How “The Amazon Effect” and Customer Behavior are Changing the Parcel Landscape
- The Explosive Growth of E-Commerce
- Increased Customer Demands and Surcharges Mean More Pressure
- Breaking up the Duopoly of FedEx/UPS
- Big Retailers Get Into the Shipping Game
- The Changing Face of Last Mile Delivery
- Controlling Your Shipping Spend: Factors to Consider
- Strategies to Control Your Shipping Spend
1. The Category Of E-Commerce Is WideningWhen Jeff Bezos first launched Amazon, he envisioned an “everything store” that could empower people to buy any conceivable product and receive it almost instantly. Unfortunately for Bezos, technology and logistics in the 90’s were not quite ready to deliver on that dream, at least not the entirety of it. He first started small by selling in one category: books. These items were compact enough to ship inexpensively and people felt comfortable purchasing books without having to first inspect them in person. Soon Amazon expanded into other categories like movies and electronics, and continue to expand their product offerings today. In 2018, people are purchasing items that weren’t even considered e-commerce products 20 years ago, like furniture and appliances. With each passing year, we come closer to Bezos’ vision of an online buying experience that delivers almost anything to anyone rapidly. But the challenges associated with shipping all these goods continue to impede making that dream a total reality, and is actually changing the way we view logistics. It’s convenient for customers to furnish their entire home via e-commerce, but such a feat of online shopping requires sustainable solutions to massive logistical shipping and transport problems. These solutions almost always require carriers to expend extra resources,and as a result, carriers have complicated their surcharges in several ways. To cite just three key examples:
Dimensional WeightOne of the most significant changes to carrier pricing is dimensional weight. For most of shipping history, the volume of a package mattered less than weight, shipping method, and distance traveled. But beginning in 2015, for both UPS and FedEx, shipping charges were determined by the greater of actual weight and “dimensional weight.” Suddenly, low weight/high volume packages became much costlier to ship. This caused dismay for many businesses, who continue to feel the effects of this update in pricing structure and have opted for other services, such as USPS.
Peak SeasonMost e-commerce stores count on the holiday season to ship the most volume and make the biggest profit. This puts a strain on the supply chain of major carriers, which have responded by adding a Peak Season Surcharge (PSS) during high volume times. These are normally applied during November or December, but they might be applied at any time they are at near or full capacity. In other words, peak sales season almost always coincides with higher shipping fees. If you happen to favor shipping with UPS, here’s what you need to know about Peak Season Surcharge.
Oversized Package SurchargeIn addition to dimensional weight surcharge, extra large packages might be subject to an oversized package surcharge. For example, UPS charges a “Large Package Surcharge” when a package’s length exceeds 96 inches or its length plus girth exceeds 130 inches.
2. Increased Customer Demands And Increased Surcharges Mean More PressureThe “Amazon Effect” means modern businesses are getting pressure from two sources: customer demands and shipping costs.
Customers Expect More — But Aren’t Entirely Loyal To AmazonBusinesses are getting pressured from customers who demand an Amazon Prime-like experience whenever they buy retail products online. That sounds like a massive obstacle (after all, no one but Amazon has Amazon’s resources at their disposal), but you might see it as an opportunity. Studies show that while Amazon Prime customers primarily use Amazon for e-commerce, they aren’t necessarily wedded to the “Everything Store.” Many Amazon Prime customers are simply hunting for the best deal. And since they tend to buy much more than a typical e-commerce customer, they are good marketing prospects for an Amazon competitor. But wrestling market share from Amazon means providing a peerless experience to customers long before the package ships. Here are a few fundamental ways you can improve your e-commerce game to compete against Amazon.
- Focus On Search Engine Optimization — Most customers will search for their desired product through a search engine before they turn directly to Amazon. If their research brings them to your site, and it’s clear you offer the kind of experience and pricing that they’re accustomed to, they’ll have little reason to purchase from Amazon. A Google-friendly website that directs curious customers to the products that best match their search intent can intercept Amazon customers.
- Improve Your App Experience — Think deeply about the user experience (UX) of your shopping app. Amazon draws people in with its simple shopping platform: buttons are clearly labeled, forms are easy to fill out, and people are more eager to pull out a credit card if their online shopping experience is effortless. Help your designers and developers create an app that is easy on the eyes, functional on both desktop and mobile, intuitive to use, and bug-free.
- Begin Holiday Deals Early — Amazon Prime customers are deal hunters by nature, so the holiday season is a good time to get a jump on attracting them. If you start rolling out holiday savings opportunities earlier than Amazon (e.g. early November), you stand a good chance at piquing their interest before they consider buying their products on Amazon.
Shipping Costs Continue To RiseThe flip side of the Amazon effect equation is the rising cost of shipping. Despite the fact that customers want lower shipping costs, the increasing complexity and added fees of shipping mean that shipping costs are actually increasing. The ballooning size and number of surcharges from FedEx, UPS, and other carriers all leave executives with little choice but to make up the difference by cutting costs elsewhere or renegotiate their shipping costs. In Amazon’s world, finding opportunities to slash your fees is much more than just a way to shrink expenditures. When businesses pass those savings onto the customer, they can meet the needs of demanding customers and boost their sales numbers.
3. Breaking up the Duopoly of FedEx and UPSCarriers have the power to exert pressure on shippers because of the duopoly. UPS and FedEx enjoy the benefits of being long-entrenched shipment giants. These behemoths have been the rulers of the industry for decades. The high barrier to entry kept it that way. Shipping has proved stubbornly resistant to distribution, even in an age where Silicon Valley entrepreneurs and investors relish in dismantling stodgy old industries. Logistics is still impressively complex, so it may take more than a bright twenty-something backed by some startup capital to create an alternative to the modern system. Despite the challenges, cracks in the supremacy of the old duopoly are starting to show. And those cracks are being created by both new tech innovations and retailers who want to have more power over the supply chain.
New Technology Opens Up Opportunities For Smaller CarriersOne of the main challenges to setting up a delivery network is gathering all the event data. Carriers have to collect and transmit massive amounts of standardized data, including data about the delivery, geographic region, timestamps and more. At the moment, all this data tracking requires a centralized database, fully trained employees, and scanning devices. However, blockchain, the technology currently most famous for making cryptocurrency like Bitcoin possible, might eliminate the need for a trusted intermediary. A blockchain is essentially a list of records managed by a peer-to-peer network. The protocol and constant auditing ensures that the data is accurate, so it can be trusted without having to rely on a central record holder. Industry experts speculate that technology might help smaller delivery companies compete with the big boys. If, for example, there is a public blockchain that displays all packages that should be delivered, a small company could quickly determine which packages they can pick up. If the package needs to be delivered somewhere outside of their territory, that fact could be recorded in the blockchain and give another regional carrier, such as the postal service an opportunity to pick up the package at an exchange point to complete the delivery. The dream is that shippers would no longer be required to possess pick-up-to-delivery control on a package and its data in order to provide value. Blockchain technology might provide an “Uber for logistics,” efficiently matching businesses who require shipping services with businesses who can provide it.
4. Big Retailers Get Into The Shipping GameBut emerging technology is hardly the only threat to the duopoly. Major retailers whose business model relies on massive amounts of shipping are also working on solutions that work around FedEx and UPS. That means, of course, that Amazon is dipping its toe in shipping services. This began with Amazon Air (originally called Amazon Prime Air) in 2016. At the moment, their offerings are modest. Amazon Air’s main fleet is composed of a few dozen Boeing 767 aircraft, all operated by Air Transport Services Group and Atlas Air. But Amazon clearly envisions Amazon Air to be a major air shipper. In April of 2017, Amazon Air began operations in its principal shipping hub: Cincinnati/Northern Kentucky International Airport. The retail giant plans construction on a 920-acre facility that includes parking space for over 100 cargo aircraft. By comparison, that’s a little under half of the total air fleet of UPS which operates 239 aircraft. The big money Amazon is throwing behind this venture proves how serious they are about it: the estimated cost of the project is expected to top $1.5 billion. Amazon may have its eye on ocean freight as well. In 2015, Amazon’s Chinese subsidiary acquired a non-vessel operating common carrier license. Little is known about how (or when) Amazon would use this NVOCC license. But it indicates that Amazon is at least exploring the possibility of directly managing shipments between China and the United States. Amazon is also experimenting with technology that might make final mile delivery more efficient. Their Amazon Flex program recruits independent contractors who deliver for Amazon.com, AmazonFresh, Prime Now and Amazon Restaurants. The Flex app is designed to take care of everything. Contractors are assigned “delivery blocks,” which are essentially shifts that might last anywhere between three and six hours. An hour before the block starts, Flex workers are sent a notification that provides information on the pickup location of the items and the delivery area. Drivers scan the items with their smartphone and the app guides them through the most efficient delivery route. Currently, the Flex app is available in over 50 cities but that will likely expand if the program continues to be successful. Additionally, Amazon is working on an app called Relay. It’s designed to save truck drivers time by allowing them to pre-register loads and access security gates when picking up or delivering orders from Amazon’s fulfillment hubs. However, retail giants with traditional brick and mortar roots also see potential in directly owning the supply chain. In December 2017, Target bought grocery delivery startup Shipt for $550 Million. The acquisition comes on the heels of Target’s purchase of Grand Junction in August 2017. Grand Junction connects retailers to a network of hundreds of parcel carriers across the country. Taken together, these major purchases should empower Target to deliver goods to customers faster and more efficiently. This is seen as a direct challenge to not only the duopoly, but also Amazon’s continued emphasis of hyper-fast delivery service. For example, Target is already promoting Shift as a way to get items for a local Target store on the same day your order them. Related: Why Data Is Key To Successfully Managing Your Supply Chain
5. The Changing Face of Last Mile DeliveryThe rapidly changing landscape of supply chain services is having reverberations for the shipping industry as a whole, individual carriers, and retailers. The entire shipping industry is clearly impacted because carriers are no longer competing with just each other. Retailers, normally partners and customers of carriers, are now finding their own ways to meet the increasing customer demand curve. Everyone will have to work extra hard in order to prove their value in a world where the line between shipper and carrier is blurry as it has ever been. This will likely increase already-high demands from customers who want cheap and fast shipping. With more competition and a lower barrier to entry, carriers might have to start rethinking their services in order to stay relevant. The duopoly has long been in the comfortable position of believing that their services are too complex and capital intensive to face any real threat from technological disruption. But that’s changing in 2018. Industry leaders will have to adapt or else join the long list of former industry leaders who failed to account for changing times, such as Kodak, Blockbuster or Palm. This may include addressing the constant bane of retailers: surcharges, fees, and general rate increases. Retailers are poised to come out ahead in this new world. They will have more options thanks to increased competition and more ways to keep shipping rates down. What’s more, there will be more ways to exert direct ownership of shipping efforts. As the landscape grows more complex and hectic, there will be more money saving opportunities. But the only companies that will save are those that are able to spot the opportunities for cost reduction in the rapidly shifting parcel service industry. The most exciting developments in modern logistics are reshaping its biggest challenge: last-mile delivery. Until recently last-mile delivery was resource-intensive, but relatively straightforward. A carrier picked up packages from a hub and delivered them to front doors along a particular route. That’s changing. This “last mile” has long provided problems for carriers. The segment generates the most pollution, is expensive and highly inefficient. There is a high incidence of failed deliveries due to recipients who aren’t at home. For packages that can’t be left at a front door, this results in extra expenses associated with redelivery attempts. Even when deliveries are left at a front door, there’s a risk the package might be taken by someone besides the intended recipient. Inconsistent deliveries to certain regions also adds to the number of trucks that drive “empty.” Carriers are also slaves to the fluctuating price of gasoline. Fortunately, the “final frontier” of the supply chain has seen a number of disruptive innovations that may solve all of these problems in the near future. Here are the most promising developments for last-mile delivery.
Parcel LockersLockers facilitate a kind of self-service delivery. Rather than the package being delivered directly to the final destination, it’s secured in a locker inside of a nearby grocery or convenience store. When a package arrives at a locker, the recipient of a parcel is notified and provided credentials that allow them to open it. Unsurprisingly, Amazon is one of the pioneers of this system. In 2011, they launched lockers in London, Seattle, and New York. Now they offer lockers in over 50 cities. UPS also offers delivery lockers through its UPS Access Point network. When customers want to pick up a package, they only have to swipe their driver’s license or enter a code they receive through their mobile phone. Besides being convenient for both shippers and consumers, lockers have the added benefit of being highly secure. Packages left on a doorstep are at risk of being stolen. But packages stored in a locker can only be accessed by the intended recipient.
Delivery DronesAerial drones, which were recently featured in a spectacular fashion at the 2018 Winter Olympic Games in PyeongChang, are quickly being adopted as a last-mile delivery solution. Miniature automatic vehicles could automatically pick up a parcel from a hub and fly it directly to the final destination. Amazon’s drone program, Amazon Prime Air, is currently undergoing a private trial in the U.K. DelivAir, an experimental service from U.K.-based Cambridge Consultants, offers an even more advanced spin on drone delivery. Rather than delivering items to an address, the drones deliver directly to a person, wherever they are. It works by having the drone hone in on the target’s smartphone. It’s worth noting that one of the main barriers to preventing a world where drones zip overhead every day is regulations. In the U.S., the Federal Aviation Authority lists extensive regulations for “Small Unmanned Aircraft.” These regulations include forbidding the use of drones near airports, which often limits where drones can fly in urban areas. This explains why many of the initial trials are taking place in the U.K. Despite that, there is hope that regulators and drone operators will be able to come to an agreement that allows delivery drones to become commonplace. Some industry analysts project that mass adoption of drones for last mile delivery could arrive as early as 2020.
Bike CouriersUPS started as a humble bike delivery service in 1909 in Seattle. And the key to the future of the supply chain might be in its past. Late in 2017, UPS announced that it would begin parcel delivery in Pittsburgh via specialized electric bikes. DHL announced a similar bike delivery system in Germany and the Netherlands. The bikes can only transport between 15 and 20 packages. But the smaller fuel and maintenance expenses compared to trucks can keep costs down. And since riders can travel through bike lanes, it may be even speedier. If the trial run is a success, we may see more delivery bikes in densely packed urban areas.
Electric Delivery TrucksAll of these new innovations doesn’t mean the old school delivery trucks will be completely replaced. There will still be a place for them, particularly in rural areas where lockers or bikes are less feasible. But the trucks of the future will be powered by batteries instead of gasoline. UPS recently announced that it is deploying 50 plug-in electric delivery trucks. These trucks cost about the same as the familiar brown trucks that use conventional fuel without relying on government subsidies — an industry first. The trucks are being designed in collaboration with Workhorse Group, Inc. They claim that the trucks will be four times more fuel efficient than conventional trucks, offering substantial cost savings. The 50 trucks will be just a tiny part of UPS’ massive fleet of 35,000 gasoline-and diesel-powered vehicles. But if the experiment with electric vehicles is successful, it could spur fast adoption of the greener and cheaper trucks.
Third Party Same-Day Delivery ServicesSimultaneously, startups are creating their own last mile delivery services that directly compete with Amazon. The startup Deliv partners from thousands of retailers to enable them to offer same day delivery. UPS isn’t just partnering with Deliv; they’re investing in them and helping shape its direction. UPS invested $28 million into Deliv in February 2016 and earned a seat on their board of directors. Currently, Deliv helping UPS Stores deliver print orders. But this kind of partnership signals that third parties might have a hand in assisting shippers with ultra-fast deliveries.
Improved Last Mile Visibility for CustomersHowever, future improvements in last-mile delivery options won’t depend entirely on quantum leap innovations. Carriers are also focusing improving already existing systems. For example, expect improved parcel visibility as third parties get access to tracking technologies that are commonly used by legacy carriers. Simple smartphone apps that take advantage of GPS can let customers get access to very precise data about when their package will be delivered. Sensors can also improve technology of temperature-sensitive items. If an item has to stay below a certain temperature and is being delivered in a hot region of the country, customers can take advantage of sensors to ensure it doesn’t dip below the minimum temperature.
Striking The Right BalanceCarriers are tinkering with several solutions for last mile delivery. While undoubtedly all of these solutions will have some place in the future of the supply chain, no one knows what the final mix of last mile delivery options will look like. Carriers are trying to solve several problems at once. They want to deliver packages in a way that is speedy, cost-efficient, consistent, low noise, secure and doesn’t run afoul of FAA regulations (in the case of drones). Satisfying consumers that want delivery that’s simultaneously cheap and fast is proving to be one of the stickiest problems in logistics since the invention of overnight delivery. But through a combination of new technology and fresh thinking, we should expect to see deliveries at a cost and speed that was unheard of in the 20th century. If regular surcharge increases are a fact of life, how can businesses improve their bottom line despite that fact? It’s best to first sort all the factors that influence shipping costs into two categories: factors you can control and factors you can’t control.
6. Controlling Your Shipping Spend: Factors to Consider
CommoditiesThe raw resources required to support the supply chain are out of almost everyone’s control. Oil prices go up and down according to market demands. Labor costs tick up early according to the unemployment rate and inflation. And land prices, as any real estate agent can tell you, are still going to be determined by location, location, location.
Consumer DemandWhen consumers become accustomed to a certain price or convenience, they almost never settle for anything less. It might be nice if we could return to a time when consumers were willing to pay a reasonable price for ground shipping. But recent developments (like the Amazon effect) mean consumers demand shipments that are faster and cheaper. If anything, customers will become even more demanding in the coming years.
Carrier Profit MarginsCarriers still need to make money. And while they might be willing to shrink their profit margin if you’ve proven yourself a steady and growing customer, there’s only so much wiggle room. So if that’s what you can’t control, then what can businesses like yours do to offset costs? Related: Manage Your Shipping Spend By Tracking These 5 Metrics
7. Strategies to Control Your Shipping Spend