There is no escaping surging outbound freight costs! Here is how you can find relief
It’s flashing in the headlines - FedEx and UPS are raising rates again.
The average parcel increase of 5.9% in 2022 is now compounded by a 6.9% increase in 2023…and that is just base freight.
Accessorial charges are taking up more space in carrier bills, accounting for upwards of 50% of shipment charges. These are add-on charges to specific shipments that stack on top of base shipment costs.
According to TransImpact, 16 of the top 20 accessorials tracked went up by double digit percentages in 2022 while 4 are increasing again by double digits in 2023. This is a way for carriers to pass through costs to serve shippers - examples include oversize packages, residential deliveries, peak season surcharge and a favorite for anyone that has read a carrier bill - the ‘arbitrary’ fee. Companies that sell large, bulky, or heavyweight products are particularly vulnerable - think furniture, sporting equipment, machinery, parts, supplies, bedding, large toys.
The third piece of the parcel carrier billing puzzle is the fuel surcharge. This is set at the carriers’ discretion, changes frequently, and doesn’t move in lockstep with diesel prices. Companies traveling long routes to delivery regions will see higher fuel surcharges on the overall bill.
What does this mean for a shipper’s profits?
A shipment that used to cost $10 to ship in 2020 can now translate to $14 - $15 in total cost. For a $75 order with a 35% gross margin, this translates to a one-third reduction in net profit.
Even companies with long term carrier contracts are affected. Max annual contractual increases kick in. Carriers pass higher costs through accessorial charges which typically fall outside of contract.
"Most don’t really understand what their total year-over-year increases are going to be," as noted in Freightwaves.
For companies that also ship through LTL and truckload, prices remain at record highs. LTL is likely to see further increases. It is predicted that anywhere from 500 million to 1 billion of additional warehouse square footage will be added in the US by 2025 as more companies open warehouses to get closer to delivery regions. This will, in turn, trigger an increase in demand for LTL shipments in an environment with already-constrained LTL capacity.
Six ways shippers can find relief
Recover costs from carriers: You may already be using a freight bill & pay auditor who can assist in recovering carrier costs by auditing your bills for errors or inconsistencies to contract. They also can assist with carrier negotiations using benchmarks and tactics that have netted positive results for other shippers. A knock-on benefit is that you will have all of your freight billing data consolidated - no trivial task if you are using different shippers. Having this data centralized can open up a world of other opportunities that we will cover below.
Find where it is unprofitable to ship: Review the freight costs across products and locations to understand profitability. If 2% of your SKUs are driving 20% of your LTL expense (a pattern we often see with shippers of larger bulky items), you will want to know what that is costing you in margin. To help bring down this cost, consider opportunities to forward stock inventory to ship in lower cost truckload quantities. Alternatively, you may be able to bundle certain products together to bring down the shipping cost impact on margins. At a minimum, you will want to know what is unprofitable to ship as there will undoubtedly be instances where shipping costs are 1-2x of the sales value of the delivery.
Recalibrate shipping and handling rates to recover your costs: If you quote customers for freight at time of order, you can reset shipping and handling fees to recover freight costs. Start by measuring freight recovery against your shipping and handling rates. You will quickly spotlight where you are losing money - for example, below $30 orders at standard shipment speeds going to certain locations.
Taking this a step further, review shipping cost performance through the lens of shipping lanes, products, order types, and customers.
Compare your item master weights and your actual shipments weights. Fill in gaps or inaccuracies in your master data by comparing to your freight billed weight, factoring in the weight of the corrugate and fill. You may be inadvertently miscalculating freight charges due to internal system weight inaccuracies.
These small changes can result in big gains in freight revenue.
Once you are able to model your historical billing costs tied to order lines, it is in reach to predict shipping costs in the cart despite not having all the details you would at time of delivery. Machine learning can enable this prediction engine to dynamically generate accurate shipping quotes in a cart.
Tweak your free shipping offer: If shipping is offered for free, you can review targeted ‘needle-and-thread’ changes to the free shipping program that help you recover outlier costs. For example, those 2% of SKUs driving 20% of LTL expenses may be candidates for exclusion from free shipping or require a higher order value to ship for free. Certain locations beyond the obvious ones you may already know about may be costing you more to ship. It is possible to recover costs without making wholesale changes to your free shipping program that could be negatively perceived by customers.
Structure win-win options in contracts and sales agreements: If you have B2B customers under contracts or sales agreements where freight is explicitly or implicitly factored into price, use the same data to measure the real shipping cost of sales. Compare with what you are contracted. It may not be realistic to pass through the difference to your customer but you can structure options that help lower costs for both parties. For example…
Align shipping discounts for DC deliveries vs. direct to end destinations which in effect increases the load size and reduces total shipping cost per unit
Offer lower shipping costs in certain regions or for certain shipment product configurations
Motivate customers to pull forward demand in a week to increase shipment size, reduce the need for additional shipments, and take cost out of the network
Give customers an informed choice factoring in environmental impact: More customers care about the environmental impact of the companies they buy from now than ever before. Shipping is an exciting point of alignment between companies and customers. If a customer is presented with a choice at time of checkout online - getting a delivery next day with 3-4x higher carbon emissions than a 5 day ground delivery (difference between next day air and parcel ground), a customer might be inclined to wait a few more days for a shipment that wasn’t time sensitive. This can also translate for B2B relationships as more companies report carbon emissions impact and seek to offset this impact with carbon credits. This includes internal fleet and third party shippers. Programs that help reduce carbon emissions, which translate to fewer miles traveled with more efficient shipments. With pending SEC environment reporting requirements, the urgency around is likely to accelerate.
Even if you can’t escape higher shipping costs altogether, there are many ways you can counteract them and increase your margins.
Synapsum helps companies reduce and recover these costs to serve. If you would benefit from tackling the above or related cost-to-serve opportunities, let’s connect.
References:
Rising Shipping Costs Prompt Businesses to Get Creative with Deliveries. WSJ. October 24 2022.
Don’t Scoff at General Rate Increases, Experts Say. Freightwaves. October 10 2022.
