US carriers have already shifted away from fixed price per parcel. Zone-based pricing structures with complex (volume) surcharges have become the new standard.
Watch out, they are coming over to Europe!
PostNL started applying volumetric weight surcharges from July 2021 onwards.1 However, volumetric surcharges aren’t the only rate structures and surcharges shippers are subjected to. Charges such as:
Carriers provide these “incentives” to their customers to steer towards the parcels or pallets that fit their distribution network. For some carriers, heavy parcels don’t fit their network therefore, they apply higher rates for these shipments.
The number of carriers and the diversity of each carrier’s freight rate, surcharge type, and pricing model is hard to keep up with. For shippers or packing operators, it would be an impossible task to look up transport rates and surcharges for every carrier and order, while still maintaining a high handling speed.
Yet for cost-optimal packing, these rates and surcharges must be considered. If done right, it has a massive impact on your transport costs. Of course, this adds significant complexity to the packing decisions. The complexity that is not considered in human decisions or basic cubing software.
The reason cost-optimal packing can be counterintuitive is that some carriers offer pricing models which make splitting an order more cost-efficient. This means that more packages must be transported, but because of the categorization of volumetric weight rates, the carrier contract rates can be exploited.
Additionally, since both UPS, FedEx, and other carriers apply oversize package surcharges when a shipment exceeds either the size or weight limits they have set forth, splitting an order can help to avoid the surcharges.
When determining cost-optimal packing knowing what kind of pricing model the carrier has and how to exploit the existing loopholes in carrier contracts is crucial.
While cartonization solution – software which determines the best box(es) for your order profile, with a high fill rate as the main objective function - is one way towards cost-optimal packing, it does not take into account transport rates and surcharges.
The carrier rate is calculated by taking into account dimensional weight (or volumetric weight) and actual weight. The carrier will consider the largest weight of the two, also known as chargeable weight - if the actual weight is larger than the dimensional weight, that parameter will be considered when calculating the transport rates.
A simplified example is displayed below, where carrier A imposes freight rate and weight rate charges. Carrier A has its own base rate and additional weight rate depending on the chargeable weight category. The cost of shipping is a sum of the base rate and chargeable weight times the weight rate.
To reduce parcel transport costs, an order that could perfectly fit into one needs to be split up across two boxes.
In this scenario, the rate structure is exploited by splitting an order into 2 separate packages, which decreases the cost of transport by 42 %.
While actual weight across the 2 boxes remains the same, dimensional weight or DIM weight falls under the smallest weight category in carriers' freight rate, so the total cost or transportation cost can be significantly reduced.
Carrier zone rates can also affect the cost-optimal packing since carriers use zones to define pricing contracts where each package price depends on the destination zone.
Carriers impose zone rate structures that can be exploited by the same practice - order splitting, which means that for smaller shipping distances cost-optimal packing differs from larger shipping distances. For example, for shorter distances carriers want you to have fewer or smaller boxes because fewer and smaller boxes are easier to handle. For larger shipping distances the total chargeable weight and dimension are a bigger concern than the number of boxes since larger distances mean more spent fuel and vehicle wear.
Consequently, optimal packing differs per carrier. There are other scenarios where carriers impose an expensive overweight surcharge when one of the box dimensions exceeds a certain weight so order again needs to be split into multiple boxes, incurring an extra fixed transport cost per box, but avoiding the surcharge for overweight parcel transportation.
Due to the explosion of e-commerce and omnichannel activities, automation of the cartonization process has become a must. However, these cartonization solutions must be able to exploit the transport rates during the cartonization process.
While 3D cartonization solution considers 3D shapes to pack items in boxes, transport rates are neglected. That’s why we recommend cost-efficient 3D cartonization solution which accounts for transport rates as well and can enable you to save significant financial resources as well as time on item handling.
Packers are only human, and it is human to not always find the optimal combination, especially when transport rate complexity comes into play. What’s more, packers also lose time by doing restacks when items don’t fit a selected box at a packing station. Restacks have an even higher impact when selecting the wrong box in pick-to-box operations, where pickers need to go back to the outbound zone to take a new box type.
This valuable operator time can be better utilized by giving first-time-right instructions, accompanied by 3D visualizations of how the items should be rotated and stacked.
An important factor for shippers is to be always aware of the changes in freight rates for parcels and the surcharge types set by the carrier. These rates change regularly, requiring shippers to adapt and overcome the impacts of these freight rates.
Sources:
[1] Team Sendcloud. (2022). PostNL surcharges. From: https://support.sendcloud.com/hc/en-us/articles/360024843972-PostNL-surcharges-
[2] Shipware. (2018). Types of Shipping Surcharges: A Guide. From: https://shipware.com/blog/types-of-shipping-surcharges/