyback these techniques for compounded savings. To get started, here are five tools you need to take under consideration. (See Figure 2.)

1. Cartonizing and carton regimes: Available carton choices (differing volumes and dimensions) have a substantial impact on supply chain costs. In a perfect world there would be enough unique cartons deployed to exactly fit an order’s contents, minimizing void fill and packaging materials.
   In reality, there are constraints to the amount of available cartons a shipper can choose from. Cartonizing algorithms select from this “carton regime” and determine which cartons best fit a particular order. Cartonizing improvements work by balancing the additional complexity of more cartons versus the savings from adopting the right sized cartons. As a first step, shippers should review the effectiveness of the cartons they currently deploy.
   When discussing cartonizing it’s important to note that each package shipped is charged a minimum charge by a carrier. These minimums add up quickly and penalize shippers who ship customer orders across multiple cartons. For example, three five-pound packages to a consignee will more than double a parcel bill versus a single fifteen-pound package.
   While bigger cartons aren’t necessarily better, reducing the number of cartons shipped through better cartonizing is an important tactic used in controlling costs. Many accessorials are directly tied to the number of cartons shipped. Reducing the number of cartons reduces the corresponding accessorials and has additional benefits in warehouse productivity by reducing the number of packages handled.
2. Optimal packaging minimizes cost: A key measure of the effectiveness of a carton is the volume it holds; on the other hand, the cost of a carton is dependent on the amount of material it requires. There is a direct relationship between the amount of material used and the volume a carton encloses. “Optimal Cartons” use the least possible corrugated or enclose the most volume possible. Chicago Consulting has developed an optimization tool that maximizes the volume per cost or, equivalently, minimizes the cost for a given volume. Shippers can enter their carton dimensions at www.chicago-consulting.com/optimalCartons.shtml and find out if their current cartons are optimally sized.
3. Stub balancing exploits sweet spots: In a large multibox order, the final box used is called the “stub” box. It contains the final items or “leftovers” needed to complete an order. Usually this box contains less weight than other non-stub boxes.
   Given that you must use two boxes to fulfill an order, there is a cost difference in how a shipper allocates weight between those two boxes. Stub balancing exploits sweet spots in a carrier’s tariff structure to generate the best weight allocation. Items are then shifted between boxes to reach this target.
   For example, by allocating 40 pounds of weight between two packages we can generate a best case/worst case cost breakout. Using a Zone 5 consignee, the best case would allocate 23 pounds in one box and 17 pounds in the second box for a total cost of $18.93. The worst case would allocate 38 pounds in one box and 2 pounds in the second box for a total cost of $21.24. The worst case is 12.2 percent higher than our optimal case. (See Figures 3 and 4.)
   
   
   
4. Pound shaving reduces the total pounds billed: For shippers who send multiple packages to the same consignee, pound shaving can reduce the amount of pounds billed. All carriers (UPS, FedEx, DHL) round fractional scale weights up to the next integer pound to calculate billable weight; for example, 2.2 pounds would be rounded up and billed as 3 pounds.
   In the cartonizing stage, shippers should shift items between two packages to bring the weight down on one package and up on another package. Done properly, this reduces the number of packages whose weight is subject to this upward rounding. (See Figure 5.)
   
5. Dimensional weight cartons: Carriers have set aggressive targets on densifying the freight they carry and have chosen to penalize lighter weight bulky shipments. Previously, shippers would place large bulky shipments in multiple boxes to avoid paying an oversize penalty. Under new 2008 pricing, this oversize penalty is replaced with a new formula. Packages above 3.0 cubic feet are evaluated using a negotiated dimensional factor with customers making up the difference if the scale weight is less than the “dim” weight.

Shippers who send multiple cartons to a consignee should consider adding a new “biggest” carton that deliberately incurs a dimensional weight charge but decreases total order cost.
As you can see by the techniques presented here, it’s possible for logistics professionals to combat and even reverse these parcel increases. We hope shippers expand on these out of the box tools and develop new ones of their own.

Jeff Haushalter is a consultant with Chicago Consulting, a firm that specializes in designing and optimizing supply chains. Jeff can be reached at jeff@chicago-consulting.com.