CSCMP's Supply Chain Quarterly
December 19, 2018
Forward Thinking

Commentary: Driving profitability in an express world

The pressure is on to move to faster and faster delivery to the end consumer. Here are a few strategies shippers can adopt to drive profitability in their transportation networks while still providing what their customers really want.

As e-commerce continues to explode, the arms race for faster fulfillment is becoming increasingly intense. Two of the largest players, and Wal-Mart Stores Inc., are jockeying for position as the e-commerce kings. Their latest battleground: the online grocery market.

While these giants forge ahead, many other e-commerce shippers find themselves struggling to keep up. One problem that many of them inevitably face is maintaining profitability while still providing end customers the fast fulfillment that they desire. To accomplish this, retailers that hope to stay in the race must continually adapt and optimize their networks to keep their shipping costs and transit times low.

This focus on efficient, cost-effective fulfillment is having a significant impact on the carriers that serve the e-commerce market. According to "The Impact of Brand Strategy on Parcel Transportation: GMT 2017 Benchmark Report," a research report prepared by Green Mountain Technology in partnership with Cleveland Research Company, most parcel and less-than-truckload (LTL) carriers identify two-day-or-less order fulfillment as their primary strategic focus. They also cite it as one of their most difficult competitive challenges.

Opportunities to mitigate rising costs

The need to meet end customers' growing expectations is raising costs for e-commerce shippers, but there are ways they can mitigate those costs while still maintaining efficient operations. For example, with the widespread advent of omnichannel commerce, customers have more ways than ever to place orders, and single customers often place multiple orders throughout the day. Shipping a multitude of smaller packages can quickly accumulate unnecessary shipping costs, since flat surcharges, such as residential and delivery-area surcharges, are applied on a per-package basis. As a result, it is increasingly important for retailers to identify opportunities to combine split orders into single packages. In that regard, implementing improved "cartonization" logic to determine the ideal box size and the optimal arrangement of items within that box often provides a significant return on investment. Additionally, consolidation of orders from the same customer that occur within a specified time frame can further reduce the likelihood of split orders. By effectively scheduling these order holding periods with their fulfillment cycle and carrier cutoff times, shippers can reduce their shipping cost without any negative impact on transit times.

Another example of a way to keep costs down is to pay attention to the impact of package size on freight costs. Consider the example of dimensional weight, which is is based on the total volume of the package relative to the total weight. In recent years, the introduction by FedEx and UPS of dimensional weight as a basis for all air and ground freight charges has added yet another complexity to U.S. parcel distribution costs. In the most recent example, in September, FedEx announced that it will begin applying dimensional weight adjustments to its SmartPost service in 2018. Once that policy goes into effect, FedEx will calculate the billable weight of a SmartPost package by taking the greater of the actual weight and the dimensional weight. The adjustments, if they occur, will always be increases in billable weight. (Similar practices are gaining ground internationally as well; for example, DHL and Canada Post also apply dimensional weight adjustments to shipments.)

Dimensional weight adjustments, coupled with large- and oversize-package surcharges (based on the length and girth dimensions of a package), further underline the importance of box engineering in minimizing transportation costs. In many cases, parcel shippers can easily avoid a lot of unnecessary cost by selecting or engineering a slightly smaller box that falls within these dimensional constraints.

Amazon and Wal-Mart invest large sums of money in their networks in order to achieve faster fulfillment times, opening distribution centers across the globe and acquiring e-commerce and brick-and-mortar companies alike to maximize their consumer reach. Not every shipper has access to the amount of investment capital required to follow in Amazon's path, but larger retailers have taken to shipping from their store locations to mimic a larger distribution network. Target, for example, recently announced its Target Restock program, which allows customers with a Target credit card to order a variety of household items in-store and have them delivered directly to their homes by the next day for a flat US$5 fee. In a similar vein, shippers can eliminate the costly residential leg of a delivery by providing a "buy online, pickup in store" offering, which naturally shortens transit time. Both of these methods seek to shrink the distance between ship point and customer in order to shorten transit times and reduce costs; however, it is important to note that stores will most likely require special resources and inventory management considerations to be able to directly fulfill orders.

Achieving faster transit time does not always require a broad distribution network. Shippers can "zone skip" by consolidating orders with similar destinations into trailers and sending them directly to carrier hubs near those destinations. Additionally, shippers can explore the use of regional carriers. These carriers service various sections of the country and operate more efficiently within these service areas than larger international carriers can, which often leads to faster transit times at an equal or lower cost. Retailers looking to ship locally and quickly can also leverage crowdsourced carriers through the use of services such as Instacart or Deliv. These options allow retailers to more easily adapt to fluctuating demand, particularly during peak periods when other carriers' networks are bottlenecked.

The last, and possibly the most important, insight lies in a retailer's ability to identify what its customers truly value in an online shopping experience. Fast order fulfillment is not the answer for every retailer, with some customers preferring "no-risk" return policies or increased shipment visibility to receiving their items one or two days faster. Aligning e-commerce strategy with customer expectations for the individual retailer will always be the best way to get the greatest value for their transportation spend.

Shipping in an increasingly express world is not getting any easier. Shippers must continue to innovate and adapt their networks to be able to keep pace with burgeoning customer expectations. Those retailers that are best able to navigate the new complexities of their networks will be the ones with the best opportunity to succeed.

Travis Peter is a strategic solutions engineer at Green Mountain Technology (GMT), a parcel spend management service provider for shippers with over 10 million parcels per year.

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