22 April 2019
We know free shipping isn't really free. But how much does shipping truly cost? The answer: It varies and making guesses can be detrimental for companies. Even for shippers that think they’re doing everything right, skipping the research on freight and dimensional weight fees can come at a huge cost – potentially even risking the entire business.
The E-commerce fulfilment process is complex and lately it’s becoming survival of the fittest.
Sealed Air recently engaged with an online retailer of discount shoes that fulfilled and shipped 2.5 million orders from three different warehouses across the USA.
Like most E-commerce businesses, the shoe company strived to meet rising expectations for speed and convenience by absorbing shipping fees in house instead of passing these costs on to customers. This is a common practice for E-commerce operations, and for good reason. According to the National Retail Federation, many online shoppers consider shipping costs before getting to the checkout page, with 65 percent saying they review free-shipping thresholds before adding items to their online shopping baskets. Offering free shipping worked in this company’s favour for a while as a way to encourage sales, but ultimately the shoe seller struggled to get enough boxes out the door to keep up with rising demand.
To optimise resources, carriers charge shippers based on dimensional weight, which takes cube size into account. Dimensionalisers are used to precisely measure the outer bounds of the package, capture the actual weight and assign that information to the shipment’s tracking number. The final, billable weight is the greater of the dimensional weight compared to the actual weight.
With these systems in place, carriers are paying closer attention to the accuracy of measurements provided by shippers – and penalising companies that estimate poorly.
Our shoe customer’s shipping container of choice was a polybag mailer. The solution kept packaging material costs low and made it easy for packers to fulfil orders from their individual pack stations. Before the package left the facility, each shipment was logged in the carrier’s system with an actual weight of 2.2 kg, the average weight of a pair of shoes. The packers did not weigh each individual pack.
The problem? Each package’s dimensional weight was frequently larger than its actual weight. The company had no idea how much money it was paying for freight based on dimensional weight policies.
The average chargeback was between $1 and $1.50 per package, bringing the total cost to ship each pack to a pricey $10.
To reduce package dimensions, the shoe seller instructed its packers to tape down the sides of the polybag. Unfortunately, this plan caused more harm than good. Taping the polybag simply redistributed the air inside of the bag and had no impact on reducing the dimensions of the package.
In addition to failing to resolve the dimensional weight problem, taping the sides of the bag drastically slowed down the packing operation – a problem the company was already combating. In addition, taped bags stalled order throughput and increased material and labour costs.
After implementing a flawed solution and failing to stem the loss of control over its fulfilment operations, the shoe retailer had limited resources to review its freight bills. Sealed Air recommended an examination of recent freight bills to identify where money was being spent. After the audit, the answer was clear. In just one quarter, the company had paid more than $300,000 in dimensional weight fees – plus freight costs. In just one year, it had shovelled out more than $1 million in unaccounted freight chargebacks.
Unfortunately, it didn’t end there. The retailer’s lack of awareness of its financial situation had caused issues in other parts of the company’s packaging operations, including increased material costs, slower throughput velocity and higher labour costs. But ultimately, the millions of dollars it had been blindly paying for freight was too much to bear and the company was forced to close.
Companies that are still assigning ballpark estimates or generalising package measurements should plan to tack an additional 20 percent onto each freight bill. Carriers charge shippers for the larger dimensional weight, plus a fee for having to make the correction.
The packaging solution Sealed Air recommended to the shoe retailer required a capital investment of $500,000 and an increase in material costs of 28 cents per pack. However, these costs would have been offset by labour and freight savings alone. It could have:
The return on investment would have taken only three months.
Don’t be the next company that crumbles underneath freight costs. To avoid being surprised by your next freight bill, exercise regular audits to identify opportunities to cut costs and increase efficiency. A little homework will go a long way to increase profits.