Shipping Cost Reduction Strategies September 15, 2008

By: Maxim Mironov

Reprinted from: http://www.optimalogica.com/

There are two most commonly used strategies to reduce shipping cost: negotiate volume discounts or shop around each time for the best price. While both strategies produce results, consolidation is the better one for rapidly growing online retailers.

Strategy 1. Consolidation
Do an assessment of your current shipping agreements. Are you shipping on your account? Using vendor`s accounts? Working with a freight forwarder? If you work with many partners – likely you are a small fish for each of them. Promise to become a big one, share your shipment statistics and ask carriers to make you a proposal.

Even small retailers can significantly improve their shipping discounts by just doing the math and discussing their business. Shippers love volume and growth. Demonstrate both and 8 out of 10 carriers will offer you better discounts.

I dealt with 70,000 products being shipped from anywhere in the US to anywhere. Consolidating shipments with 2 carriers for each delivery method – UPS and FedEx for small parcels, Roadway and BAX for LTL and Sun Delivery and Home Direct for White Glove orders – proved to be the best strategy. By doing so I justified better discounts yet kept some flexibility to chose better shipper for specific cases. After figuring out BAX had excessive damage rate in one of their terminals I promptly switched vendor to Roadway and prevented further issues.

The choice you are to make is do you want to ship on your own account or work with a freight forwarder. To set up your accounts you need to learn a bit about the transportation industry and negotiate a lot. Freight forwarders usually look at your data and make a prompt offer. In your case going with a freight forwarder may be a better decision, but none of the forwarders came close to the discount rates I negotiated myself.

Along with reducing shipping costs you make your fulfillment transparent. Vendor ships the order using your UPS account, specifies your Purchase Order in the Reference Field and, voula, you have ship confirmation, expected delivery date and actual shipping cost.

Third benefit is scalability. By putting your logistics on autopilot you simplify vendor setup process. With a system in place setting up a new vendor takes less than an hour.

For the reasons above I believe that consolidation is a better strategy for online retailers. Having said this I still think that in some cases shopping around is a great strategy.

Strategy 2. Shopping around
The underlying assumption of the strategy is that shippers have underutilized routes (true), are willing to deliver your shipment for pennies to increase utilization (true) and you can catch those deals (sometimes true).

Some companies prefer to maintain rate tables for multiple carriers in their system and run a rate comparison for each shipment internally. Others utilize services like FreightQuote. Both ways have significant maintenance cost. Either you need to constantly synchronize rate tables with the carriers or you need a person who would manually obtain quotes from the freight comparison websites.

A sweet spot for the Shopping Around strategy is single large shipments and exceptions. Let`s say you have a container coming from China, or one of the customers wants a delivery to a lonely rock around Hawaii. These cases are to rare to focus on during your discounts negotiation and your default rate will likely be suboptimal.

In conclusion, I want to restate my recommendation for online retailers to consolidate shipments. Along with lower shipping costs you will make customer happier by providing them with accurate information about their orders and simplify your cost reconciliation process.