Shipping rate changes and the bottom line

Posted on Feb 27, 2015 in Nuts & Bolts

Major parcel carriers, including UPS and FedEx, have changed the way they charge for U.S. ground shipments weighing less than 150 pounds in 2015. What does it mean for your business? Depending on its size, a package could be subject to a minor hike in shipping costs. But, for companies that rely on parcel carriers to distribute products across the country, the change could mean huge expenditure increases and decreased profits – two pitfalls that can easily be avoided.

Not all weights are equal
The growth of e-commerce and digital purchasing behaviors has increased the number of mixed product shipments, or the shipment of many individual items as opposed to in groups or bulk quantities. This has led to the over-protection of products with oversized packaging, and the use of one-size-fits-all packaging, in which a retailer will pack varying items in the same-sized box, regardless of size or extra space. These behaviors decrease supply chain efficiency, so parcel carriers are looking to minimize wasted space, meet sustainability goals and improve profits wherever possible.

Shipment costs are traditionally assigned based on the actual weight of a package, as it reads on a scale. Carriers will now determine shipping costs according to the dimensional (DIM) weight, or the theoretical weight of a package based on its volume and a carrier-determined optimal density. The current optimal density for U.S. carriers is about 10.4 cubic feet, or 0.0060 pounds per cubic inch, which makes the current DIM factor 166 cubic inches per pound.

Consider a five-pound shipment. On the left, a box that is about 0.3 cubic feet has a density of about 17 pounds per cubic foot. In this case, the parcel will be billed per actual weight and the DIM factor will not be used. On the right, a box that is 1 cubic foot has a density of 5 pounds per cubic foot. The density is much lower, but the volume that is being used is more valuable than the actual weight, so the box would be considered heavier based on that larger volume and billed per the DIM weight.

Mitigating the effects
What does this mean for shippers? In many cases, it could mean no change. The DIM weight is already automatically applied to packages larger than three cubic feet, and packages that are denser than the carrier density factor will be billed according to the actual package weight. But for others, this may mark an unprecedented shipping rate increase that could have a dramatic effect on their business.

In the marketplace, customers might see higher subscription costs for online purchasing clubs, and a reduction in companies that offer free shipping. Products may be priced higher, as shippers attempt to pass the costs through to buyers. At the same time, this could instill buyer sensibility, heightening awareness of shipping costs and the need to shop around for retailers that take a more responsible approach to packaging.

For companies that are impacted the most by this change, there are several ways to minimize the cost of shipping and avoid paying exorbitant DIM rates:

• Maximize the package density. Reorient products to fit more snugly in a package so that weight and DIM are equivalent.
• Decrease the overall package size. Reassess the size of the packaging that is being used for certain products to minimize the size of the box used.
• Reduce excessive protection. Excessive use of peanuts, air strips, bubble wrap and other packing products leads to the use of oversized, less-dense packaging with higher shipping charges.

Maximizing margins
After decreasing the package size to offset the carrier shipping charge, the question must still be asked: does the package still work? The core purpose of a package is to protect. If a product is affected by damage by the time it is received and rendered unusable by the end consumer, then additional costs to manufacture and issue replacements can also affect a company’s bottom line.

In the following example, a company evaluates their total cost after a packaging redesign. Following the DIM weight shipping change, their shipping costs increased by 8% from one year to the next. This change initiated the package redesign resulting in an immediate savings on packaging cost but an increase in product damage rate percentage resulting in an increase in total cost. With Smithers’ total cost evaluation, the client is able to better optimize their packaging, While their shipping costs did increase slightly, they were still able to save on packaging cost while still maintaining their damage rate at 2%.

Distribution testing allows a company to validate package redesign and ensure superior performance in the supply chain. It’s a great way to collect data about the performance of a package. Testing also evaluates the effect of the package change on the damage rate and estimates the total cost to supply a product. There are four major evaluation areas for distribution testing:

• Vibration Testing. Determines how a package will withstand hazards while being shipped via air, road or rail.

• Compression Testing. Determines how a package withstands weight stacked on top of it during storage and transport.
• Impact/Drop Testing. Determines how well a package protects its contents against various drop and impact conditions.
• Atmospheric Testing. The conditioning of a package to determine how it changes under various changes in temperature, humidity, etc.

After package redesign, approval and distribution testing, the next step is to determine whether or not a product will work in the supply chain and the total cost to implement. Smithers Pira developed a total cost estimator – the PACKSmart Calculator – to help people understand the total cost equation and predict how changes might affect a company’s bottom line. Visit http://www.smitherspira.com/services/distribution-testing to learn more about the PACKSmart Calculator.

Positioning For Success
Increases in shipping costs may affect total costs, but reducing the packaging may result in an increase in damage costs. The key is to understand how product requirements, damage rate, and current shipping costs versus future shipping costs each will affect the total costs before considering the best option. Balance the damage rate with the need for adjustments using resources like the PACKSmart Calculator and distribution testing to achieve the best possible results.  

About Mike Kuebler
Mike Kuebler is the Technical Director of Distribution and Package Testing at Smithers Pira. With more than 15 years of experience in the transportation and packaging industries, Kuebler guides a team of packaging experts who analyze the true impact that the supply chain has on a package. Whether manufacturers are looking to optimize the cost and design of their current packaging, reduce the use of packaging materials to contribute to sustainability initiatives or analyze and correct package damage issues, Kuebler keeps the focus of all efforts on the concept of “Just Right Packaging.”