The ongoing boom in eCommerce has driven a shortage of industrial real estate, exacerbated an existing driver shortage, and placed additional strain on major U.S. ports. Unfortunately, record sales volumes and tight transportation capacity have resulted in most major parcel carriers raising rates by 5.9% in 2022. Additionally, peak season surcharges have become the norm for parcel carriers, further driving up shipping costs during high crucial sales periods.
As parcel shipping rates continue to rise, eCommerce businesses must find ways to mitigate the impact on the fulfillment budget. Here are some ways shippers can alter fulfillment strategies to compensate for higher shipping costs.
1. Streamline packaging
Packaging relates directly to parcel shipping costs. Parcel carriers rely on two methods to determine the cost of shipping a package—its actual weight or dimensional (DIM) weight. Dimensional weight came about as a way for carriers to avoid losing money on large, lightweight packages. For example, UPS uses the following dimensional weight formula:
- (length x width x height) / 139
The exact divisor used in the formula may vary by carrier and specific service at that carrier. For example, USPS uses the 166 as its divisor. Using UPS’s formula, a 12x12x12 package would have a dimensional weight of 12.4. Since carriers round up, the package’s dimensional weight would be 13 pounds.
What if the items in the package only amount to a few pounds of actual weight? On top of that, say the package contains a significant amount of empty space filled with dunnage. In this case, the shipper pays the carrier to move a 13-pound package when they could pay for much less. Warehouses must train packers to select the right shipping box size and how to use the least amount of dunnage possible to keep parcel shipping costs down.
2. Treat employees better
Do your pickers, packers, forklift drivers, and other employees like coming to work? On the surface, this may not seem like a cost issue. However, maintaining a happy staff in the fulfillment center can have a notable financial impact. For example:
- Hiring costs a lot. According to the U.S. Small Business Association, the cost of hiring an employee can run as much as 1.4 times the position’s annual salary. Therefore, after training, benefits, insurance, fringe benefits, and other associated costs, hiring a $35,000/year warehouse associate might run you as much as $49,000.
- Taking more care. When your employees are happy and invested in their job, they’ll care more about handling and packaging the products you sell. Conversely, a disgruntled worker may pay less attention or handle goods aggressively. This behavior may result in packing the wrong SKU or damaging a product during handling.
- Practice makes perfect. When an experienced warehouse worker quits, it will take time for a replacement to get up to speed. Even if you hired someone immediately, it could take weeks or months for them to reach their predecessor’s level of productivity. Lower productivity due to inexperience can add up financially—especially if you have high turnover.
3. Find a cheaper warehouse
Maintaining a warehouse in a primary market comes at a high cost. Also, three years is a relatively common length for a warehouse contract. Therefore, many businesses who were lucky enough to sign an affordable three-year agreement in 2019 are looking at a very different market come renewal time. If you can’t afford to keep your metropolitan warehouse, consider moving outside of the major markets to keep costs down.
Warehouse costs in Los Angeles have risen 45 percent in the last year alone. Though rates in secondary markets have also risen substantially since the onset of the pandemic, the costs remain well below what you would pay in the New York City, Chicago, or Los Angeles areas.
4. Use a 3PL’s volume discount
Your 3PL can help you soften the financial sting of rising parcel shipping costs through its negotiations with parcel carriers. A logistics provider can leverage the total shipping volume of all its clients to get lower rates with parcel carriers. Depending on the size of the 3PL and its total volume, these rates may be substantially lower than what each individual shipper would pay on its own.
About Phoenix Logistics
Strategic Real Estate. Applied Technology. Tailored Service. Creativity. Flexibility. These fundamentals reflect everything we do at Phoenix Logistics. We provide specialized support in locating and attaining the correct logistics solutions for every client we serve. Most logistic competitors work to win 3PL contracts, and then attempt to secure the real estate to support it. As an affiliate of giant industrial real estate firm Phoenix Investors, we can quickly secure real estate solutions across its portfolio or leverage its market and financial strength to quickly source and acquire real estate to meet our client’s need.
Mr. Frank P. Crivello began his real estate career in 1982, focusing his investments in multifamily, office, industrial, and shopping center developments across the United States. From 1994 to 2008, Mr. Crivello assisted Phoenix Investors in its execution of its then business model of acquiring net lease commercial real estate across the United States. Since 2009, Mr. Crivello has assisted Phoenix Investors in the shift of its core focus to the acquisition of industrial real estate throughout the country.
Given his extensive experience in all aspects of commercial real estate, Mr. Crivello provides strategic and operational input to Phoenix Investors and its affiliated companies.
Mr. Crivello received a B.A., Magna Cum Laude, from Brown University and the London School of Economics, while completing a double major in Economics and Political Science; he is a member of Phi Beta Kappa. Outside of his business interests, Mr. Crivello invests his time, energy, and financial support across a wide net of charitable projects and organizations.