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The Factors of Parcel Shipping Cost Sensitivity to Distribution Location

When parcel shipping to customers is involved in a supply chain network, there are several factors to be considered which may affect freight costs and drive optimal distribution locations.  One of the common goals of most distribution network analysis studies is to reduce freight costs.  With that in mind the degree to which that is possible with parcel shipping depends on a variety of factors discussed below.

Parcel Pricing Structure – Parcel package costs in the U.S. are based on USPS zones.  Zones are defined by the origin and destination 3-digit zip codes and range from 1-8 domestically with 1 being local within a 50-mile radius, 2 being the closest to the origin outside a 50-mile radius, and 8 being the outermost distance.  Parcel package costs do not increase proportionately with distance from the origin.  All other factors notwithstanding, this generally means that parcel package costs are less influential when determining the best distribution geographies.

Volume of Parcel Shipping – Businesses should understand their outbound to customer shipping profile using recent historical shipping data to answer several important questions.

  • What percentage of overall shipping units are shipped via small package parcel?

If a significant percentage is parcel, more attention should be paid to the rates and package sizes.

  • What are the sizes and density of the packages?
  • Does the business ship many light packages, larger packages or some combination thereof?
  • Is there any opportunity to consolidate orders or reduce packaging size?

Also, higher volumes shipping via other modes such as LTL, Truckload, or intermodal may negate or minimize the influence of parcel shipping on the overall network strategy.  Data-driven answers to those questions will help businesses define their need for an effective parcel shipping strategy.

Negotiated Rates – Many shippers with sufficient volume negotiate discounted rate contracts directly with parcel carriers.  There are multiple pricing characteristics in addition to the base rates that can be negotiated such as minimum spend, dimensional weighting factors, and tiers for usage-based shipping.  Other surcharges such as the residential delivery surcharges may also be negotiated to lower overall parcel spend.  Many times, flat or flatter rate package prices can be negotiated at lower weight breaks.  For example, a 5 lb. package may cost $10 to ship to any zone, rather than increasing with zone as would be the case with unnegotiated base rates.  The “flatter” the rates that can be negotiated, the less sensitive parcel costs will be to the outbound origin distribution location.

Inbound Sourcing – Although perfectly placed locations may be less critical when considering outbound parcel shipping for the reasons discussed, the inbound source of the product may be more influential on the optimal location.  If the origin of the product is international and arrives via ocean container, this may drive the optimal distribution locations coastward.  On the contrary domestic sourcing may pull the distribution node inland.  Understanding the inbound source may help clarify why certain optimal locations are chosen.

Service Level Importance – It should also be determined to what degree outbound service level is important.  Is fast service a priority?  Do a considerable number of customers demand next day or 2-day transit times?  There are two common ways to improve speed to customer for parcel shippers, both with cost tradeoffs.  The first is to upgrade to express service (next day, 2-day, 3-day, etc.) and pay the associated upcharge.  Secondly, improved service can be achieved through relocation to a better geographically positioned distribution node for faster ground service to a larger percentage of customer demand.  In this case, a robust network model can be used to quantify the tradeoffs between minimizing parcel costs and maximizing service levels.

Understanding the relationship between parcel shipping costs and distribution locations in an important characteristic of the optimized supply chain.  A scientific approach to all of these factors is best and may mean that a full network analysis complete with a network modeling effort is in order.  Properly performed, the network analysis will mathematically quantify alternatives for cost-effective parcel shipping narrowly, and the best possible overall network solution more broadly.
—Eric Payne, St. Onge Company

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