How Do You Reduce Your Small Parcel Shipping Costs?
For any company looking to reduce expenses, shipping is a good place to start. Logistics can account for as much as 25% of a business’s overall costs. For many companies, however, trying to understand where and how to cut shipping costs is an exercise in frustration. Small parcel shipping charges are complex, and they’re changing all the time. It’s hard to determine which carrier and combination of service levels and other options is the best for any individual shipment, let alone predict what the final invoiced amount will be.
The number of variables and the frequent changes made by carriers can make the task of reducing overall shipping costs seem daunting, but taking some time to understand 1) the factors that affect the final cost, 2) your unique shipping landscape, and 3) how these two combine can enable you to achieve significant savings.
To help you understand what’s involved, let’s take a look at the most important variables.
Little regulation of the standards: Compared to LTL and TL freight, small parcel is lightly regulated, meaning that the carriers can make arbitrary changes to their rating methodologies and charge what they like for certain shipping fees, like accessorials. Each carrier does provide its own guidelines, but there is a lot of variation between them, and, as noted, they can change at any time. So for shippers, it’s important to pay attention to every announcement by the carriers and assess how it affects your shipping landscape.
The wild, wild world of accessorials: Speaking of arbitrary changes, the realm of additional fees and surcharges can seem like it’s ruled by anarchy. The carriers frequently change not only how they calculate these extra fees — several changes have been announced already this year — but also add new ones at any time, creating a world of confusion for shippers. Adding to the difficulty, many of these accessorials, such as residential and out-of-area, Saturday delivery, and holiday rush surcharges, only show up on the invoice, making it difficult if not impossible to calculate the total shipping cost in advance. They are also often misapplied, making post-audit of small parcel invoices a necessity.
Permutations of service levels: Most carriers (notably the Big Two) offer similar service levels: next-day, 2-day, 3-day, ground, etc. However, the carriers’ time commitments for each of these levels can be different, so it’s difficult to make apples-to-apples comparisons. For any single shipment, it’s necessary to take into account the combination of cost and transit time.
GRIs: The carriers typically raise their rates yearly, and shippers now expect and anticipate the annual announcements of General Rate Increase (GRI) adjustments of rates across routes. Unless you have specific language in your agreement with the carrier, it is very difficult to avoid the GRIs, but it is possible to mitigate the damage by fully understanding how the GRIs impact your individual shipping characteristics.
Dimensional weight pricing (DIM): A few years ago, carriers modified their process for calculating shipping rates to use size, rather than weight. Called dimensional weight pricing (DIM), this method was designed to offset carrier costs for transporting large, lightweight shipments. Hopefully by now you have a good understanding of how DIM rating affects your shipments, but, as with everything else, the rules can change at any time, so it’s important to stay on top of how these rates are calculated.
Rating changes made by the carrier: As a shipper, you know the frustration of having estimated how much a shipment will cost, only to find the final, billed amount is different, often quite a bit higher. This is because carriers often re-rate orders, which can include additional charges like correction of the DIM weight, address correction, or oversize fees.
For shippers, it can be tempting to throw up your hands and just take the hit of all this variability, but there are steps you can take to gain some measure of control. The first is to have an efficient shipping process that collects accurate information at the time of logging the shipment (DIM, address correction, etc.). The second is to put effort into negotiating service agreements with the carriers that take into account your unique shipping patterns and needs (or hire an expert to help with this). Once those two factors are in place, it’s a matter of staying on top of all the GRI, fee, and surcharge announcements and understanding how they will affect your business.