Three Ways to Prepare for Shipping in 2021
Food and beverage customers increased their package count by 95% in 2020, according to VeriShip’s data records of approximately 70 million packages shipped annually. This doubling of shipping volume has likely put a serious strain on your team.
As we head into the peak shipping season, are you ready to manage the volume? Is your shipping contract?
One often-overlooked aspect of operations, particularly during this time of great change, is your shipping contract. Though it may seem like a perfunctory task, a poorly negotiated contract — or one based on pre-pandemic shipping behaviors and volume — could be costing you millions.
Consider these staggering stats: If a business shipped 10,000 extra packages during the past 90 days (a realistic scenario), and the cost per package has increased from $15 to $22, shipping ate away $70,000 from your bottom line.
Chances are you’ve never planned for this type of environment, but you can act now to be prepared in 2021. These are our top three recommendations for food and beverage companies looking to optimize their shipping environment for the year to come.
Recommendation No. 1: Review Delivery Records to Understand Where You Were, Where You are Now and What Changed
When reviewing your contract, pay particular attention to these elements:
- Service utilization (e.g., ground, two-day, one-day) — Both FedEx and UPS abandoned their service guarantees early in the pandemic, so if you are offering a two-day service but charging based on standard ground, you are paying exorbitantly more — all without gaining the consumer satisfaction lift the expedited experience promised.
For example, take a 5-pound package shipped across the country via ground service. Undiscounted, it would cost $15.25 and take five days to get there. But if a customer chooses two-day shipping, that same package would cost $62.16 via two-day air. It doesn’t take long for a nearly $50 cost increase to eat away at margins, while also potentially damaging your customer relationship.
- Average package weights — Pre-COVID, consumers were likely to buy a small number of items from a wide range of online sites. We predict future online shopping habits will include more grouping of orders — buying the toilet paper along with a big supply order, for example — which means package weights will likely go up.
If shipping is optimized and your contract well-negotiated, you’ll be able to manage the shift. But bigger packages can hit margins hard. For example, major carriers took a 20% increase in the weight-based additional handling surcharge in 2020. In 2021, that rate will go up another 6.3%.
On Oct. 29, UPS added another layer to its 2021 general rate increase, effectively adding a surcharge to its surcharge. Now the carrier will consider where large packages are being shipped, adding another layer of cost.
Recommendation No. 2: Evaluate Service Contracts and Providers’ Overall Performance
When the expected (like the general rate increase) or the unexpected (like a global pandemic) happens, it’s essential to understand the effects on your business. Industry statistics and comparisons are important, but every shipper is different and will experience these changes uniquely.
In addition to your shipping volume, review the following metrics to determine the best course forward: service type utilization, package weights, package dimensions, pickup and delivery locations, and surcharges.
Where is this data? Everywhere and nowhere at the same time. It’s scattered among all your invoices and reports and in your contract. A predictive analytics platform and “what-if” modeling software can help.
Where shouldn’t you look? We don’t recommend relying on your carrier rep to shed some light. You’ll have a much stronger negotiating position if you understand your shipping profile and how it relates to the carriers’ pricing tactics.
One hint: It’s likely the carriers’ performance was below average. Our data for the food and beverage industry indicates that the weekly on-time percentage dropped from the 90% range in the summer months of 2019 to 70%-80% from June to August 2020, hitting a low mark in June.
Recommendation No. 3: Reach an Agreement on Contract Modifications
If you think you can only talk with your carrier rep once a year, you have waited too long. It’s time to reach out now. Ideally, you’ll build a strong, ongoing relationship so you can discuss changes as they are happening. Coming to an agreement on contract modifications that will adequately distribute the new cost burden should be the shared expectation.
Not sure what to ask? Start with an impact analysis of your historical data. You might get pushback. Keep asking. And remember those key metrics from recommendation No. 2. Now is the time to understand how changing consumer behavior affected your shipping costs — and how you might shift your contract to manage these changes.
For example, our data indicate that the portion of packages going to residential locations — which are more costly than commercial — went from about 47% in March 2020 to nearly 65% in April 2020, compared to a peak of 51% in 2019 during the heavy holiday season. FedEx raised its residential surcharges by 8.8% for 2021, so if your business has consistent year-round volume to a mix of residential/commercial addresses, it’s time to find deeper discounts to minimize the impact.
Just like everything else in 2020, the world of estimating shipping spend has changed drastically. But careful planning and close attention to the details and trends of your shipping operations and costs will put you ahead of the game in 2021.
Andrew Brueckner oversees VeriShip’s client and logistics strategy.