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You are about to enter a dimension of size, weight, and volume

If the retail industry needed a catalyst for change, one that nearly mandates more efficient and sustainable packaging practices, FedEx recently provided the blowtorch to ignite it.

In the boldest pricing adjustment in almost 20 years, FedEx announced that it will use a dimensional weight formula to calculate rates on packages measuring less than three cubic feet. UPS followed suit quickly, and the policy is scheduled to be implemented by both carriers before the first day of 2015. This won’t affect holiday shipping rates, but it will impact many of the accompanying returns.

Today’s consumer has come to expect a delivery process that is both fast and cheap, adjectives in business that don’t usually mix, unless you're talking about fast food, ultra-low quality products, or businesses that don't stand the test of time.  The "gimme now, ship it cheap" expectation has led to a retailing practice of waste riddled with costs and lost opportunities that FedEx and UPS are no longer willing to absorb internally.

Digital retail customers have been blooming for years in the form of quality products delivered to consumer’s front doors quickly and inexpensively. That party is about to end.

The FedEx and UPS rate changes shift the cost of inefficiency from carriers back to shippers and will force them to respond by either absorbing the incremental shipping costs, passing the costs to customers or optimizing packaging to minimize new costs.

Absorbing costs or passing them onto customers are ill-advised, so right sizing packaging is the a better option, but it requires the right expertise and planning to execute properly. Digital retailers should feel a sense of urgency to implement the necessary adjustments to their supply chains before the price changes take effect.

This upcoming holiday season is perfect for a “dry run” to test and optimize new packaging tactics. Retailers beware, if you don’t also optimize the return shipment packaging, the additional costs of inefficiencies could cost you two-fold. The day the changes take hold retailers must consider that most customers re-use packaging materials to send returns. Therefore, any shipped items whose return window is after the new year will probably be affected by the new rates.

Brace for impact
Before planning any changes, retailers must understand what the impact of dimensional weight policies will be. This free dimensional weight calculator makes it easy to determine precisely what the pricing looks like now. The general rule is that light and bulky parcels will see the most significant cost increases. Analyzing shipment histories provides a high level overview of bottom line impact, which may range from negligible increases in shipping costs to as much as 40% based on industry insights.

Understanding shipment volumes and weights provides a means to quantify the immediate effects of new dimensional weight pricing structures. It is important to know the types of items being shipped so that cost of damages and cost of packaging can be balanced to find the optimal packaging size for each item. For example, certain items can undergo simple changes such as shipping in padded envelopes instead of boxes with air pillows; for others, a holistic review of your packaging system may be necessary to maintain the balance of protection and “shipability”.

Right size the right way
When right sizing packages makes the most sense, there are many options available to help reduce the size of parcels. Experts abound in designing dimensional weight optimized packaging, and on-demand carton printing companies and corrugated suppliers can offer advice and provide necessary materials. Work with an independent partner to determine the best path forward.

Shippers should take advantage of the remaining time before the new rates take effect to test packaging options. Don’t wait until the busy holiday period, for an opportunity to conduct A/B tests of different packaging to determine the optimal mix of product protection vs. shipment costs. Smart retailers should already have all of the kinks worked out of their packaging before the new rates kick in.

Navigating the sea of options
These shipping rate changes will force the hands of shippers to become more efficient in how they package and ship their products. Like most everything else, shipping rates are negotiable. The dim-weight divisor used in the calculation of shipping rates can possibly be negotiated by shippers with significant leverage as a logical first step. But, don’t let that be the only step you take.

Though dimensional weight will change how rates are calculated for many parcels, the bigger pricing strategy will not change: it will still be based on origin-destination pairs zip codes. Shortening shipment distances by locating more supply closer to more customers can make sense and will continue to result in transportation savings depending upon your supply chain network. Reevaluating distribution center location and shipping lanes in light of the new dimensional weight pricing may provide a means to curb the incremental charges, but must be reviewed holistically.

It’s the perfect time to consider a supply chain network analysis to assess distribution center locations. Relocating your hubs can create an opportunity to use niche regional carriers. Remember, although ubiquitous, FedEx and UPS are not the only carriers in the market. Some shippers may realize even more efficiencies by adjusting shipment volumes away from these two major players and capitalizing on smaller regional carriers and the USPS, who have not implemented this dim-weight pricing structure.  

Regardless of what mitigation strategies digital retailers implement to keep transportation costs in check, the biggest risk is proper management of customer expectations regarding product availability and price. The lure of free shipping has historically trumped delivery speed. The potential of higher shipping costs for parcel-sized purchases could drive more shoppers back to their brick and mortar roots when price savings no longer adequately counter the convenience of next-day delivery.  

This new pricing structure is likely to be the biggest game changer in digital retailing for 2015. Which merchants thrive and which ones fail will largely depend on how successfully they understand and respond to impending shipping rate changes. These rate changes, the most significant since 1995, represent the biggest shift in procurement to consumers that digital retailers will face, including the birth of the internet.


Darren Jorgenson is Practice Leader of the Packaging Optimization Practice for Chainalytics. He can be reached at djorgenson@chainalytics.com.

 

 

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