Resource Scarcity: Why E-commerce Shipping Costs Are Cutting into Profits
-commerce retailers and manufacturers are under increasing pressure from rising shipping prices. In 2016, the United States Postal Service increased rates by 10 percent, and the United Postal Service (UPS) and Federal Express (FedEx) both increased rates by 5 percent – with additional rate increases to go into effect in 2017. Nearly all carriers have begun assessing and charging shipping fees based not just on the weight of an item (as they have in the past) but also on overall package dimension.
Vicki Case, Vice President of E-commerce and Fulfillment Solutions at Sealed Air, explains how resource scarcity is behind the rise in shipping costs and what e-commerce companies can do about in response.
Major shipping and transportation logistics companies are getting more sophisticated with the use of their resources. Driven by the need to meet increased demand for a high volume of e-commerce deliveries, every truck on the road and plane in the sky becomes critical. Every inch of unused or misused space in a cargo era creates a ripple of cost and inefficiency across the supply chain; so they need to make sure they can fit as many packages as possible into each and every load.
Shipping air and unnecessary void-fill materials is a waste of resources, one that almost all consumers have experienced. I ordered some pinecone garland this past Christmas and received six large boxes that were mostly filled with packing material that I had to throw out. These poor packaging practices lead to a misuse of shipping space and resources.
Dimensional weight pricing models encourage retailers and manufacturers to be more disciplined about their packaging practices – using the minimum amount of material required to adequately protect each order. Smarter, smaller packages mean that more orders fit on the back of every delivery truck and get where they are going on-time with as little monetary or environmental cost as possible.
What areas are most affected by these transportation resource scarcities?
Dense, urban metro areas like New York, Los Angeles, and Chicago face extra constraints when it comes to the efficient movement of goods. Inefficient shipping practices – even just a few cubic inches here and there – can quickly add up to more delivery trucks on the road at a time when traffic congestion is worsening around urban areas with rising populations. Even more people are expected to choose city living in the coming years, while overall consumer buying behavior continues to shift in favor of online purchases and at-home deliveries. Those two trends equal a future in which delivery density in urban areas will strain the infrastructure of our roads and highways. It’s not possible to continue building new roads to release the pressure – the only option is to ship more efficiently and make every inch and every mile count.
Will shipping costs continue to rise?
In the United States, freight volumes are expected to increase by 26 percent by 2026, and we’re already short 38,000 truckers. More people are buying online, and it’s only going to make resources even scarcer. And that’s going to drive costs up.
What implications do these changes have for ecommerce retailers?
Many major e-commerce retailers struggle to recover even half of their freight expenses, so any increases in shipping rates cause a direct hit to their profit and loss statements. While consumers have become accustomed to offers of free and fast delivery, the retail industry cannot shoulder the cost of shipping indefinitely. They will need to do more to create efficiency in their packaging operations and provide greater incentives for consumers to be more efficient by combining orders and being more flexible with delivery time.
Wasteful, messy, unnecessary over-boxing and void fillers are already a pet peeve of consumers today – if and when retailers shift their pricing strategy to share more of the shipping cost burden with their consumers, they can be assured that consumers will be paying close attention to the efficiency of each package they’re paying to have delivered to their door.
How could companies keep their shipping costs down?
It’s about getting it right from the beginning. Imagine the value stream as a river with bends and rapids starting at the manufacturing and ending at the customer’s front door. If you have the right boat that can handle those bends and rapids, it’ll save you time and effort trying to navigate that river. In other words, if a retailer or manufacturer knows that 60 percent of their products will be delivered through e-commerce, they need to anticipate that need and create packaging practices that are easy for their labor forces to execute consistently for every single order.
They should also leverage automation and right-sizing technology to ensure that the right amount of packaging is being dispensed or applied on-demand for each order without sacrificing product integrity or opening them up to the risk of damage.
To learn more about how leveraging an on-demand mentality can help optimize your supply chain, read "Urbanization: Why Every Business Needs to Start Thinking On Demand."