Article is republished from Parcel Magazine and written by OnTrac Vice President of Business Development Mark Magill.
Recent media outlets have reported a record high economic outlook and consumer sentiment that has led to ever increasing ecommerce parcel volumes. This growth rate has put great pressure on shippers to keep transportation costs in check while simultaneously gaining the necessary carrier capacity to serve their customers. Those massive parcel volumes have triggered higher parcel rates and accessorial charges, and have placed capacity constraints on what the national carriers can handle during Peak shipping season. Those factors have prompted many shippers to seek out alternative delivery methods.
An obvious choice would be the regional parcel carriers who deliver to multiple states and serve millions of consumers in concentrated geographical areas. They appear to be an excellent solution, simply because the very largest parcel shippers use multiple regional parcel carriers on a grand scale. However, just because Amazon uses regionals does that mean it will be a viable alternative for you? In this article, we will examine some of the factors that determine the Return on Investment (ROI) in adding regional carriers to your carrier portfolio.
First and foremost, you need detailed shipping data to accurately complete the analysis. To put it bluntly, “Data Is King!” If you want the most competitive rates from a regional carrier, it is vital to provide them with a two month shipping sample containing line item data with weights, dates and zip codes. If you really want to increase your ROI though, you should also provide them with street level delivery address information. This will enable the carrier to determine the delivery density of your shipment profile. Delivery density (the average number of shipments delivered to an address on a given day) is one of the main determinants of a regional carrier’s costs. If your data can demonstrate that your typical residential delivery order consists of 1.15 shipments being delivered per address, you can command a much better rate than if it was only one shipment per delivery. You may not be aware that this data is readily available on your national carrier invoice that you can download from their websites in Excel format. (When providing this data to a regional carrier, PLEASE remove the national carrier name and rates.) If you employ a freight auditor, they will have this information available for you as well.
Next, let’s take a quick look at how the national carriers structure their rates. In your national carrier contract you will almost certainly find the words, ”subject to all applicable minimums.” In plain English, this means the lowest price you will pay for a shipment is the Zone 2, one pound Ground rate. The 2019 tariff rate for this absolute minimum charge is now $7.85. This means that if you have a 50% discount on your rates, the net discount is mitigated by that minimum charge and consequently you will never get a straight 50% discount ($3.92.) Rather, the lowest price you will pay on any package is that $7.85 Zone 2, one pound charge, or whatever minimum charge you have negotiated. Check your math carefully. You may be surprised to find that your effective net discount is really only 25% when calculated using that absolute minimum charge. The good news here is that it is much easier to get relief on that minimum charge from a regional carrier than it is from the nationals. If you’re a high volume shipper, make it a goal of yours to get that minimum charge reduced by at least 20% from the regionals you contact. This is an easy way to reduce your basic package charge.
Now what about those accessorial charges that can easily add 50% to your total package charge? In the annual shipper surveys released by Parcel Magazine, the increase in accessorial charges is consistently listed as the shipper’s greatest source of irritation. Those additional fees for residential deliveries, extended delivery areas, dimensional weight, additional handling and large packages all put great pressure on a shipper’s budget and they are always looking for ways to reduce the impact of those fees. Reducing accessorial charges is also a quick way to rack up savings when adding regional carriers. This is very evident by looking at their websites. Some regional carriers don’t even assess a residential or a delivery area surcharge. (Voila! You’ve just achieved a 100% reduction in those charges.) The other regional carriers typically charge less than the national carriers for those additional charges and make it easier to negotiate them at a lower rate.
There is an old Bob Dylan song that says “You give something up for everything you gain” and that is certainly true when adding additional carriers to your portfolio. Let’s take a look at some of those additional costs so you will have an accurate perspective on the true ROI you can expect to gain. A key element is to measure what impact diverting volume will have on your national carrier’s contract. The national carriers (wisely) construct their shipping agreements so there are penalties like loss of discount if the parcel volumes shipped with them diminish. Pay close attention to this to determine your net effective savings in light of your national carrier discount structure.
What about the soft costs of adding alternative delivery methods? They are most certainly part of the equation. Additional carriers will necessitate additional dock doors. Do you have those doors available? How about invoicing? Each regional carrier will be invoicing you separately and there are administrative costs associated with that. There is also the training issue involved with preparing your customer service and shipping departments to effectively utilize your new carrier. Can you quantify how much that may impact your budget?
Another very important issue to address is integration. Specifically, how will you transmit the shipping data to the new carrier and how will you create a label for the packages shipped with them? If you’re using the shipping system provided by the national carriers, you will need to purchase an additional shipping software solution. Similarly, if you are using your own homegrown legacy system, there will be IT costs for the programming required to add another carrier. Thankfully, the price has come down considerably for shipping software and some solutions can be purchased for mere pennies a tracking number. Though there are certainly additional costs involved in integration, it should be emphasized that there is a built in benefit when you add a multi-carrier solution. The reason for this is shippers who single source with a national carrier and strictly use the shipping system provided by the carrier are in effect sitting ducks. Employing only one option gives your carrier great leverage over you and you should never allow yourself to be placed in that position. EVERY shipper should utilize some kind of multi-carrier transportation system and have at least one other carrier in place even if it just means having an account with the other national carrier and giving them just one percent of your business. This is self-preservation at its most basic level.
In order to fully balance the ROI of adding carriers, the faster delivery speed of regional carriers should be taken into account. The Amazon Effect is in full force and with the incredible amount of distribution centers they have operational, their customers can get two-day, next-day and even same-day delivery at no extra charge. Adding a regional carrier to your carrier mix can mitigate this advantage because the regional carriers provide a much larger next-day Ground footprint, usually offering next-day Ground delivery more than 400 miles from your shipping location. In comparison, the next-day footprint of the national carrier’s Ground service is only 200 miles. It doesn’t have to be Amazon you’re competing with, though. What if you are a plumbing supply company with a DC located in Harrisburg, Pennsylvania that competes with a company whose DC is located in New England? This means your competitor will provide next day Ground delivery to your mutual customers in Boston and you will be at a competitive disadvantage with the national carrier’s two-day Ground transit time. However, if you add one of the several regional carriers that serve the Northeast you can optimize your deliveries with the next-day regional Ground footprint that stretches from your Pennsylvania DC all the way to your customer in Massachusetts. It may be very worthwhile to take a close look at where your largest customers are located, and then determine if you can improve your transit time (and your customer experience) by adding a regional carrier with Zone 4 next-day delivery capability. This may help build customer loyalty and even increase sales.
Please do your due diligence and look at all factors involved in accurately determining the ROI in adding regional carriers. Compile the detailed data that will enable you to command the best discount, take a close look at your national carrier contracts, set pricing objectives with the regional carriers, and take a good look at the not so obvious factors like soft costs and integration. Putting all of these together will give you a clear picture of the best course of action for your company.