20% of Shipping Costs Are Actually "Soft Costs"

Every shipper wants to reduce shipping costs. It’s a no-brainer for improving the bottom line and growing margins, and all too often, we see businesses look for a “magic bullet” to decrease hard costs, i.e. negotiating better rates, threatening to leave carriers, or introduce new carriers. These are all valid and great ways to reduce shipping costs, but the real spending problem may be closer to home than you think. Tariff based shipping charges account for 80% of shipping expenses so hard costs are definitely an okay place start. But a lot more goes into your shipping rates than the carrier tariff. In fact 20%, and sometimes more, of true shipping costs actually lie in soft costs. In addition, a portion of the 80% hard costs are frequently attributed to soft cost policies and behaviors.

What are Soft Shipping Costs?  

Shipping is the greatest non-COGS expense and it’s growing more than 5% each year. As costs increase, companies need to be more vigilant about identifying areas for shipping cost savings and fulfillment process optimization. But what does this actually look like? And how are these soft costs uncovered?

To truly understand everything that contributes to shipping costs, let’s examine the life of an order.

The life of an order  

Order fulfillment is a long and expensive process that touches every aspect of your business:

• Customer Service - handles all post-purchase customer inquiries and complaints
• Operations - handles returns, damages, lost shipments, insurance claims
• Finance - is in charge of rebills, accessorial charges, invoice reconciliation, materials charges, labor usage
• eCommerce - depends on shipping to influence initial and repeat purchase rates, conversion rates, buyer delivery experience, and online sales
• Marketing - is in charge of the budget that funds shipping subsidization, as well as order growth driven by similar promotions
• IT - is responsible for ensuring all carrier integrations work and all systems effectively speak to one another (WMS, ERP, eCommerce etc)

If an expense is related to shipping but is not a direct shipping cost, it can be considered a "soft cost." Items like labor, refunds, fulfillment, customer service, damages, errors, exceptions and returns can all fall under this category.

Dissecting the Fulfillment Process   

Every company’s internal processes are a little bit unique, but they all have similarities. Let’s look at an average order fulfillment process.

Step One - Order is placed 

Accepting the order

The customer order is the most important stage of the sales process and the fulfillment process. It is easy to treat order acquisition as a stage that is only impacted by sales, but the teams responsible for order fulfillment (Operations, Customer Service, Finance) are all responsible for key components of the buying process.

The easiest way to see the responsibility they bear is to consider the information the customer requires before completing the transaction. A few examples include:

• Shipping costs
• Shipping policies and timelines
• Return policies
  

It is imperative that potential customers have access to all relevant data before the sale is completed. And these teams (Operations, Customer Service, Finance) must make sure that data is available and accurate.  In addition, they must follow through on the promises made in those deal terms or customers won’t return.  So in many cases, the impact of the fulfillment process is felt before the sale is even made.

Order fulfillment begins

System connections are vital to successful, low-cost order fulfillment.  Standard systems usually include:

• ERP (Enterprise Resource Planning) like NetSuite, SAP, Oracle or Sage
• Ecommerce like Magento, Shopify Plus, Hybris, or Demandware
• WMS - (Warehouse Management System) like 3PL Central or an IMS like Stitch Labs
• TMS (Transportation Management System) like ShipHawk

Most companies run an ERP alongside an eCommerce platform of some kind.  Many also run a WMS and a TMS.  

Automation starts with the flow of the order data from the commerce platform into the other systems for processing.  It is not possible to completely automate fulfillment if the systems are not connected.  Modern APIs and plugins make these connections easy and fast for most shippers.

NOTE: Every company should run some level of TMS as software for running logistics has been proven to lower shipping costs and is available in all sizes and costs, including free.

Order Fulfillment Best Practices (Step One)

• Provide customers will all relevant data and terms up front and in front of any registration walls. You will notice order conversion fall if any information that is required to complete the sale is gated.
• Ensure policies (shipping, returns, costs, etc.) are clear, easy to find, and acceptable to the target audience.
• Understand the customer by gathering all relevant information in a non-obtrusive way
• Connect all internal systems (ERP, TMS, etc.)
• Maintain accurate inventory data

Step Two - Order contents are identified 

$ Ideal scenario 1 - the pick list automatically prints details and location of items in the order

$ Ideal scenario 2 - the warehouse team uses a handheld device to identify and locate the contents of the order

$$$ Costly scenario - the warehouse team has to manually print documentation 

Order fulfillment automation

What happens after the order has been finalized?  The customer clicked buy, the money transfer was initiated, and now the order must be shipped.

There are 5 levels of order fulfillment automation that shippers can choose from.  Each level provides a little more automation than the preceding level.  And each level impacts the next five steps of the order fulfillment process.

The 5 levels of order fulfillment automation

1. Manually select and key order - Manually select order, print pick slip, and print labels, one order at a time.
2. Scan box to populate order - Manually verify order details and rate carriers. Print one order at a time.
3. Scan box to populate order then batch - Manually verify order details and rate carriers. Batch process multiple orders.
4. Scan box to print label - Scan box and fully automate one order at a time.
5. Don’t scan - Fully automate multiple orders.  

A level one automation is a completely manual process where a level 5 automation is a completely automated process.  Usually, a shipper’s fulfillment labor costs are directly correlated to the fulfillment automation level employed in their warehouse(s).

Order Fulfillment Best Practices (Step Two)

• If inventory data is accurate and complete, the best practice is to employ level 4 or 5 automation.  These levels remove manual decision making and rely on data-driven business rules to decide how each order is fulfilled.
• If inventory data is incomplete, best practice is to employ level 3 automation, but re-keying updated order details may be required and may result in an increase in errors, carrier charges, and packing materials usage.  
• If inventory data is incomplete, the best practice would also include improving inventory data.

Step Three - Order is picked

$ Ideal scenario - Items are scanned for confirmation

$$$ Costly scenario - Items are manually confirmed 

Generating the pick list

This step is frequently referred to as “pick-and-pack.” Although we separate pick-and-pack into multiple stages, it starts with pulling the order from the shelves.

There are multiple methods for generating the pick list:

• The interface of a workstation can be used to reference order contents.
• A pick list can be manually printed when the order is confirmed.
• A pick list can be automatically printed upon order confirmation.
• A pick list can be populated on a mobile device.

Order Fulfillment Best Practices (Step Three)

• Auto generate pick lists either on paper or a mobile device

Step Four - Order container is selected

This step can look different at every warehouse:

$ Ideal scenario - The software used for order management sends the order data into the shipping software which speaks directly to a box making machine like Packsize and the box was cut and assembled along with an automated pick ticket and shipping label

$$ Acceptable scenario 1 - The shipping software ingested the order data and calculated the optimal box for the order and indicated the box code on the pick slip.

$$ Acceptable scenario 2 - A simple algorithm or spreadsheet cubed out each item in the order and suggested a box size.

$$$ Costly scenario 1 - The warehouse team looks at the items order and makes their best guess as to the smallest box to use based on predefined rule.

$$$ Costly scenario 2 - The warehouse team selects a box by what looks the best or is closest at hand.

Box selection

After items are picked, the order moves to packaging selection. The first step is to select the right shipping box. With a manual strategy, a staff member looks at the ordered items, maybe measures, and chooses a box by eyeballing the options. With this method, it's impossible to determine whether this was the most efficient choice. This variance affects both the cost of packing materials and the shipping cost since most carriers now employ dimensional pricing.

An automated approach would use software to configure the order when it is placed by the customer.  Configuring the order in advance offers several key benefits:

1. Knowing the box the order will be packed in allows proper rating at the point of sale.  The box size will impact the shipping price if shipment pricing rules use real shipping rates for setting buyer shipping prices or subsidies. Accurately determining the price in advance means the price the customer pays is also accurate.
2. Determining the proper packaging allows cross-carrier and cross-mode rating so the optimal carrier and service can be selected in advance and the shipment labels can be batch processed.
3. Knowing the box in advance allows the optimal box to be indicated on the pick ticket or sent, automatically, to the box making machine. This could eliminate packing stations in the fulfillment process.

Box selection affects both the cost of packing materials and the shipping cost since most carriers now employ dimensional pricing.

With the right technology solution, you can set a standardized process for choosing the best boxes based on item weight, size, and value.  This functionality also supports the ability to combine orders.

Order Fulfillment Best Practices (Step Four)

• Auto determine packing materials and box selection at the time of sale
• Indicate appropriate box on pick slip
• Use an API to communicate box size directly to a box making machine (if one is used)
• Combine orders whenever possible

Step Five - Order is packed.

$ Ideal scenario - Shipping software calculated proper packing materials and labor cost required for order fulfillment.

$$ Acceptable scenario - Order is packed according to documented packing standards.

$$$ Costly scenario - Warehouse team packs the order using the “best guess” method.

Packing Materials

Selecting the box is the first step in packing an order. Additional materials are required to wrap and/or pad the items so the meet the carrier’s packing requirements and are eligible for cargo insurance. Materials should be programmatically assigned and measured for cost analysis and to support programmatically generating final packed weights and dimensions.

Labor

Calculate labor by order while taking into account materials usage and the labor required to utilize different material times. Not only does this help to determine the portion of the true shipping cost that is related to labor, it also serves as a benchmark from which to measure and track labor utilization.

Order Fulfillment Best Practices (Step Five)

• Programmatically assign packing materials
• Measure labor on a per order basis

Step Six - Shipping carrier and service is selected and label is printed

$ Ideal scenario 1 - The shipping software calculated the final weights and dims before the order was picked and the label was printed out at the same time as the pick slip and the box.

$ Ideal scenario 2 - A dimensioner is used to auto calculate and enter the packed weights and dimensions.

$$$ Costly scenario 1- The warehouse team manually weighs and measures the box and keys in the figures before printing out the label.

$$$ Costly scenario 2 - The warehouse team does not enter final weights and dimensions and uses the quoted or default data which will cause invoice discrepancies that finance must reconcile.

How to select the right shipping carrier for every order

As noted above, there are many options for carrier selection starting with manually keying in the final package weight and dimensions, populating a list of possible carriers, and selecting one based on the requirements of each specific order. Not only is this process time consuming, but it is also proven to increase the shipping cost.

One of the most popular shipper requests is to remove order-by-order decision making from the warehouse team. Fulfillment automation allows shippers to set rules to automatically select the best carrier. This may be the cheapest or it may be the least expensive once additional factors like on time delivery performance and damage are factored in. Carrier selection workflows can be eliminated no matter how many carriers are involved.

Business rules and logic

The best way to keep shipping costs to a minimum is to use preset business shipping rules to define carrier selection criteria and then to automate the selection for every order. The system can account for far more variables than a human, and the system is not swayed by preference. The variables that must be considered when selecting a carrier include:

• Package weight
• Package dimensions
• Order value
• Carrier type (parcel/freight)
• Packaging type (carton/pallet/drum/loose/unpacked)
• Origin address and type (commercial/residential)
• Destination address and type (commercial/residential)
• Service requested
• Carrier historic service performance by lane
• Carrier historic damage rates
• Carrier base rate
• Accessorial charges

The lowest shipping price will only be realized when all relevant components are factored into the query. And even if the shipper uses only a few carriers, the best carrier will change based on each order’s unique characteristics.

How actual service times impact true shipping cost

When ShipHawk examined delivery times from hundreds of thousands of 2-day shipments, we found that USPS Priority Mail frequently outperformed both FedEx and UPS 2-day services.

• USPS Priority Mail average time in transit - 2.17 days
• FedEx/UPS 2-day - 2.46 days

Order Fulfillment Best Practices (Step Six)

• Pre-configure business rules to account for shipping policies, shipping subsidies, carrier cost requirements, and carrier service requirements.
• Automate carrier selection at the point of purchase.
• Batch label print or use scan to print functionality.

Step Seven - Carrier dispatch and order staging  

Carrier booking and dispatch

There are several options for carrier notification and dispatch:

• Call the carrier each time a shipment is processed
• Schedule a recurring pickup
• Have the carrier drop a trailer for loading as orders are ready (applicable to high volume shippers only)

Once the carrier has been chosen, the order information needs to be entered into the proper carrier system so they know when the shipment will be available for pickup. Even if a recurring pickup is scheduled, the shipment data must still be communicated to the carrier so they send the right equipment to pick up the shipments.

Order Fulfillment Best Practices (Step Seven)

• Use third party software to connect to all carriers via a single API. This is the most cost effective connectivity.

Step Eight - Carrier pickup

$ Ideal scenario - Carrier was programmatically selected based on numerous factors including lowest tariff price, delivery time, damage rates, and recent carrier performance by lane.

$$ Acceptable scenario - Carrier was programmatically selected based on a basic multi-carrier rate comparison

$$$ Costly scenario - Carrier was manually selected.

Carrier pickup pitfalls

There are several additional carrier pickup pitfalls shippers need to be aware of:

• Linear foot rule - Less-than-truckload pallets can not take up more than the predetermined parameters of weight and space (usually 11 linear feet and 500# per linear foot) on a single truck. Doing so may result in linear foot charges that may be in the thousands of dollars.
• Cubic capacity - Each truck has a limited cubic capacity. If a day’s shipment volume exceeds the cubic capacity of the truck, a portion of that day’s shipments will not be picked up.
• Orders not ready on the dock - Trucks don’t wait. The driver has a route to run with other customers who need pickups as well. Shipments not ready when the truck arrives will frequently be left behind.
• Scheduling for multiple same-day pickups - Many companies have seasonal fluctuations in shipment volumes. If carriers are not notified, and more than one truck is needed to handle the quantity of shipments, the overflow will be left for a pickup the following day.

Order Fulfillment Best Practices (Step Eight)

• Don’t violate the carrier’s linear foot rules. Book a partial or full truck for larger loads.
• High volume shippers should arrange to have their carriers drop trailers so they can be filled at the convenience of the shipper.
• Notify carriers of all changes in shipment volume

Step Nine - Data returned to ERP and/or customer tracking software

$ Ideal scenario - The shipping software is integrated with your ERP and automatically feeds the order, tracking, and inventory data back to the ERP.

$$$ Costly scenario 1- The shipping software is integrated with your ERP, but does not automatically feed all data back to the ERP requiring manual inputs.

$$$ Costly scenario 2 - The shipping software is not integrated with the WMS or ERP and all order, tracking and inventory data must be manually keyed.

Synchronizing data and carrier tracking

Today's customers want to know order status immediately and they want to be kept up-to-date on every stage of the shipment. Most carriers provide shippers with a tracking number for generic shipment status updates. Sending customers to the carrier website is a manual and inefficient way of updating customers.

The alternative most shippers are moving to is to provide buyers with a branded, on-site tracking experience. Automated push notifications can send customers updated tracking information based on their preferences. This gives customers a greater sense of control over the shopping experience and leads to more repeat purchases. Not only does tracking enhancement save the time and energy it would take to deliver information but it also optimizes the end user experience of the brand.

Order Fulfillment Best Practices (Step Nine)

• Keep buyers on brand and bring tracking data back to a page the company controls.
• Keep customers updated by email and text message.
• Include order status updates alongside tracking information so the customer has one place to get all information related to their order.

Step Ten - Carrier invoice reconciliation

$ Ideal scenario - The shipping software kept a record of all the order characteristics for rapid reconciliation. The software reported unexpected charges instantly so the finance team can make system adjustments before losses mount.

$$ Acceptable scenario - The shipping software produced reconciliation reports to be compared against carrier invoices 30-45 days later.

$$$ Costly scenario - Finance receives carrier bills 30-45 days later and does their best to make manual adjustments to the OMS, ERP, WMS and/or shipping software to account for the unexpected charges and prevent them from happening again.

Automate carrier invoice reconciliation

A sharp-eyed accountant knows how to match the information on bank statements with carrier invoices. But, there's no need to pay for more accounting fees than you need to.

The insights provided by a quality transportation management system ensure accurate data in real time. In addition, original shipment quote criteria and carrier prices are stored so they can be automatically referenced when the carrier invoice is received. As with other processes, shipping software can remove or reduce human error that can add additional costs to the invoice reconciliation cost.

Rebills

When the carrier says the shipment criteria is different than the criteria submitted in the quote, companies can run into rebills, which can be costly. These changes generally come about due to submission of misinformation about package weight, dimensions, dimensional weight, or freight class. This soft cost is probably one of the least expected that businesses run into. Fortunately, it is avoidable.

A modern transportation management system takes into account all the characteristics of the order and the destination up front so quotes are accurate. The system also stores a record of the quote and the data used for the quote so when carriers try to come back for more money, shippers have the evidence to back up the lower price.

Order Fulfillment Best Practices (Step Ten)

• Use software to manage and automate carrier invoice reconciliation.
• Store initial quote criteria and carrier quote data to use to refute carrier rebills.

How do Soft Shipping Costs Impact Your Bottom Line?

After reviewing the 10 stages of order fulfillment above, I’m sure it is more obvious how soft costs can impact your true shipping costs, but let’s take it a step further and look at a real life example in dollars. Consider this example company.

Annual shipping spend (carrier shipping charges) - $1.8mm

Which equates to:

• 4,350 annual LTL shipments at an average of $183.91 per shipment
• 55,500 parcel shipments with an average cost of just over $18 (this customer ships many large parcel items)

Annual fulfillment labor expense for parcel - $114,187.50

Annual fulfillment labor expense for LTL - $139,200

“Hidden” soft costs for this customer:

• An average of $26.25 in "hidden" costs per parcel shipment
• An average of $32 in “hidden” labor costs per freight shipment

20%, and sometimes more, of true shipping costs actually lie in soft costs. In addition, a portion of the 80% hard costs are frequently attributed to soft cost policies and behaviors.

Defining Soft Shipping Costs

The 10 stages of order fulfillment make it clear that shipping costs include more than just those on the carriers’ tariffs According to our data, fulfillment related costs account for an average of 20% of a company’s total true shipping costs. For some businesses it is much more. 

1. Fulfillment labor
2. Packing materials
3. Errors (damaged, lost, or mispicked products/shipments)
4. Returns processing
5. Finance (tasks related to shipping)
6. Customer service (tasks related to shipping)
7. Soft cost behavior and policy impact on 80% tariff-based hard costs (i.e. dim weight charges)

Many of these processes are not routine - meaning there is little or no standardization. Most organizations are using legacy software and processes that rely on dated standards or “best guess” methods which add significant costs to already expensive carrier shipping prices.

The greatest shipping hurdle today is not making minor tweaks to your tariffs; it is finding simple and consistent ways to standardize and automate the order fulfillment process so that:

a) fulfillment costs are low

b) shipping costs are controlled, and...

c) data is accurately reported on both

How to Save on Soft Shipping Costs

Fortunately, advancements in technology have kept pace with the rise in popularity of omnichannel commerce. This means that the tools exist to solve these problems. So the questions become: How do we know which tools to use? And how do we deploy them? 

You will see two key themes emerge in the sections below and it is important to understand them in advance.

Two key elements missing from manual order fulfillment:

1. Automation - The goal of automation is the consistent implementation of predefined standards.

   Great effort is put into establishing best practices. Automation guarantees those best practices are employed consistently, across every order. In addition, when done right, automation also allows shippers to skip steps, eliminate manual processes, and cut costs that were necessities of the manual systems it was built to replace.

2. Data - The goal of data is to provide a better understanding of the output of current systems in order to facilitate decision making, forecasting, and more specifically, system improvements.

   Without a clear, measured picture of the order fulfillment process, it is impossible to understand the true costs, capacity, or capability of the system. In order to optimize order fulfillment costs and processes, shippers need to have a record of the output of every stage, and the tools for making adjustments.

Additional Considerations

Customer Service

• Customer Service Expenses - It should come as no surprise that automation reduces customer service use and costs. Through a decrease in damages and returns, error-free packing and packaging, and branded, on-site tracking and push notifications, fulfillment-related customer service calls decrease while post-purchase Net Promoter Scores rise.

Returns, Damage and Mispicks

• Returns - Ecommerce shippers experience far more returns than brick and mortar stores. Where brick and mortar product returns average about 8.89%, 30% of all products ordered online are returned to the company. This is a key cost to pay attention to, especially if free shipping is offered. Returns costs can be reduced with automation and accurate data.

• Damage - Damaged packages are generally a result of human error, but it's frequently difficult to determine whether the error lies in the shipper’s warehouse or with the carrier.
  
  Being able to report on the full order fulfillment process will help shed light on damage trends and the steps needed to reduce or eliminate the problem. Do they come primarily from specific warehouses or shipping carriers? If you know for sure, you have the advantage of being able to address this problem at the source and find a real solution.

• Mispicks - Inaccurate order contents is another source of added costs. By using scan functionality to ensure the right items are included in the order, mispicks can be reduced or eliminated.

What is the ShipHawk Solution?

ShipHawk is a Smart Transportation Management System™ (TMS 2.0™) helping omnichannel retailers, manufacturers, and distributors create data-driven, automated supply chains.The result is radically lower shipping and fulfillment costs.

We built ShipHawk’s TMS 2.0™ to help companies automate order fulfillment and boost profits. As a business looking to save on soft shipping costs and scale your business, our software can help you accelerate growth, increase customer satisfaction, and reduce costs.

• Eliminate manual processing while facilitating better decisions with reliable data-driven insights.
• Experience real-time tracking visibility and exception management while reducing errors.
• Optimize multi-carrier rating, maintain your delivery network, and seamlessly onboard new shipping and fulfillment services.

ShipHawk's multi-functional platform works with all carrier types, including parcel, freight, LTL, 3PL, home delivery, on-demand, and first mile services. Robust cost controls provide real-time rating, reporting and analytics while enlisting multi-mode optimization that includes packing and dimensional pricing. ShipHawk also delivers an exceptional customer experience with post-purchase tracking and in-cart rating for all inventory types.

ShipHawk Technology

Advanced, state-of-the-art technology makes ShipHawk a natural choice. Our solution provides shippers with more than they might expect from a shipping platform. Here are some of the features you can leverage to your advantage.

• RESTful APIs - This can be a game changer for your business. Access more than 250 parcel, freight, and specialty carriers in one place. If needed, you can even add your own specialty carrier.
• Plugins - Easily integrate the system with your eCommerce platform using plugins for Magento and Shopify. Some key features are the in-cart rating showcase, access to hundreds of parcel, freight, and white glove delivery carriers, shipping policies that can be set at a product or shipment level, and more.
• Web Portal - If you prefer to set rules from your ShipHawk dashboard rather than inside your eCommerce platform, no problem. Our business service is cloud-based, so you can access it anytime from anywhere.
• Flexible and Extensible - Leverage a one-stop-shop with a diverse set of transportation options from order to delivery. Empower and scale your company with fulfillment software built for growth and evolution.

When choosing a shipping platform to scale your business, it's crucial to have easy integration with your eCommerce platform and other tools. Fortunately, the ShipHawk system integrates easily with most major platforms. You can find a list of our carrier integrations here and a list of our technology integrations here. Popular integrations include:

• Shopify
• Magento
• NetSuite
• Amazon
• Amazon Fulfillment
• eBay
• Sage
• Everest
• and many more...

Final Thoughts

Around 20% of true shipping expenses are related to the fulfillment process. These expenses are more significant than you might think. There are many types of soft costs involved with shipping and fulfillment. The answer to saving on soft shipping expenses has one solution across the board - automate processes and use data to make decisions.

ShipHawk's TMS 2.0 provides powerful solutions for your shipping and fulfillment needs. If you want to find out if this is the right platform for you, connect with a ShipHawk representative today.