SUPPLY CHAIN SUCCESS BY ERIC GRICE
Mode Inflection Points for Savings pring is nearly upon us; yes, that downtime post-holiday glaze period is over. If you are like most supply chain managers, you spent this brief respite trying to figure out how you could reduce costs to hit some unrealistic budget that was created last October. What was even going on then? I don’t know either, but based on the numbers, we seemed to think we were miracle workers once again projecting top line growth while the transportation budget seems surprisingly flat. Looking back to 2015, shippers received relief provided by continually dropping fuel prices coupled with a freight market that was remarkably more receptive than 2014. However, looking forward to 2016, most projections expect fuel to level out, meaning we must seek out other areas for cost reduction. One often overlooked and under-analyzed area is the inflection points between modes. I am going to discuss some quick tips of how understanding your shipment characteristics, along with your parcel & freight tariffs, can drive savings. PARCEL VS LTL This is the decision we are most familiar with mainly due to frequency. For most shippers, it is a static decision based on a weight or carton count threshold, possibly a combination of both. The common inflection point is around 150 pounds and/or 15 cartons, but these numbers are surprisingly sensitive. First, let’s be honest and think about how many of us take the time to consider dimensions and use chargeable weight in this decision pro10
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cess, as opposed to just actual weight. Perhaps you have already factored your average carton dimensions and weight into your established inflection point; please remember to never underestimate the light and fluffy tax (DIM weighting). Another important factor is your parcel incentives. Your effective parcel cost will be a direct result of your pricing agreement. Perhaps you focused on express discounts due to your spend density but this easily could have left an unfavorable ground discount. On the other hand, for LTL, even without a strategic sourcing effort within this weight break, shipment costs are going to be a near market average minimum charge. I also want to bust any myths about the 150 pound shipment ceiling (shipping individual packages that exceed 150 lbs. would result in unacceptable surcharges) as multi-weight pricing can extend beyond and, if sourced well, be advantageous to certain shippers. Another important factor is the length of haul. If we take a quick look at Illustration A we can see how at the same decision point (Total weight 150 Lbs. & 15 cartons for each) the least cost mode changes. Normally at shorter distances the driving factor of parcel cost is carton count. Illustration B shows a series of zone 2 shipments. When we held the weight static at 150 Lbs., but varied the cartons (gray line), we saw a large variance. Meanwhile when we held the carton count static at 15, but varied the weight (orange), the cost delta was minimal. As we get out to the larger zones, Illustration C, we used the same shipment set in the previous example but now the price moves significantly with variances in both cartons and total weight. Meanwhile, for LTL, the negotiated minimum charges are still the main factor in your cost comparison.
LTL VS VOLUME While maybe not as redundant, making the right decision between your standard LTL tariff and a spot quote can quickly mean a couple hundred dollars — yes, a couple hundred per shipment. Almost all LTL tariffs have pricing that is good up to 20 or even 24 linear feet but they have these nasty little cubic capacity clauses when you breach the six pallet threshold. We find over 750 cube (by their calculations) that you must be over six pounds per cubic foot unless the rate you expected to see and was, presumably, kicked out by most any rating engine becomes meaningless (even the rate off carrier websites will often not reflect these). One important thing to remember is that they are not measuring the cube based on actual dimensions of that pallet you shrink wrapped; if you only built the pallet to two feet they are still going to calculate a pallet space normally at 125 cube. This makes our magic number 750 pounds per pallet; if you are averaging over this, you normally can go ahead and use your tariff all the way up to 10 or even 12 pallets. If not, the carrier will normally apply a dimensional weight and re-rate at class 150 (absent of any FAK). Therefore, it is very
PARCEL March/April 2016