Free shipping is the illusion of e-commerce.
Every day, companies spend millions of dollars repositioning products from one location in the world to another by means best summarized by the Christmas classic It’s a Wonderful Life: “Anchor Chains, plane motors, and train whistles”. One aspect that indirectly drives all these logistics costs: Package Optimization. It effects all of us, quietly behind the scenes. My most recent amazon cart will be our example:
Items Purchased:
- Nonstick Frying Pan Skillet (9.5 inch)
- 6 Pack Men’s Running Ankle Socks with Cushion
- Men’s quick Dry Stretch Running Shorts (15% off)
- Men’s On Cloud X Running Shoes
Before we look at ways to optimize a company’s units per package, we must first consider how a warehouse or distribution center (DC) views our most recent order, by functional business unit (BU). In our shopping cart, the frying pan would be in the BU “Kitchen Wares”, the socks and shorts into “Men’s Apparel”, and the shoes into “Men’s Footwear”. In a multi-node supply chain network, business units are commonly consolidated to specific distribution centers.
In our thought experiment, let’s say the network developed in such a way that they service “Men’s Apparel” and “Kitchen Wares” out of a fulfillment center in New Jersey, and “Men’s Footwear” out of a hub in Indiana. With many retail companies developing one-stop-shop e-commerce strategies, the SKU count within these networks can be north of a hundred thousand, and due to the complexity of managing this many units in one building, it is common practice to group BU into specific DCs.
However, when we receive our order, it arrives in separate boxes, as the shoes came from a different origin than the pan or the apparel. This can be extremely costly for the distributor because they have to pay shipping on multiple packages. Those familiar with parcel rates know this isn’t a linear equation and adds incredible overhead. Many retail clients come to Miebach Consulting with this same issue, and this is the crux of the problem: What is the cost benefit of placing products that are commonly ordered in the same cart within the same distribution center?
Thinking about the products in our shopping cart, it would be a fair assumption that “Men’s Apparel” is often ordered alongside “Men’s Shoes” within a – physical or digital -- shopping cart. Therefore, it stands to reason that there would be a larger savings if we were to place these synergistic products in the same distribution center. To do this, we must ask four questions for last mile parcel shipments.
1. How frequently are these items ordered together?
The frequency these business units are ordered in the same cart affects the magnitude of our savings. This can be tedious to calculate, however, we can’t assume that if we place shoes and socks in the same building, they will be purchased together in every order. We need to understand how likely it is that two specific business units will be ordered in the same cart and prioritize locating the most synergetic BUs together. We could find that there isn’t much overlap, or that there aren’t cost efficiencies to glean from this.
2. What is the average weight of a SKU?
When you ship a package at UPS or FedEx, they calculate the cost of your shipment using a matrix, a “rate card”. One of the variables of this matrix is the package’s weight - the larger the package, the higher the cost to ship will be. If you can calculate the average SKU weight per business unit, it is easier to determine if it’s a desirable business unit to consolidate with like ordered products. If the average weight of two synergistic BUs is very high (e.g., 15 Lbs.+), such as an online furniture company, it is increasingly important to ship those products in the same package. Whereas if you are a fashion retailer and the average package weight is low (e.g., 1-2 Lbs.), the incremental cost of a few additional shipments, especially after volume discounts that can exceed 70-80% of the shipping cost, is less significant.
3. Does consolidating business units reduce average shipment zones?
The other variable in the rate card matrix is shipment zones - the representation of distance, or how far your package is traveling. The higher the numbered zone, the further the distance the package will be sent. Incrementally, each additional zone your package must go through usually has a larger impact on the cost than each incremental pound your package increases. If there are two DCs in your network both located in the same zone, shifting products from one location to the other will have negligible impact on the total shipment cost because you are not getting any closer to your customer. If one of those DCs is located on the West Coast and the other is on the East Coast, the argument for shifting inventory is stronger as your average zones per shipment will reduce.
4. Can your distribution centers handle additional capacity?
Think of optimizing units per package as a secondary or tertiary network concern. It is only efficient if the supply chain is functional to begin with. Therefore, even if you determine that moving a BU to a different DC is a cost-efficient network shift, it only works if the nodes have the capacity to manage the redistributed inventory. The savings are moot if they clog up your shelving, decreasing the efficiency of your operations, and cause delayed or missed shipments. The primary concern for your network should first be your warehousing throughput: the machinery, labor, pick locations, and inventory slots are the determining factors for the capacity of your network.
Assuming inventory and network analyses confirmed the hypothesis that Men’s Apparel and Men’s Shoes are synergistic, and the cost analysis indicates significant savings are possible, it would support the business case to locate these products within the same distribution center.
Optimizing units per package is often an afterthought for supply chains. Demand distribution, proximity to customer, and network capacity are the large cost drivers in a network, and indirectly determine the number of packages a warehouse ships annually. However, package optimization, and understanding what logic goes into nesting certain products together, allows companies to take charge of their last mile and grants control over their inventory after it has left their warehouse docks. Package Optimization is a tool that can impact savings and service level. It can both can save hundreds of thousands of dollars annually and be the determinant on whether we got our shoes and shorts on the same day.