January 24, 2008
Football playoffs are upon us, and the Superbowl is looming large for many sports fans. Every January we can rest assured that there will be big screen TVs tuned in across America trying to figure out what was more exciting, the games or the commercials.However, if you are not careful, you just may miss another annual tradition in shipping.
January marks the return of the annual shipping rate increases from FedEx, UPS and the other parcel carriers. The annual carrier rate hike typically gets very minimal press or analyst exposure outside the shipping and logistics industry. That said, forums and blogs with retail business readership tend to heat up, and many business owners take a second look at their carrier account “discounts”. At Shipwire, we see business discounts as a distraction at best and clearly the wrong place for retailers to be focusing their attention. True shipping cost savings are not found in a carrier discount — they are found by locating inventory closer to your customer and gaining economies of scale.
Like the Superbowl, the annual carrier price hike seems like a bit of a game. Every year, and 2008 is no exception, UPS, FedEx and other carriers increase their shipping rates while claiming that those price hikes will be offset by reductions in the fuel surcharges. However, if you carefully do the accounting, you will notice that a few months (or less) after the rate hikes, the fuel surcharges creep back up to previous levels or higher. I”m sure there are all sorts of sound business reasons for the rate hikes and fuel surcharge “reduction”; however, I think you can see why the word “game” comes to mind.
Shipwire often gets asked by customers if we offer shipping “discounts”.More often than not, business owners have been led to believe that their businesses’ shipping usage qualifies them for some “special discount”, and they are saving money on shipping. My responses are always the same, “If you rely on a discount, you are not running your business right.” I then typically follow-up with a reasonable question, “Can you show me the discount on your bill?”
After years in the shipping and logistics industry, my belief is that the only real shipping discount is found by locating inventory closer to your end buyer. This article will demystify shipping carrier “discounts”. More importantly, we will demonstrate proven methods of getting true long-term shipping cost savings through intelligent warehousing. Finally, we will consider why growing businesses should outsource their storage and shipping and not just the parcel delivery portion of their business.
RETAIL VS DISCOUNTS DEMYSTIFIED
Carriers have what amounts to a two-tier pricing structure. Carriers offer “retail shipping prices” on their websites for individuals and business customers without “business accounts”. For customers that conduct frequent shipments, carriers offer a business account. Carriers tell businesses that they can get a percent “discount” off retail by opening a business account. Typically, to qualify for this “discount” you pay a weekly account fee, and the discount fluctuates based on your volume and account shipping usage (profile) measured on a weekly basis. In any given week if your volume doesn’t reach your target, you don’t get the discount, and you still get to pay the account fee and potentially a laundry list of other rarely discussed fees, such as address correction fees and undeliverable shipment fees.
If you have a business with consistent heavy volume, you may rightly qualify every week. However, what type of discount is the business qualified to receive? The account discount applies before any fuel or residential surcharge fees. For example a $6.91 shipment may have a $2.30 residential surcharge, a $0.41 fuel surcharge, and a base rate of $4.20. Your discount only applies to the base rate. If there is a shipping discrepancy in the address, or delivery, the additional fees can easily double the final cost.
Additionally, many carrier business account terms have a “residential” limitation on discounts. Residential parcel deliveries tend to be more expensive due to a number of factors (delivery attempts, parcel theft and residential location), and carriers charge a premium for piecemeal parcel delivery to a residence. For obvious reasons, carriers much prefer delivering packages in bulk to businesses, for which most discounts apply. If you check the fine print, carriers reserve the right to exempt any shipment from a discount, at their discretion. Residential ground shipments are generally given the most limited and “special” consideration when it comes to applying discounts.
If you have a shipping account, ask your carrier to show you — on your account bill — how much the total average discount was in any given billing period. If you think you are getting a discount and can’t find it on your statement, you may want to ask yourself why. If you get a discount amount on your statement or after a support call, pay attention to what it applies to. How much are you saving after the fuel surcharge, residential surcharge, weekly account fee, and other fees you can get hit with?
Hopefully, you can see why we consider shipping discounts and the carrier rate hikes a bit of a game. Any “discount” is typically short lived, and the carrier makes it back up with account fees, price increases, and complex timing measurements that seem to disqualify many business account holders from discounts more often than not. A discount is a shiny ball hung out for small businesses to reach for while not paying attention to the annual price increases going on around them. Is that really a discount you can take to the bank? Do you want to build your business around this?
Now let me show you how to get real savings on your business shipping without all the games.
THE RULES OF SHIPPING, ORDER FULFILLMENT, AND ECONOMIES OF SCALE
Discovering real savings in your storage and shipping supply chain has been the same since the time of Alexander the Great — use the cheapest mode of transport for the longest distance, and discover ways to leverage “economies of scale”.
When you move product in bulk (large quantity versus individual parcel), you get the greatest economies of scale and the lowest cost. When product inventory is moved in bulk from consolidation points (manufacturer and freight forwarding short-term storage), to distribution points (warehouses) it can be moved very cost effectively on a per-item basis. The most expensive part of retail fulfillment is the last leg of the products journey — from your warehouse to the end-buyer — that is typically a parcel shipment with a major carrier rather than freight.
Let’s look at a very simple example, a 10-lb. parcel shipment from a New York City warehouse to a residence in Los Angeles. If your warehouse is in New York, your cost for a normal ground shipment to the residence in LA would be approximately $12.66 (ground, with residence fee and fuel surcharges). If you need to get it there via next-day air it would be approximately $81.00. If you put some of your inventory in a warehouse in Los Angeles, your cost for that same package would be $8.39 (ground, with residence fee and fuel surcharges). If you had to get the product to the customer the next day, it would be the same $8.39 fee.
What is the lesson? Your carrier pricing is a factor of distance. If you strategically place inventory in multiple locations, you can increase your service delivery speed and reduce costs. Granted, in this example we saved a little over $4.00. However, if you”re doing 100 shipments a week you would be saving over $1,500 monthly just on shipping. You just saved roughly one-third of your shipping costs while increasing your service levels. This is a true cost savings (rather than a discount), after fuel surcharge, residential surcharge, and any other games the carriers throw at you.
The objection we typically hear is, “I would have to pay to move my inventory to my second warehouse.” Bulk freight shipping, those 18-wheelers you always see on the interstate, is cheap compared to the outbound piecemeal parcel shipping of FedEx or UPS. An 18-wheeler filled with 10,000 stuffed animals will cost less than $5,000 to ship from NYC to LA, that’s $0.50 a stuffed animal, in return for $3.00, $5.00, or more in savings for each stuffed animal you would ship individually — not to mention your buyers get faster delivery times.
Therefore, the rule is to strategically place inventory closer to the end-buyer, and always try to shorten the last leg of the parcel delivery by the carriers. In industry jargon, this is sometimes known as “forward warehousing”; think of it as real savings. Alexander the Great actually invented the concept; he called it a “forward supply depot.”
There is another economy of scale that is available today and unique to the ecommerce economy — aggregation and outsourced order fulfillment. Traditionally, you had to have a large operation to reach any logistics or shipping economy of scale. For new companies and most growing Web merchants, that type of scale was impossible. However, today it can be accomplished very quickly by outsourcing order fulfillment to gain economies of scale with other growing businesses. The main objection to outsourced order fulfillment is “loss of control”. This couldn’t be further from the truth, and the reality is that, if you use a carrier, aren’t you already outsourcing your shipping?
Storing and shipping product isn’t complex, it is just incredibly time consuming, tedious, and subject to frequent frustrating break downs. That is on its best day when a customer isn’t breathing down your neck. The question you should ask yourself is why do the time-consuming, tedious and frustrating part if you are already outsourcing your shipping to a carrier? Business consultants constantly harp on the idea that you should outsource anything that isn’t your core competence. Ask yourself if running a warehouse and shipping is your core competence, or just the mechanism to delivery your products to your customers. Warehouse and shipping is just business infrastructure and facilities that distract you from your core business of selling product.
The last objection I typically hear is, “My customers pay the outbound shipping, and it isn’t a business cost”. That is patently absurd. In reality your customers pay the inbound and outbound shipping. They also pay for every inefficient decision you make if they buy from you. That is unless you are losing money on every sale. The fundamental problem many small businesses make is not understanding their total costs. That is, the cost of the product, importing and inbound shipping, storage, outbound shipping, opportunity costs of the money you invested in inventory (carrying costs), merchant transaction fees, online store fees, packaging, support, and the time you spend managing all this and NOT growing your business. Now divide all that by the number of products you sell, and worry. Worry about NOT doing business like a Fortune 500 company. Worry about NOT buying in bulk and distributing product to multiple warehouses closer to your end-buyer. Worry about not taking costs and hassles of your entire supply chain.
HOW SHIPWIRE CAN GIVE YOU REAL COST SAVINGS
Shipwire controls massive amounts of warehouse space on the East and West coast, and with its Toronto Canada facility has started opening warehouses internationally. Shipwire’s Store-Sell-Ship™ Platform is designed for growing merchants that are ready to outsource their order fulfillment headaches and get serious about growing their businesses.
Shipwire controls multiple warehouses in order to help merchants strategically place inventory as close to the end-buyer as possible. This allows merchants to quickly capture the largest shipping savings available and either pass shipping cost savings onto their buyers or capture that savings if shipping is included.
Merchants that use Shipwire gain economies of scale and receive rates equivalent to carrier discounts without any complicated account qualification (or disqualification) criteria. That elusive “carrier discount” is just part of the service.
Order fulfillment is more than just storing and shipping product. A warehouse or fulfillment company that can’t handle the complexities of your inventory storage, provide features for real-time order submission through your Web store, and counsel you on how to save money at every stage, doesn’t deserve your business.
Shipwire plans start at $29.95 a month, and we offer a free trial with instant access to our powerful Store-Sell-Ship(tm) platform. Shipwire.com is changing the game for businesses that sell merchandise online — offering a growing warehouse network, simple bundled pricing, a developer network, and Web store integration. Today, more than 30,000 online stores have Shipwire.com built-in. Shipwire has U.S. warehouses located strategically in Los Angeles and Chicago. Shipwire can be contacted at 1-888-SHIPWIRE or Shipwire.com.