The direct to customer industry (catalog and Internet) finds itself at a cross roads in terms of shipping & handling policies and charges.
Item: Many direct business's report a growing frustration by consumers with shipping & handling charges. Some studies show consumers are refusing to place the order if the S&H charges are perceived to be out of line with the competition. However, shipping & handling is a necessity and often represent 8% to 10% of a direct business’s average order and net sales to offset some of the pick and pack labor, outbound freight charges and packing materials. Shipping & handling is one of the top 5 direct business expenses.
Item: Expedited carriers UPS and FedEx have announced average rate increases of 4.9% for 2016. However, the actual charges experienced by direct businesses may be considerably higher because residential surcharges, rural delivery and other accessorial charges increased considerably more than this average. USPS Priority Mail last increase took away a low cost way to ship packages under 3 pounds and has also gone to dimensional shipping charges for packages greater than 1 cubic foot.
Item: There have been several class action suits against direct businesses over shipping & handling. As we write this article, there is a controversial “white paper” being prepared by a direct marketing industry organization which calls excessive S&H charges “which are not reasonable” - unethical.
What to do about S&H, how to decrease costs and increase service is one of the major challenges to the direct to customer industry. Given the seriousness of these issues, it is imperative that direct business owners and executives give developing a cost effective, customer service oriented shipping strategy their highest priority.
Establish a project team
Shipping strategies shouldn’t be just the domain of fulfillment. Set up a team with members from Marketing, Customer Service and Sales. While only one person will serve as the lead negotiator, get the ideas, buy in and requirements of the entire organization which when combined will give customer service, sales and marketing competitive advantage.
Know your business model’s shipping characteristics
Develop a profile of your outbound shipping including the number of marketing orders, shipped orders, packages shipped, back order rates, ship alone, historical order and package shipped volumes by month with seasonal peaks and valleys, etc. The level of service used (e.g. next day, 2 day or ground) and why; zone distribution, weight distribution; business or residential, rural or urban deliveries. What will be your growth projections by year for three years? Do your homework and dig out the facts – many times there are assumptions made which prove flawed and change the actual versus budgeted costs. The carrier will have their own data collection forms but these are the types of data the carriers will use to develop your pricing proposal and estimate their profitability. By analyzing this data, you may also determine the opportunities for improvement. For example, direct businesses are putting more emphasis on forecasting and inventory management and initial order fill rate to better serve the customer and also reduce back order costs.
Determine customer presentation and packing requirements
From a customer perspective, is there a marketing advantage or image that you want to communicate to the customer (e.g. FedEx versus a mail box delivery)? Is one carrier more liberal with free packing materials than another? Are there some options that the carrier offers that will decrease breakage?
Determine your delivery service requirements
From our experience and customer surveys, we have always felt that it was important to have the package in office or home within 7 days unless a more expedited plan was requested. We think with the changes in rates and services, to ask your self if you are over servicing the customer’s expectations. The important thing is to deliver on what you promise in terms of delivery dates. Are there other expectations which can be adjusted without damaging the relationship or losing the sale? How flexible are you - are you open to switching to alternate vendors and methods?
Fulfillment closer to your customers
What’s your fulfillment strategy? Especially in multi-channel retail/direct companies, if you are also expecting to expand your fulfillment capabilities, look at whether multiple centers or a move more to your customer’s demographic center, will place you closer to pockets of customers and cut down delivery zones, times and costs. Or can you locate a new center at a hub which would allow a much later cut-off on order processing times and fill a higher percent of same day shipped orders. Reduction in shipping costs by relocation is a major element in the return on investment of many fulfillment centers.
Do Your Homework About Carriers and Pricing
Understand the value/importance of your business to the carriers
Many direct business's are in less densely populated areas and often represent major volume. Will your business qualify as a national or key account? What are the local market conditions and competition for volume?
Educate yourself on pricing and negotiating tactics of carriers
As with any service, the differences in how vendors price adds another element to getting “an apples to apples” comparison. Here are a few examples. Undeliverable packages are returned free of charge by UPS whereas FedEx charges a 3 day rate for air returns. Does one carrier discount residential over another? “Rural” surcharges vary by carriers but are assessed even in high population urban centers (e.g. high crime areas). FedEx separates pick up by service level for residential, commercial and air/international. Learning how carriers charge and what’s discountable and negotiable is critical.
Know where the “hidden” and accessorial costs are
Hundred weight service, over size/dimensional packages, per package pricing, residential and rural surcharges, master packing or shipment pricing options, declared value coverage, carrier guarantee waivers, service failure refunds, address corrections, minimum per package charges. A carrier’s proposal may list the pricing for these charges but your analysis will understate these charges without a thorough analysis of your freight bills.
Obtain and study carrier management reports
Carriers are typically not going to offer these to you unless you ask for them. There’s a treasure trove of information about your account contained in the carrier management reports. But you have to know what to ask for and how to use them. They generally show year to date package volume, billings (revenue) by month this year and last year. Another key data point is the revenue per package shipped from which the carrier will judge their profitability.
Get the credits due your company
It’s getting harder and harder to collect on errors from carriers. However, we recommend setting up a program to audit freight bills and service failure refunds. Understand that carriers may negotiate out your ability to audit their bills electronically by limiting the size of batches or reducing discounts. There are other specialists which will work on a gain share basis to achieve savings.
Determine where do the various methods and plans fit into your strategy
Small package carriers, LTL, truck load, air freight, consolidators and USPS – where do they fit into your strategy? Is there an opportunity to leverage inbound and outbound strategies with the carriers?
Integrate electronically with your carriers
Now a days, the carrier’s expectations are that you will integrate electronically to their systems through FedEx Powership, FedEx MC, UPS Worldship system, Accuship, “best way” rate shopping and EDI billing solutions. Some direct business's still provide system printouts of shipped packages which have to be rekeyed into the carrier systems. This can be expensive in terms of errors, delays and carrier costs passed on to you.
Implement web tools and the Internet
There are a wide variety of web based tools to assist your customer service shipping and tracking. These include shipping cost calculators, package tracking systems, on-line reporting of shipping activity and carrier management, system alerts of weather, delays, etc. Through your Internet site give your customers the ability to track their packages reducing call center service requirements.
Selecting the Carrier
Request For Proposal
With your project team, determine order, shipped and return package volume growth projections by year for three years and your shipping characteristics. Should the proposal address inbound as well as outbound freight? What service level plans? Give the carrier a specific format you want the RFP answered in. Request the payment terms, response date and sample agreement. From your existing carrier you can generally get an impact statement of how their proposed rates will increase your costs because they will have the detail shipping characteristics.
You need to take your RFP questions and design a decision matrix to get an “apples to apples” comparison of the vendor responses. Carriers will not answer the questions in an orderly way that will allow easy comparison from a pricing perspective. Generally they will give you a price list. You need to develop a pro-forma cost by year including all the “hidden costs” and accessorial costs for the expected contract life.
Consider using a transportation consultant
As we said at the outset, shipping & handling strategy and costs is a rough and tumble area of direct business operations. Whatever you thought you knew and negotiated two years ago has changed dramatically. Consider hiring an expert to assist in the negotiations of carrier rates, service, audits of freight bills, etc. We all want to believe that we are good at negotiating the best deals for our companies.What we have found is that often there is more room for savings when an expert is involved. These specialists know the recent competitive and market developments; they can determine the net effective rates based on actual shipping characteristics; they know what is discountable; they can analyze the rates and impacts of accessorial charges; they know how to read and interpret carrier management reports; with all of this they can model carrier proposals versus your unique shipping characteristics. Generally these consultants work on a shared savings basis for several years so that there isn’t any cost directly for their services. Because they are paid from the savings, the up front cost studies and negotiations are not out of pocket costs. If such an expert can’t find sufficient savings, then that’s good news. Throw a party because you’ve achieved the lowest possible costs for the time being on one of your major expenses.