Supply Chain

Understanding Small Parcel Carrier pricing!

For shippers of small packages, choosing the optimal box size and streamlining the packing process is becoming an increasingly important consideration when trying to drive down transportation costs!

As of 2015, both FedEx® and UPS® adjusted their pricing strategy for small package shipments by adding Dimensional Weight criteria to the existing weight calculation for all packages measuring 3 cubic feet or less. This announcement placed a significant impact on all shippers that move these types of packages. Through this White Paper, you will understand the impact and you will also learn about the steps that can be taken to help mitigate the impact for your organization.

Effective January 1st, 2015 for FedEx® and December 29th, 2014 for UPS® both carriers announced that they will apply Dimensional Weight (DIM) pricing on all ground packages. Up until then, these carriers only applied the DIM price model to ground packages with measurements greater than or equal to three cubic feet, or those that are categorized as air or express shipments. This change implied that the cost of shipping any package will be based in part on the package’s volume or in other words, the amount of space the package takes up on the truck.

The announced change affected all companies in the Retail or Wholesale Distribution industry shipping U.S. domestic packages.

What is Dimensional Weight?

“Dimensional Weight (DIM) reflects package density, which is the amount of the space a package occupies in relation to its actual weight.” UPS Website http://www.ups.com

DIM

Figure 1: Image from UPS Website – http://www.ups.com

To determine the DIM weight (refer to Figure 1) you first determine the package size in inches. Measure (L)ength, (W)idth and (H)eight, at their respective extreme points and rounding each measurement to the nearest whole. The result of L x W x H is the cubic size of the package in inches.

To check your DIM weight calculations use the following links:

UPS®: http://www.ups.com/content/us/en/resources/ship/packaging/dim_weight.html
Dimensional Weight = (L x W x H / 166) for US domestic shipments and (L x W x H / 139) for US international shipments

Example: This 14” x 14” x 14” carton has a Dimensional Weight for a US domestic shipment of 16.53lbs:

dim2

FedEx®: http://www.fedex.com/ae/tools/dimweight.html
Dimensional Weight = (L x W x H / 166) for US domestic shipments and (L x W x H / 139) for US international shipments

What was the impact of the change?

Once the price change took effect, these carriers began calculating costs based on a probable “higher cost” case scenario when comparing actual weight against Dimensional Weight of the package. For instance, large boxes, under 3 cubic feet, with a light product packed inside it will most likely be charged based on the DIM weight, instead of its actual weight. Until the change was announced, the cost was calculated based on the lighter, actual weight, whereas in 2015, the costs were started to be calculated based on the larger, Dimensional Weight; leading to an increase in shipping costs.

A few points to note

  • The areas feeling the greatest impact are shipments for packages larger than a shoe box, weighing less than or equal to one pound.
  • The greatest percentage increase in the rate affects heavier products as well as products traveling the furthest distance.

So what does all of this mean to an organization that ships a lot of small packages using UPS® and FedEx®? Depending on the Zone and dimensions, the cost increase to an organization varies between 9% and 90%.

Here are two varying high-level examples describing the cost impact:

  • A package measuring one cubic foot, 12” x 12” x 12”, weighing 2 pounds with a DIM weight of 11 pounds, traveling to a Zone 5 location (601 – 1,000 miles) by way of FedEx®, reflected a 32% increase in shipping costs.
  • A package measuring two cubic feet, 12” x 12” x 24”, weighing 7 pounds with a DIM weight of 21 pounds, traveling to a Zone 4 location (301 – 600 miles) by way of FedEx®, reflected a 45% increase in shipping costs.

Getting into the details behind the impact

To demonstrate how these values are calculated, this White Paper will now walk through an example using a real order.

Step 1: Calculate the Order’s Dimensional Weight

Example Order:

25 x Protein Shakes
– Dimension of item: 7” x 4” x 4”
– Volume of item: 112 cubic inches
– Weight of item: 1.19lbs

20 x Shakers
– Dimension of item: 9” x 4” x 4”
– Volume of item: 144 cubic inches
– Weight of item: 0.75lbs

Step 2: Pack the order for shipment

The next step in the process is to pack the items in order for them to be weighed and shipped via UPS®.

Delivery: 3 Large Cartons are used to pack items
– Dimension of carton: 14” x 14” x 14”
– Volume of carton: 2,744 cubic inches
– UPS® DIM Weight: 17lbs

order

Figure 2: Packing Configuration

Figure 2 shows how the products have been packed. The first carton contains 24 shakes because that is what the volume of the box allows room for. The 2nd carton has 18 shakers and the 1 remaining shake. The last box has the remaining 2 shakers.

Just by looking at the way this order was packed, the issue is very visible. To better understand how big of an impact the package configuration has on the order’s cost, let’s run through the detail.

The package’s volume utilization figures read as follows:

  • Package 1 is packed at 98% (1.555 out of 1.590 cubic feet) capacity
  • Package 2 is packed at 98% (1.565 out of 1.590 cubic feet) capacity
  • Package 3 is packed at 10.5% (0.167 out of 1.590 cubic feet) capacity

The costs associated with this packing structure are as follows:

Package 1 weighs 29lbs (24 shakes x 1.19lbs) and has a DIM weight of 17lbs (taken straight from the carton size). The cost to ship this package to a Zone 5 location, in 2015, via UPS® is $18.07 and is based on the actual weight because the actual weight is larger than the DIM weight. In 2014 the cost is the same.

Package 2 weighs 15.2lbs (1 shake x 1.19lbs + 18 shakers x 0.75lbs) and has a DIM weight of 17lbs (taken straight from the carton size). The cost to ship this package to a Zone 5 location, in 2015, via UPS® is $12.25 and is based on the DIM weight because it is larger than the actual weight. In 2014 the cost is the same.

Package 3 weighs 2lbs (2 shakers x 0.75lbs) and has a DIM weight of 17lbs (taken straight from the carton size). The cost to ship this package to a Zone 5 location, in 2015, via UPS® is $12.25 and is based on the DIM weight because it is larger than the actual weight. With 2014 pricing, this package would be charged at $8.05, a difference of $4.20 from the 2015 value. This equates to a 52% increase for this package alone in shipping costs.

In 2014 this delivery would cost $38.37 to ship whereas in 2015 and onward, it costs $42.57. That is an 11% increase in shipping costs.

Ignoring the shift towards a DIM pricing structure has undoubtedly cost a company more in shipping costs.

What can organizations do to minimize this impact on costs?

If this scenario is a concern to you then you can address the situation by performing these steps:.

STEP 1: Analyze how you are packing today

Review your current packing process to see if there is an opportunity to optimize the package size your organization currently uses. For example, packing the above example of shakes and shakers into 3 varying sizes of boxes could have saved 8.4% in cost with processes for packing more efficiently. Not to mention, it could potentially limit the net impact of the UPS® increase to a low rate of 1.6%.

STEP 2: Consider options to reduce the cost

Give due considerations to each of the following options and determine if one or more of these solutions are applicable for assisting an organization:

  • In a large enough organization, it is first advised to negotiate the shipping price impact with UPS® and FedEx® based on the 2015 budget
  • Use another carrier for small package shipments. A likely option would be to use the US. Postal Service whose Priority Mail option will continue to charge a flat rate for domestic shipments of up to 70 pounds. The U.S. Postal Service now provides tracking capability, free insurance, and partners with leading e-commerce players like Amazon.com, to offer Sunday delivery in most major cities.
  • Change the way you pack. There are many aspects to this including how many sizes of boxes are on hand, how to decide how to pack in a way that achieves maximum utilization, are their special packing instructions, is this a personnel issue, and more. A suggestion here would be to investigate implementing a Package Load Builder tool that will tell packers the optimum way to pack the given products in order to minimize costs.
  • Monitor how packages are currently packed so that one can take corrective action, either before shipping the product or after shipping it.

If the decision is made to intercept the package before it is shipped, then although an organization receives the benefit of lower shipping costs from the carrier, it must factor in the cost of the delay occurred in the shipping process, i.e. warehouses would need to reroute the package or delivery to a repacking or Quality Inspection station for it to be repacked. This takes time and ultimately has a cost in itself.

An organization’s decision to analyze the data, after the shipment has been sent, loses an opportunity to recover the costs for that shipment. Through change management and education, however, the behaviors of the packers can be influenced so as to reduce future shipping costs. This option has very little cost associated with the disruption to the packing process but has less real-time effect on poorly packed deliveries.

Implement an SAP based solution to give insight into packing exceptions as and when they occur

If an organization has immediate visibility in to a scenario where a package is not efficiently packed then corrective action can be taken prior to incurring the cost resulting from inefficiency. As mentioned above, this is often at the expense of operational efficiency in the packing process within the warehouse, i.e. the packing process is slowed to correct packing issues.

Assumptions:

  1. SAP’s packing functionality (Handling Units) are used within SAP ECC
  2. Material master data is correctly maintained for the materials being packed and the packing materials themselves
  3. Access to SAP Event Management is available (SAP EM – Module within SCM or can be implemented as a stand-alone add-on to SAP NetWeaver)

Solution:

The following components need to be implemented in order to gain the necessary insight into packing inefficiencies in real-time.

  1. SAP EM extraction for Handling Units on the SAP ECC server
  2. SAP EM configuration and Web UI display on the SAP EM server

A decision then needs to be made that determines whether a packing exception should proactively notify the packer that the package is under packed or if it should instruct the conveyor system to re-route the delivery to the QA inspection line. If this is required then SAP EM will trigger the necessary interface call to perform the re-routing or it will notify the packer of a packing discrepancy. This requires SAP EM Rule Set and Activity Function configuration to achieve this.

If the decision is to let the packing discrepancies get shipped and perform a post-process analysis of what happened, then the interface between SAP® EM and SAP® BW needs to be configured so that the number of packages, with content, per packer, with a packing discrepancy can be measured.

Using the example shown in Figure 2, the following view can be pulled from within the SAP EM Web UI (See Figure 3).

figure3

FIGURE 3: SAP EM Exception Reporting / Notifications

The first two rows shown in Figure 3 show the first two cartons that were packed within compliance. Notice their % packed is displayed together with the relevant pack station, packaging type, and a variety of additional pertinent information. Note: any relevant information can be configured to display in this list.

The third row depicts the package that was packed poorly. If it is measured against an organization’s self-imposed target of 80% filled space with 20% or less air, the status is automatically set to “Packed out of compliance” by SAP EM. Setting this status allows anyone else to search for packages with this particular status. This information can then be pushed to SAP BW to perform a count as a % of the total, in order to see how well the team is performing against set targets.

Selecting the line to view details for that package gives even more insight into the Handling Unit detail for that particular delivery. All the information needed in order to determine whether or not this package was packed in compliance versus just being packed out of compliance, is available for display.

pack

With this solution in place we choose how to reduce the impact of the DIM pricing change.

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