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Faster Shipping = Higher Costs! Here’s what to do.

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Recent financial reports from Amazon attributed a downturn in profits as a direct result of the company’s heavy investment into speeding up delivery times to their customers.  Amazon’s third quarter profits fell 26% from a year ago to $2.1 Billion. This was Amazon’s first profit decline since 2017 and second reporting quarter in a row where the company missed analyst’s expectations.

Amazon reported that their world-wide shipping costs increased 46% to $9.6 Billion from the previous year.  The additional costs were related to its growth of its one-day shipping program for Prime members. Amazon projects that their fourth quarter expenditures in this area alone will almost double from their second quarter expenditures, to a figure of $1.5 Billion.  

Adding to these costs was the growth in hiring with their current employment at approximately 750,000 workers.  The hiring growth is necessary based on the need to have inventory placed closer to their ultimate customers so Amazon can in fact meet their one-day delivery commitments.  More Fulfillment centers and more employees in those fulfillment centers filling orders add to the cost of expedited shipping for sure. 

We have been reporting for some time now that offering “free shipping” and “faster shipping” services to customers creates significant cost drivers that Retailers, Brands or Consumer Products companies must continually keep their eye on.  They must ensure these costs do not spiral out of control, which is easier said than done. Yes, we certainly do understand that overall customer sentiment is to demand “free AND faster shipping” and that these trends are a direct result of “The Amazon Effect.”  But by following the leader, (in this case Amazon), do Retailers, Brands or Consumer Products companies have the wherewithal to truly control their logistics costs while they try to compete head on with “the Big Guys”, (let’s not forget about Wal-Mart and Target)!    

Well, the answer to that question depends on whether or not these companies have implemented a comprehensive Data Science approach to analyzing and ultimately controlling their transportation and logistics costs.  For companies to be truly successful they must first gain a complete understanding of how their costs are calculated by the freight carriers.  

It’s necessary to create an ongoing and comprehensive analysis of their “actual” shipment activity and “actual” costs associated with that shipping activity.  This process also requires a comprehensive invoice audit process for all transportation and logistics related invoices to ensure 100% invoice payment accuracy in accordance with all carrier contracts and pricing agreements.  

There is no way a company can truly manage the risk of overspending on transportation and logistics without these processes firmly in place.  And very often Retailers, Brands or Consumer Products companies do not have the expertise in house to be totally successful at these tasks.  

There are many examples of shippers being lulled into a false sense of security believing their transportation and logistics costs are completely under control and match their pricing agreements to a tee; here are just two of those examples.

  • A shipper negotiated revised rates with their primary parcel carrier and was assured by that parcel carrier that their new contract would reduce their parcel shipping costs in excess of $300K annually.  Before signing the actual contract, the company had their invoice auditor perform a financial audit to determine if the “New” rates they had just negotiated would in fact save the company that same amount of money the carrier was claiming they would.  Well the value of the financial audit turned out to be “PRICELESS!” The financial audit results indicated that the shipper would not be saving anywhere near the $300K annually and in fact would actually be paying more than their current contract rates.

So how could this possibly happen?  It was just that the parcel carrier offered incentives that were not completely geared to the shipper’s actual shipping services.  In other words, the carrier offered larger discounts on services the shipper rarely used. The carrier did not offer additional incentives on many of the surcharges the shipper was responsible for paying.  And finally, they offered the shipper additional financial considerations if the shipper upgraded certain technologies, which the shipper never had any interest in doing and therefore never actually took advantage of.  

The financial audit provided “Big Data Mining” capabilities the shipper did not have access to in house.  The auditor tracked every package the shipper made by service type, zone, actual shipment weight, (billed weight if different), along with applying any required surcharges and compared the current and proposed new incentives and Viola, the proposed savings immediately disappeared.

  • In another case, a shipper’s weekly shipping volume fluctuated throughout the year and sometimes moved them into a position where they no longer qualified for any carrier discounts.  The contract they negotiated did not take into account the peaks and valleys this particular shipper’s business dealt with. Only after the shipper engaged their Third Party Auditor to perform a financial audit of their actual shipping activity, did the company find out they were constantly losing ground when their shipping volumes dropped to certain levels. And most importantly, the shipper had no idea their shipments were not being discounted during those shipping season downturns.

So, what actually is a financial audit; it is an audit that goes much further than a service audit where Third Party Auditors are merely auditing parcel invoices for late delivery refunds.  While a service audit is an extremely valuable audit, it must be coupled with a financial audit that compares the shipper’s actual shipping activity with the actual rates charged and matches those costs to the shipper’s contract or pricing agreement to ensure 100% accuracy; all this while at the same time providing insight into areas where costs just might be raging out of control without the shippers’ knowledge.  

So, when companies are pressured to offer “faster shipping” or “free shipping” services or both for that matter to its customers, having a comprehensive financial audit in place will keep a watchful eye on the shipper’s freight spend.  It will trigger alarms if the costs are exceeding shippers’ budgets which they continually rely on to assure profitability.  

If your company is not receiving the ongoing value of a service audit combined with a financial audit it may be time to make a change.   

 

Breaking News

Breaking: General Rate Increases for Asia Imports

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We’ve been hearing that this year’s Peak Ocean Import Shipping Season might not be something to write home about; no surprise there, especially with the continuing tariff negotiations.  One would think then that the ocean carriers might reduce rates due to the expected low shipping volumes in an effort to entice shippers to put more containers on their ships headed to the US, Canada and Mexico.

However, that is not the case and in fact hasn’t stopped the ocean carriers from announcing they will apply a General Rate Increase beginning this November.  Thanks to our friends at OEC Group, we can now share with you the following General Rate Increases.

Effective November 1, 2019, A General Rate Increase (GRI) has been filed for all cargo imported from Asia ports of loading, to the U.S.A., Canada, and Mexico ports/ramps of discharge.

The proposed increases are as follows:

General Rate Increase – November 1, 2019

USD         900 / 20′

USD      1,000 / 40′

USD      1,125 / 40′ HQ

USD      1,125 / 40′ Reefer

USD      1,266 / 45′

USD      1,600 / 53′

As it is not possible to predict the future market based on the current trade conditions, we recommend all shippers continue to monitor the situation as it develops.

Should you have any questions or need any additional information, please feel free to reach out to us.

Truck

Trucking Uncertainty Creates Real Opportunities for Shippers

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Earlier this year we heard of numerous trucking operations just shutting down, unable to make their businesses operate profitably.  We’re also hearing many other truckers are now laying off hundreds of employees in an effort to “stop the bleeding” or at least to help offset spiraling operating costs.  

Recent reports from financial firm, Bloomberg Intelligence states that this year’s Peak Shipping Season won’t be particularly strong.  In fact, Bloomberg expects the growth rate of the real Gross Domestic Product to drop from 2.9% in 2018, to 2.3% in 2019 and 1.8% in 2020. 

In the past, these numbers would be clear warning signs of a slowing economy to come.  Trucking operations were in fact a fairly accurate bellwether of the state of the economy, whether it was on the rise, or about to slow down.  However, in today’s global driven economy, there are many more factors to be taken into account before such predictions are proven accurate.  

Today many manufacturers are carrying high levels of inventories reducing the need for trucking capacity; there is obviously a great deal of uncertainty surrounding trade talks between China and the US, the USMCA and how these talks and potential agreements will finally end up, and of course, Brexit is still up in the air.

All of this “noise” is creating an unsettled trucking industry and it’s anyone’s guess where all of these issues will ultimately lead us.

However, even with all of this uncertainty, one thing we know for sure is that the LTL freight carriers will be increasing their rates shortly and passing those increases on to all of their shipper customers, if they have not already done so.

The fourth quarter of every calendar year is typically the time for shippers to evaluate their transportation service providers and the level of overall service they have received from those freight carriers in the past year.  It’s also a time to track freight budgets to make sure they are still in line to meet calendar year 2019 predictions and of course, to outline their service needs and freight budget requirements for calendar year 2020.

So, is this trucking uncertainty we’ve been hearing about an opportunity for shippers to not only strengthen their relationships with their freight carriers and well into the future, but also an opportunity to benefit from lower freight costs….you bet it is.

Some might look at this pending opportunity and think with a potential slowing down of the economy that their freight carriers will obviously be in a “weakened” financial condition.  And, that this might be an excellent time for the shippers to take advantage of their freight carriers and seek drastically reduced rates.

A word of caution to our shipper friends with that thought process in mind; don’t be fooled into thinking you actually have the upper hand.  The LTL freight carriers are well aware of the “hammer over the head” effect that was put on them in years past; first during the initial stages of deregulation, as well as through every recession, and especially during the “Great Recession”.  They’re on to you and they’re not going to roll over and play dead, you can bet on that.

However, this is an excellent time for shippers to finally think about creating a strong, mutually beneficial and long term “profitable” business relationship for the shipper and for their carriers as well.  Now isn’t that a novel approach!  

The first step is obviously to ensure the carriers they are working with can provide ALL of the services the shipper needs.  This includes timely pick-up and delivery, claim free service, advanced technology services to meet the shipper’s needs as well as any other “value added” services the shipper needs to operate efficiently.  Once that process has been completed and documented, the next step is to benchmark their current freight costs to ensure the rates and fees being paid are the most competitive rates for the services offered.  

Notice we didn’t say the “lowest” rates or the “cheapest” rates because that’s not a place a shipper wants to find themselves especially if they have not first qualified the freight carrier’s services as totally meeting the shipper’s needs.  While all of this sounds very logical, you would be amazed at the number of companies that select carriers solely on the basis of costs and wind up paying much more than they should in the end, perhaps even losing customers due to poor service.

But how can a shipper benchmark their rates if they only have access to their own shipment data to analyze.  The answer is they can’t and that’s why they need help with the process to ensure they receive the “best deal” for their company for the long haul.  

Shippers should engage a Third Party Consultant that has access to millions of shipping transactions and pricing data for similarly situated shippers, can you say DATA MINING CREATES BIG DATA!  These firms have the ability to benchmark the rates a shipper should receive based on their volumes, seasonality, shipping lanes, average weights per shipment, etc.  Once the benchmark analysis is completed these consultants will provide Target Pricing specifically generated for the shipper and document the savings the shipper will receive.  These firms almost always base their fees on a percentage of the actual savings achieved, AKA Gain Share, for their clients.  Now that’s a deal worth looking into.   

If this process sounds like something your firm would find valuable, we’d love to hear from you.  

Drone

Drones Coming to a Sky Near You

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FAA gives UPS green light to ship medical products and specimens within the state of North Carolina

Over the past several years there has been much talk about the use of drones to make deliveries of packages to a home near you.  Many sceptics have been saying, “never going to happen, at least not in my lifetime.”  Others said, “Yes, we will absolutely see it happen and, in the very near future.”  Well, now we know the later response is actually more accurate.

Yesterday, the Wall Street Journal reported the Federal Aviation Administration (FAA), announced that UPS’ Flight Forward business unit received an immediate green light to ship medical products and specimens within the state of North Carolina covering various hospital campuses throughout the Tarheel state.  UPS stated this approval was a major step in enhancing services for the health care industry and believe it would obviously include other industries in the future.

UPS also stated that the FAA approval “has no limits on the size and scope of operations.”  UPS went on to say that they have already started limited flying under this new certification.

David Abney, UPS’  Chairman and CEO said “we’re going to move ahead quickly and expand rapidly.  It’s not going to be a small operation.”  Mr. Abney also predicted the first phase could include in excess of 100 hospital campuses.

The FAA approval was actually the second such drone use approval.  The first was given months ago to Alphabet Inc.’s Wing Aviation unit to fly a fleet of drones for consumer goods deliveries.  That specific approval however was restricted to a rural area around Blacksburg, VA., and required detailed scrutiny for similar future applications  elsewhere.

According to UPS, they believe their certification will offer faster and easier future approvals on a case by case basis.  If that is true, a competitive drone flying industry will be off the ground in the very near future.

Not to be outdone, Amazon and Uber Technologies are potential competitors still seeking FAA approval to initiate their drone delivery operations.  Drone operators can opt for broad certification’s such as UPS received, or they can respond to the FAA ‘s invitation to apply for a more targeted waiver or exemption under existing rules.  Whichever path they choose it’s obvious that more approvals will be forthcoming in the not-to-distant future.