Amazon is growing on-demand services after reporting a 20% sales increase in 2015.
New rules at the U.S. Postal Service create new challenges for retailers
No matter how wonderful retail e-commerce sites become-and they have come a long way in the past 10 years-they’re only as good as their ability to deliver the goods to customers. And just as consumers expect more of web sites the better e-commerce gets, they’re also expecting more and better options in delivery service.
But though retailers have more options than ever before for delivering goods, they’re also facing new challenges-like a new rate structure from the U.S. Postal Service based on the shape and size of packages, instead of just weight. Those rates are forcing retailers to think harder about the value of large and odd-shaped packaging designed for promotional purposes compared to standard size packages designed for efficient shipping. “A lot of times retailers pay all their attention to customer presentations in packaging and no attention to shipping costs,” says John Fontanella, vice president of research and retail industry analyst at AMR Research Inc. “That has to be addressed.”
The new U.S. Postal Service rates were a response earlier this year to new package shipment pricing imposed by FedEx Corp. for its air freight. Forced to conserve space in its planes’ cargo holds, FedEx now bases air-freight rates on cubic measurements, or length times height times width, in addition to weight. The larger the container, the higher the expense, regardless of how heavy it is.
The Postal Service, which relies solely on FedEx for its air freight shipments, passed the new dimension-based pricing system onto customers in May for Priority Mail packages of at least one cubic foot, causing double-digit percentage increases in the shipping costs of many retail products, Fontanella says. “In one case a retailer’s shipping cost went up about 20% because of dimension-based pricing,” he says. Retailers can be especially hard hit, he says, for lightweight products like hats or jewelry shipped in large boxes stuffed with lightweight protective packaging material.
“Direct shippers are now experiencing what bulk shippers have known for years, that shipping packaged air can be expensive,” says Paula Rosenblum, managing principal with research and advisory firm RSR Research LLC. “It takes up cubic space in trucks, planes and even in distribution facilities and is more expensive to sort and deliver.”
UPS, as well as the Postal Service and FedEx, charges dimension-based pricing, though terms can vary for different contracts with shippers, a UPS spokeswoman says. Fontanella says he expects all carriers will eventually use dimension pricing for air shipments to go along with industry pressures. “I can’t see them not doing dimension-based pricing over the long term,” he says.
Searching for options
Dimension-based pricing challenges retailers, as well as their in-house product and packaging designers and even suppliers, to come up with more efficient shipping containers. While retailers will have the most control over packaging of their own private label products, broader product lines will require more cooperation among merchants and suppliers. “This is a challenge to the whole retail ecosystem, not just retailers themselves,” Rosenblum says. “It makes sense to re-think item packaging so the cost of a single shipment can be reduced to an absolute minimum. If you can get your merchandise to fit into a standard size package, you can take advantage of lower cost priority mail rates.”
That challenge extends all the way to product package designs. “When product engineers design something, they don’t think about logistics costs,” says Fontanella.
Rosenblum, a former CIO at a party supplies retail chain, suggests that retailers press both suppliers and carriers for additional options in packaging materials and containers. One way to encourage cooperation is to agree to a minimum purchase amount, which can make it more rewarding for a supplier to cooperate in designing particular packages by size and shape, experts say.
Indeed, market competition already appears to be providing shippers with more options, Rosenblum and others say. The Postal Service, for instance, is making available through local post offices and other facilities special standard-size packaging, including shoe boxes and special containers with padding materials for sending photographs and gift items. “We’ll help shippers find the right packaging,” says Jim Cochrane, manager of package services.
The pay-off can be lower rates to ship the same product. For example, mailing a CD in a large, protective envelope instead of a box can save 33 cents per unit shipped, he adds.
Product designers, merchandisers and shipping professionals will have to work out the best combination of packaging to support shipping efficiency as well as merchandising and marketing strategies-deciding, for instance, whether it’s better to ship jewelry in a decorative box that creates a distinct image for the retailer or a flat pouch that could be shipped at a lower rate. “We recognize that for some mailers the look of a mail piece is more important than its postage,” Cochrane says.
To help shippers decide, the Postal Service provides package planning tools and rate calculators in its Direct Mail section of USPS.com.
Some retailers are using systems designed to make it faster and more efficient to prepare shipments for dimension-based pricing, helping to get them out the door as quickly as possible.
One major web-only retailer that asked to remain anonymous has configured a fulfillment and shipping system designed to expedite shipping through dimension pricing while taking advantage of the best available rates.
Using the laser-based CubiScan package-measuring system from Quantronix Inc., the retailer gathers the dimensions and weight of packages during fulfillment. The CubiScan system integrates through XML with a broader system that includes the HighJump Supply Chain Advantage application from HighJump Software and a shipping management module from Kewill Systems.
Once CubiScan measurement data is in the HighJump application, the fully web-enabled system-using XML-based application integration and browser access to data-can use the Kewill module to connect with multiple carriers and determine the best carrier rate for a particular package, HighJump says. “We do rate shopping, because one carrier might have a better rate for certain dimensions,” says Chad Collins, vice president of global strategy for HighJump Software, a unit of 3M.