Shipping Rate Changes and the Bottom Line
By Mike Kuebler | Supply Demand Chain Executive
Major parcel carriers, including UPS and FedEx, are changing the way they charge for U.S. ground shipments weighing less than 150 pounds in 2015. What does it mean for your business? Depending on its size, a package could be subject to a minor hike in shipping costs. But, for companies that rely on parcel carriers to distribute products across the country, the change could mean huge expenditure increases and decreased profits—two pitfalls that can easily be avoided.
Not All Weights Are Equal
The growth of e-commerce and digital purchasing behaviors is increasing the number of mixed product shipments, or the shipment of many individual items as opposed to in groups or bulk quantities. This is leading to the over-protection of products with oversized packaging and the use of one-size-fits-all packaging, in which a retailer can pack varying items in the same-sized box, regardless of size or extra space. These behaviors decrease supply chain efficiency, so parcel carriers are looking to minimize wasted space, meet sustainability goals and improve profits wherever possible.
Shipment costs are traditionally assigned based on the actual weight of a package, as it reads on a scale. Carriers will now determine shipping costs according to the dimensional (DIM) weight, or the theoretical weight of a package based on its volume and a carrier-determined optimal density. The current optimal density for U.S. carriers is about 10.4 cubic feet, or 0.0060 pounds per cubic inch, which makes the current DIM factor 166 cubic inches per pound.
Consider a 5-pound shipment. A box that is about 0.3 cubic feet has a density of about 17 pounds per cubic foot. In this case, the parcel can be billed per actual weight and the DIM factor is not used. A box that is 1 cubic foot has a density of 5 pounds per cubic foot. The density is much lower, but the volume that is being used is more valuable than the actual weight, so the box would be considered heavier based on that larger volume and billed per the DIM weight.
Mitigating the Effects
What does this mean for shippers? In many cases, it could mean no change. The DIM weight is already automatically applied to packages larger than three cubic feet and packages that are denser than the carrier density factor is billed according to the actual package weight. But for others, this may mark an unprecedented shipping rate increase that could have a dramatic effect on their business.
In the marketplace, customers may see higher subscription costs for online purchasing clubs and a reduction in companies that offer free shipping. Products may be priced higher, as shippers attempt to pass the costs through to buyers. At the same time, this could instill buyer sensibility, heightening awareness of shipping costs and the need to shop around for retailers that take a more responsible approach to packaging.
For companies that are impacted the most by this change, there are several ways to minimize the cost of shipping and avoid paying exorbitant DIM rates:
- Maximize the package density. Reorient products to fit more snugly in a package so that weight and DIM are equivalent.
- Decrease the overall package size. Reassess the size of the packaging that is being used for certain products to minimize the size of the box used.
- Reduce excessive protection. Excessive use of peanuts, air strips, bubble wrap and other packing products lead to the use of oversized, less-dense packaging with higher shipping charges.
After decreasing the package size to offset the carrier shipping charge, the question must still be asked: Does the package still work? The core purpose of a package is to protect. If a product is affected by damage by the time it is received and rendered unusable by the end consumer, then additional costs to manufacture and issue replacements can also affect a company’s bottom line.
In the following example, a company evaluates its total cost after a packaging redesign. Following the DIM weight shipping change, its shipping costs increased by 8 percent from one year to the next. This change initiated the package redesign, resulting in an immediate savings on packaging cost, but an increase in the product damage rate percentage, resulting in an increase in total cost. With Smithers’ total cost evaluation, the client is able to better optimize its packaging. While its shipping costs did increase slightly, it was still able to save on packaging cost while maintaining its damage rate at 2 percent.
Distribution testing allows a company to validate package redesign and ensure superior performance in the supply chain. It’s a great way to collect data about the performance of a package. Testing also evaluates the effect of the package change on the damage rate and estimates the total cost to supply a product. There are four major evaluation areas for distribution testing:
- Vibration testing, which determines how a package withstands hazards while being shipped via air, road or rail.
- Compression testing, which determines how a package withstands weight stacked on top of it during storage and transport.
- Impact/drop testing, which determines how well a package protects its contents against various drop and impact conditions.
- Atmospheric testing, which is the conditioning of a package to determine how it changes under various changes in temperature, humidity, etc.
After package redesign, approval and distribution testing, the next step is to determine whether or not a product works in the supply chain and the total cost to implement.
Positioning For Success
Increases in shipping costs may affect total costs, but reducing the packaging may result in an increase in damage costs. The key is to understand how product requirements, damage rate and current shipping costs vs. future shipping costs each affect the total costs before considering the best option. Balance the damage rate with the need for adjustments using resources and distribution testing to achieve the best possible results.