How packaging can affect freight costs.
June 27, 2006 by SwizStick
Filed under 3PL, Contract Logistics, Education, Supply Chain Management
This is a fairly elementary article that explains in very simple and clear terms how packaging can affect parcel shipping costs.
The major parcel carriers’ tariffs include a host of accessorial charges that can pile on additional costs faster than you can say “schedule a pickup.” Two common surcharges are those for “oversize” packages that exceed the carrier’s maximum standard dimensions, weights, and density (for air express) and for “irregulars,” or packages whose shapes are incompatible with automated, high-speed sortation facilitie. “If your package is not a cardboard square, it’s probably subject to handling charges,” says Brett Febus, president of transportation consultants Insource Logistics. “Many of those packages are hand-carried, put on carts, and pulled around the sorting hubs,” he says.
In recent years, parcel carriers have broken down the former surcharge into “Oversize 1,” “Oversize 2,” and “Oversize 3″ categories; the bigger the package, the higher the category—and the greater the surcharge. (For size and weight surcharges, see the table.)
If you’re getting hit with oversize or special-handling charges, investigate whether changing your packaging could help you avoid those extra costs, suggests Doug Kahl, director of sales and business development for AFMS, a Portland, Ore., consultancy that specializes in parcel shipping. “Compare the size and dimensions of the item being shipped to the box it’s being shipped in,” he says. If you’re using a large box with a lot of protective dunnage, decide whether the additional oversize costs are worthwhile compared to the risk of damage posed by reduced packaging. In some cases, he adds, the item itself may qualify for Oversize 1 but the packaging converts it to a more expensive Oversize 2 or 3.
They include a useful table that breaks down the accessorial charges for the major parcel delivery companies such as FedEx and UPS.
This lesson could just as easily be extended beyond standard parcel delivery to large cargo shipments as well. While most companies with an efficient logistics and/or purchasing organization already consistently look at packaging as part of their overall supply chain strategy, I have always been amazed to find more than a few companies who gave little thought to how they packaged or tendered their cargo for shipment. And this doesn’t only extend to saving a buck: sometimes reworking the packaging can save money in other ways, such as reduced pilferage or cargo claims. I’ll give you two examples:
Example 1: One of my past clients was a company that exported sensitive electronic material that had to be packaged very well to avoid damage. Hence, the boxes, while not too large, tended to be quite light as much of the space inside the box was taken up by cushioning material. In addition, the client built the cargo into strapped pallets, with often a lone box or perhaps 2 strapped to the top of the pallet. This forced the customer to pay freight charges based not only on the dimensional (or volume) weight of the cargo, but based on pallets instead of boxes. This is not a big problem except for when you are tendering pallets with a single box or 2 on top, which forces you to pay for the empty space created by the top layer.
We first advised the client to switch from shipping built pallets to individual boxes. They refused on the grounds that they had too many past problems with lost and pilfered cargo. So we instead worked with them to arrange their orders in such a way so that when it came time for shipping, they could build the orders into perfectly square pallets. By building perfectly square pallets, they avoided paying for the “dead space†that they normally paid for in their previous pallet constructions.
It sounds so simple, but sometimes the most obvious solution isn’t obvious to everybody.
Example 2: Another client had vigorously eliminated all “unnecessary packaging†from their supply chain as their product was rather low value and not susceptible to damage. They ended up with a special thin cardboard box that was more of a corrugated “wrap†that went around 1 shipping unit of goods, which usually meant 8-12 units per package. They calculated the number and size of units per package to ensure optimum package size to maximize the space of a floor loaded ocean container. This enabled them to take greater advantage of the total cubic space available to them in their floor loaded containers from the factories in China. They experienced freight cost savings due to the increased efficiency.
There was one problem: while the product arrived damage free at the port, they quickly began receiving a rash of damage claims from their customers who were consistently receiving damaged product. Turns out that they unloaded the product from the inbound containers immediately onto arranged pallets which were then trucked directly to their various customers’ distribution centers. It made sense in theory because the goods were never stored after arrival, they came straight from the container onto a pallet and were shipped almost immediately to distribution centers around the U.S.
Unfortunately, in their concentration to squeeze every cent out of their re-packaging venture from the factories overseas, they neglected to consider how many times their cargo might cross docks from the time it left their warehouse at the port to their customers’ distribution centers, and finally to the eventual end user. The company had saved money on overall freight costs but was paying far more in damage claims and negative PR.
This is a case where a third party logistics provider turned out to be the economical solution. The cost involved to re-package the product after arrival into the U.S. and before it went out to their customers was not feasible if our client did it themselves. However, we were able to come up with a cross dock solution that involved re-packing the cargo from the containers into larger master packs that only marginally increased their domestic freight costs. And we managed to do it at a cost less than the company would have incurred had they done it themselves. Long story short, the damage claims mostly disappeared.
In this case the company faced a serious problem, which they eventually overcame, because they were so focused on cutting costs and increasing efficiencies that they neglected to see the big picture of what would happen to their packages once they were on their way to the customers.
The moral of the story is that every smart company should take a good hard look at the packaging of their products. The best supply chains are those that maximize the efficiency and cost effectiveness of their packaging while balancing the needs of their company and their customer, all the while keeping the big picture in mind. Careful consultation with the various divisions within your company, and especially with your customers and logistics providers, should be done before any re-packaging venture is conducted.
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