Businesses have made great progress to get goods into customers’ hands quickly. They increasingly fulfill e-commerce orders from diverse distribution networks, casting aside the old model of using single distribution centers to cover wide territories, like the U.S., for example. They’ve reconfigured stores for in-store pickup, offered next- or even same-day deliveries, or become direct sellers for the first time.
Behind the scenes, they’ve been taking steps to stock and deliver their products more directly and from locations that are closer to customers to reduce the distances products must travel, and these steps fall into four categories:
1. Retail Footprint: Effectively turning stores into distribution nodes.
2. Manufacturers Selling Directly: Many spent decades cutting production costs, and as they turn their attention to costs of distribution, resellers beware.
3. 3-D Print And Ship: Companies are helping businesses in many industries reinvent their supply chains and reduce waste.
4. Pickup Sites: They mitigate the misery and time requirements of last-mile delivery.
Because UPS, FedEx and European carriers including DHL Express are increasing rates for 2020, sellers have another incentive to get closer to customers. Of course, some changes will affect certain shippers more than others, but one set of rate increases that came from UPS and caught my attention focuses on two- and three-day air delivery.
The rates charged for these services will increase at least 4% regardless of the distance goods are shipped, but as shippers send goods to distant zones, the charges for services that are already expensive will increase by 6% to 8% in many cases.
In other words, it’s getting more expensive at a faster rate to deliver goods over longer distances. The implication? Once again, it makes sense to be closer to customers. Direct sellers have yet another incentive to use more than one U.S. distribution center.
I have worked in the supply chain, shipping and logistics industries, helping businesses launch innovative technologies since the 1990s. From my perspective, the trend of needing to be closer to customers to provide better service more cost-effectively affects all of e-commerce fulfillment. Shippers globally, regardless of which software and carriers they use, increasingly look for ways to stock more of the right products in locations that are closer to the customers who need them.
These carrier rate hikes are just the latest in a long list of reasons for shippers to evolve beyond a single U.S. warehouse. It’s just too hard for shippers to provide the right level of service in a cost-effective manner without having a wider geographic footprint, through their own distribution centers, converting stores into distribution nodes or contracting with third-party logistics providers (3PLs).
Some Shippers Are More Affected Than Others
To know what will affect them, shippers need to consider the new rate hikes in the context of their own operations and forecast the impact of the changes.
For starters, shippers should audit their 2019 shipping records to identify the carriers and carrier services they use most often. How much are those services increasing compared to alternative services? Better understanding this dynamic can help shippers determine the potential to save by shopping competitive offerings.
What percentage of total parcel distribution costs do these top carrier services represent? This can help quantify how significant the rate hikes might be. If a shipper finds three-quarters of its parcel deliveries are currently being sent via UPS two- or three-day air service, for example, costs are about to skyrocket, and it may be time to investigate other options.
Other Ways To Drive Down Distribution Costs
Understanding what to expect from rate hikes alone is like preparing to take a blow to the chin — not nearly as effective as blocking the shot. Shippers can take immediate steps to reduce their distribution costs. In fact, shippers should protect their best interests in the short term by:
• Rate Shopping: Knowing where and when a package must arrive, shippers should weigh multiple options to choose the most appropriate carrier and service each time. Just because a parcel needs to arrive tomorrow doesn’t mean it needs to be shipped overnight. By studying the shipping execution of lower-cost carrier services — ground shipping, for example — shippers can develop reliable models in which lower-cost carrier services can get the parcel to its destination overnight but at less cost.
Taking a methodical approach to deciding which carriers a shipper should adopt as part of their carrier network can also control the imminent rate hikes. Shippers often overlook niche carriers, particularly those providing last-mile, competitively priced delivery services to meet customer demands. Assembling a versatile mix of carriers and services from which to choose ensures a shipper can quickly cast a wide net and select the best carrier and service for each order from each customer.
• Ensuring Compliance: Shippers should eliminate bad addresses and stay in compliance with other carrier requirements to avoid accessorial charges that can pile up fast. Other ways shippers can reduce distribution costs independently include consolidated shipping across borders to reduce taxes and offering customers choices of either free or fast delivery. Consolidated shipping allows shippers to send large sets of parcels across borders as one shipment to later break them up for local delivery within the destination country; they can use their own local distribution center or the services of a third-party logistics provider. Offering customers the choice between free and fast delivery empowers sellers to regularly say yes to customers without breaking the bank. Customers can either select free shipping and receive their order in two to three days, or they can get next-day delivery for a small upgrade over the free shipping offered.
Over time, with the right strategic plan in place, shippers can address the need for more fundamental but complex operational changes to get closer to customers. They can apply effective Band-Aid fixes today to control costs and boost service while addressing the more fundamental operational shifts that must happen over time.
