Top 5 Strategies for Profitable Shipping

Fireworks, boats, and barbecues… summer is in full swing, and depending on your line of business, this might be the time to go on vacation.

You can rest easy in the knowledge that the carriers are working hard on finding new ways to increase your rates (!), so you may want to start brainstorming on the beach to get a head start on getting more for your money when it comes to your operations. After working with thousands of clients for more than two decades, LJM’s expert strategists and negotiators have developed a series of effective, actionable tactics and streamlining methods for negotiating optimal parcel rates and contracts.

  • Evaluating Carrier Options based on Cost and Service
  • Negotiating with your Carrier(s)
  • Implementing Technology Solutions
  • Optimizing Shipping Materials
  • Streamlining Operational Efficiencies

Evaluating Carrier Options Based on Cost and Service

Most of the clients we work with are married to their incumbent carrier.  Many UPS shippers won’t even consider FedEx, or vice versa, much less wade into more treacherous waters with lesser known options such as regional carriers, couriers, the US Postal Service and companies that partner with it, or even alternative services offered by the two major carriers such as SurePost or SmartPost.  Oftentimes the concern stems from one or a few negative experiences from the past, or the perception that any change to a perceived inferior carrier or service will result in a negative customer experience.  Other shippers may also find their options limited by the preferences and prejudices of their own customers.

The mentality is often ‘if it ain’t broke, don’t fix it,’ but this strategy will only hold up for so long before constant rate increases and changes in carrier policies create an environment where stability and the status quo is no longer profitable.  To maintain your place within the competitive landscape, you will need to evaluate all your shipping options on an ongoing basis.

Some of the key regional carriers include the following:

  • Dicom: Services the Northeast and Mid-Atlantic, as well as Canada
  • GSO: services California and parts of NV, AZ and NM
  • LaserShip: services parts of the East Coast
  • LSO: services Texas and parts of Oklahoma
  • OnTrac: services the West Coast and parts of AZ, NV, UT, CO, & ID
  • Pitt Ohio: services parts of the Northeast and Midwest
  • Spee-Dee Delivery: services parts of the Midwest
  • US Cargo: services parts of the Midwest and East Coast

Although these carriers cover nearly 90% of the US population, it’s challenging for a shipper to have to rely on one or more regional carriers for most of their volume.  None of these smaller carriers operate out of charity, so you will need to have both; DC’s or origin points geographically in line with their offerings, as well as enough volume to provide them, for a serious quote.  When negotiated properly however, such a volume shift can often provide cost savings of 25% to 40% against the national carriers, so it’s worthwhile to examine whether you may have the opportunity to shift a portion of your volume in key markets.

There are more alternatives than just regional carriers.  Many large shippers continue to use UPS Ground and FedEx Home Delivery rather than the respective carriers’ SurePost and SmartPost solutions, and there are various other similar solutions through the USPS or their partners such as Newgistics, OSM Worldwide, and the new DHL ECommerce service, that can generate substantial savings without significantly impacting service levels.  As Amazon enters the delivery world with their new courier vans, expect more to follow suit as technology continues to challenge the duopoly set by UPS and FedEx.

By single sourcing your shipping, you ultimately lose leverage with either of the two national carriers, which inevitably leads to higher spend.  Reviewing your options on a regular basis as well as keeping a constant eye to ensure that you are meeting your incumbent carriers’ volume requirements will help you keep a tighter grip on your costs.

Negotiate with Your Carriers

Once you’ve made the necessary improvements to packaging and operational efficiencies and determined your optimal carrier options, the focus should turn towards negotiation efforts, and here, it is absolutely essential that you list specific goals based on your company’s needs and requirements.  Don’t assume that your current agreement(s) is protecting your best interest; parcel agreements never look the same, and most leave significant gaps which will likely lead to unexpected expenditures.  Since carrier reps will often ‘lead’ the shipper to focus on more obvious services and weights, many other components of your spend which may account for substantial costs end up ignored.

When assessing your agreement, review your discounts on transportation charges and fees against your historical shipping patterns.  Odds are that there are services that aren’t receiving the discounts they qualify for, and some are likely to not be getting any discounts at all and while you’re at it, you can review your own activity to identify areas where more appropriate services can be utilized, and where you are incurring avoidable fees.

Both carriers include as part of their standard agreement pricing tiers based on the volume you ship with them, where even a slight decrease in your spend may drop you into a lower tier, resulting in a subsequent drop in your discounts as well.  Based on the structure of your agreement, some of these drop-offs can be quite steep, so you should be constantly monitoring your volume levels, available on most carrier invoices, to make sure you are meeting the appropriate revenue qualifier.  As you have plenty on your plate already, you may also ask your account manager to provide you with consistent updates on where you stand regarding your tiers.  If you see a significant gap between your current incentive-based discounts and those that are available at higher tiers, you should ask your account manager to make adjustments to minimize the gap so that you will qualify for more aggressive pricing.

Don’t feel that your agreement is set in stone.  There may be x months or years remaining on your contract during what is typically a three-year term, and many shippers feel obligated to wait until the end of the term to negotiate, unaware that most agreements include a 30 day out clause with no penalties when making changes.  Some may include an early termination and/or minimum commitment fee, but these are rarely applied, and the carriers see these as more of a deterrent than anything else.  You should be putting out your business to bid on a regular basis; (we suggest every two years for most shippers) and conduct quarterly reviews with your carriers to ensure your updated needs are consistently being met.

Allow for enough time for the carrier(s) to make the necessary changes to your agreement.  A full-blown RFP is likely to require several rounds and weeks, sometimes even months of negotiations in order to achieve the best results.  This is a time-consuming process with all carriers and requires patience, as each pricing request needs to be escalated within the corporate pricing or finance group.  A thorough analysis requires substantial time and effort on your part as well to determine the true impact of a carrier proposal, and your analytics team must be able to apply the current and proposed net transportation costs based on discounts, minimums, and fees against an accurate shipment profile based on historical spend.  With all the work required on both ends for a thorough and accurate review, you need to set realistic timetables for the negotiation, bearing in mind that engaging with more than one carrier will increase its complexity as base rates and zones differ for most services, as do select fees.  If your business has one or more peak seasons where bandwidth is at a minimum, schedule your negotiation accordingly so that you give yourself enough time for the process to play out fully, so you are not rushed into signing a less than optimal agreement.

Don’t be married to your incumbent carrier.  FedEx and UPS are typically both good options, yet most organizations are reluctant to make a switch.  With services being similar, the cost savings may be substantial enough to justify the short-term potential headaches.  Although a change in carriers is typically unnecessary to achieve savings, you should keep your mind open and be willing to negotiate with other carriers; but be sure when doing so you are comparing apples to apples, oftentimes a cumbersome and complex process.

We often hear how UPS and FedEx make their own rules, established their own terms, then limit your visibility to gain the advantage.  While there is some truth to that, increased knowledge and visibility on your end can help you level the playing field, and the basis of any negotiation is to have clear goals and an understanding of what you are setting out to accomplish.  Although it may be a challenge to have either of the two national carriers offer pricing based on lower volume, if you can provide a case around a potential shift to a regional carrier, the USPS, or another solution, the carriers may prove to be more flexible; rather than losing your volume, they may even decide to offer pricing beyond their standard guidelines to retain your business.  Developing these meaningful relationships with the carriers and constantly driving ongoing discussions with them is critical as costs continue to increase and the supply chain continues to increase in complexity.

Implementing Technology Solutions

There are a variety of technological solutions that are available to help optimize carriers and services based on cost and time in transit.  To open the door to the possibility of engaging multiple carriers, it’s beneficial and sometimes necessary to implement multi-carrier shipping software.  This enables a shipper to choose the lowest cost carrier based on acceptable transit times and service levels, and having options protects a shipper from any carrier changes or interruptions in service.  Proper technology can also help provide cost-effective inventory management when properly integrated with the organization’s warehouse management system, an initiative that should be pursued if possible.

A relatively modest upfront investment and small ongoing fee can also help provide an ongoing environment for cost management by implementing systems that focus on effectively cubing, weighing, and dimensioning shipments.  This helps ensure that proper costs are being passed down to the recipient at the time of purchase and will drive organizations to utilize their packaging more efficiently.  Gaining access to your own shipping data is another critical step that every organization needs to take.  To have complete visibility to your own transportation costs, based on service levels, zones, weights, residential/commercial status, urban vs rural, and many other factors, the data must be compiled and analyzed consistently.  Most shippers are shocked by the amount of money that’s not only spend on transportation costs, but on seemingly random accessorial charges and unexpected fees such as late shipments, as well as shipments that may not be receiving any discounts.

For any of the services you utilize, you need to determine what discounts are being applied to less common shipments such as undeliverable packages, third party, undeliverable third party, freight collect, and other occurrences.  In reviewing your data, you will be able to identify areas not addressed by your current agreement…gaps that can be resolved by one quick phone call to your account rep.

By having visibility to your data, you will be equipped to review your shipment volume, service utilization, zone distribution, actual against billed weights, dimensions, pickup requirements, etc., helping you identify areas where more cost-effective shipping methods and packaging can be used.

Optimize Shipping Materials

By now, you’ve hopefully been able to adjust your standard packaging with both national carriers squeezing your margins on increasing your dimensional weight as well as upping significantly their size related fees such as Large Package, Additional Handling, and Over Maximum Limits.  Shippers should evaluate their box sizes, and this may include analyzing the impact of cut-down vs. standard box sizes, opportunity to utilize Jiffy Mailers or other packs and packaging options.  Options for dunnage should also be analyzed, so that shipping “empty air” is minimized.  Hardware that can optimize density should be evaluated as well.  While you will often have to commit to an upfront investment, most of these costs can be absorbed in a relatively small amount of time.  Finally, recognize that certain packages or SKU’s are no longer viable options to ship parcel, as both Carriers are increasing their pricing purposefully to encourage you to consider other options such as LTL.

Streamline Operating Efficiencies

There are many options you can pursue when optimizing your operational efficiency.  Not only does such an evaluation require a comprehensive review of your SOP’s and procedures that influence outbound shipments, but the scope would need to expand to inbound, as well as the returns process.  Are products being brought in, then distributed in the most efficient manner?  Is it more beneficial to drop-ship certain products?  Is a centralized warehouse, multiple DC’s, or a ‘store-to-door’ strategy your most effective method to ship, or perhaps a combination?  Is partnering with a 3PL in some cases the right fit?  Such a route may increase operating costs and carrying inventory but lead to reduced shipping costs and improved time-in-transit.

Internally, examine the pick and pack processes and evaluate all the factors that influence your customers’ experiences.  There are many more options that can be beneficial for cost reductions and operational improvements.  Identify the low-hanging fruit and work your way through the larger initiatives accordingly.