United Parcel Service Inc. and FedEx Corp. recently began pricing all ground shipments using dimensional weight. In the past, this method of pricing was generally applied only to packages with dimensional weight greater than three (3) cubic feet (L x H x W > 5,184 cubic inches). “As a result, it will cost more to ship Ground packages where the dimensional weight exceeds the actual weight,” says Thomas Andersen, Partner and Vice President of Supply Chain Service at LJM Freight Auditing & Consulting. “Some experts believe this change could impact as many as 30% of all packages shipped using Ground service.”
While the new pricing structure has the obvious potential to significantly increase transportation costs for many parcel shippers, it could also negatively impact e-commerce sales levels, making it even harder for smaller companies to compete with giants like Amazon.com Inc. and Wal-Mart Stores Inc. Since the Amazons and Wal-Marts of the world likely have the bargaining power with FedEx and UPS to negotiate and potentially fight the increase (see section on negotiation below), they may not have to significantly increase shipping costs to customers. Smaller e-commerce shippers, however, may not be so lucky. These companies will have to make operational changes to reduce box sizes, when possible, to provide competitive costs without taking a hit on margins. This post outlines a three-step action plan for companies wanting to proactively minimize the impact.
Step 1: Estimate the Impact on Your Company
Before your company starts making operational changes, it is important to at least estimate the financial impact dimensional weight pricing will have on your business. This will allow your company to gauge the urgency and level of investment required. If historic data exists that includes box dimensions, actual weight and shipping charges, it will be relatively easy to compare what your company was actually charged for each shipment versus what would have been charged had the new dimensional weight rules been in place.
Dimensional Weight is calculated by multiplying the length by width by height of each package (in inches) dividing by 166 (for domestic shipments) or 139 (for shipments to Canada). Here’s an example provided by Thomas Anderson of LJM Consulting: a 2 lb. package with dimensions of 10”L x 10”W x 10”H will be billed at 7 lbs. as of January 1, 2015 (10 x 10 x 10 = 1000 ÷ 166 = 6.024 rounded up to 7 lbs. Previously, it was billed as a 2 lb. package.
If your company doesn’t have the data to perform this comparative analysis, you are not alone. You can get a reasonably good idea of the price differential with an audit. Head to the shipping dock with a laptop and a tape measure. For each box that is shipped, capture the box dimensions, the actual package weight and the shipping cost. Next calculate the dimensional weight (see above) and apply your company’s shipping rate to it. Compare your current shipping costs for each package with the future cost and extrapolate it over a year’s time, taking into account seasonality.
Step 2: Negotiate with the Carriers
Some companies may have the ability to negotiate more favorable terms with the carriers. Don’t assume that the new dimensional weight policies are set in stone or apply universally to all companies.
Have a conversation with your carrier. You may be able to postpone the change or bargain for a better dimensional weight factor.
Step 3: Make Operational Improvements to Reduce Box Sizes
This change represents a great incentive to finally justify the investment in time required to optimize the packing process. In addition to reducing your company’s parcel cost, you may be surprised at how these changes could both directly and indirectly improve your operation, not to mention the environment. Here’s how:
1. Gather Dimensional Data: If you don’t already have accurate product dimensional data in your Item Master, collect it. Relying on the subjective judgment of a packing clerk to determine the ideal shipping container size will probably cause your company to leave money on the table under the new rules. For tips on gathering and maintaining cube data, see this blog post: Gathering Cube Data on SKUs. Under the new way of operating, you will need this data to determine the smallest possible box size for a given shipment. The added benefit of collecting this data is that it will enable you to:
- Better slot your product for more efficient picking and replenishment
- Take advantage of productivity-enhancing processes such as directed putway and bin replenishment.
- Make distribution center design and layout changes faster and with a higher degree of confidence, potentially reducing the amount of space required or allowing you to extend the amount of time a given location can support growth.
2. Pre-Cartonize Orders: Develop pre-cartonization capabilities to determine the smallest possible carton size per order. Your existing warehouse management system may already have this ability built in. If not, there are a number of “bolt-on” packages available to enable this capability.
3. Optimize Shipping Container Sizes: Rationalize/optimize the number of available carton sizes at your disposal. Generally my advice to clients is to minimize the number of box sizes available in the distribution center. However, a change such as this one may actually be justification for increasing the number of carton sizes that your company uses.
4. Investigate Customizable Box-Building Technology: These fairly new packaging machines allow companies to customize the size and shape of a box based on the contents destined for it. Instead of being confined to just a few box sizes in an operation, these systems offer an endless number of box size options, saving on dunnage, box storage space requirements, box erecting labor, waste, and transportation costs, to name a few benefits. These machines come with cubing software that can identify the optimal box size. The equipment takes an input of flat corrugated paperboard material and then cuts, erects and glues sturdy custom boxes in real time. There are a few different business models in this space. Some vendors will provide the machine at no cost with a contract to purchase the corrugated material directly from them. Other companies require the machine to be purchased.
5. Optimize Consumer Packaging Design: If your company’s products are susceptible to damage and thus require significant amounts of dunnage, it may make sense to re-visit the consumer product packaging, or research new ways of securing the product within the outer shipping carton. If empty space around the product can be minimized, then box sizes can be reduced.
While no company likes to be under the gun to make operational changes in a situation such as this one, external rate shifts can be an opportunity to improve processes and reduce waste, with positive impacts in numerous areas of the supply chain.
Ian Hobkirk is founder and managing director of Commonwealth Supply Chain Advisors, which advisors companies on managing supply chains and distribution centers.Favorite