How is it that online retailers can afford to offer Free Shipping?

If you are an online retailers you probably have asked the question. "How do so many of my competitors offer free shipping on customer orders?", which is then followed by the thought.  "How can I compete with free shipping offers?"

There are a few ways online sellers are able to provide discounted or free shipping, but unfortunately the reality is there are NO free shipping service options with Fed Ex or UPS or the USPS or anyone else. So, whether your business is a high volume shipper, small ecommerce start-up, or growing ecommerce retailer there is no such thing as free shipping for anyone.

 What large shippers do get, that most small companies typically do not, are significant discounts on UPS/ Fed Ex  published rates. In addition, if a company is shipping a very large amount of the same size packages there is often the chance to get preferential rates in those circumstances.

Clearly if you are a small online retailer you are at a real disadvantage because you are without the leverage to negotiate better rates with FedEx or UPS. But in the end, just like your business, the big online retailers are covering the cost of shipping with the margins in their products.

What to do about it as a startup or small online retailer? Obviously it is paramount to figure out ways to minimize shipping expenses because these are costs that are not going away no matter how big you get. The cost to an online retailer of managing inbound freight and other logistics expenses are a matter of scale as well so make sure to be managing shipping costs for larger product moves as well. This includes the right ecommerce shipping software as well.

Consider alternatives to FedEx or UPS by looking at the options offered by the USPS. Many companies find that options like a Flat Rate Priority Mail box are a good way to reduce costs. FedEx and UPS charge hefty residential, extended delivery area and fuel surcharges that hurt the economics of shipping Business to Consumer (B2C).

More distance equals more cost so your shipping location is directly correlated to your shipping costs. The densest population centers in the US are located in Northeast part of the country. If you are shipping from San Francisco to customers in New York, the cost could be double or more than the cost to ship to New York from a location on the east coast. Another advantage the big guys have is the volume to ship from multiple points within the US. They can service most of the country with a bunch of cheaper ZONE 2 or 3 shipments (short distances), as opposed to expensive ZONE 8 shipments (long distances) going cross country by having multiple warehouse locations to ship from. In the end it does take volume to make it worthwhile to set up multiple shipping points around the country.

Many 3rd party ecommerce order fulfillment warehouses will pass on their volume discounts with FedEx/ UPS, so consider outsourcing your order fulfillment and shipping. Your operation will potentially benefit from the scale and volume of all the customers shipping from that fulfillment center, not to mention the other costs and headaches of managing your own fulfillment.

Fuel Surcharges make up 40% of your logistics management costs - know how they work

Fuel Surcharges make up 40% of your logistics costs – you need to know how they work

Around 10 years ago is when fuel surcharges became ubiquitous. Prior to that time, the cost of fuel was always there of course, but in those days shippers essentially paid for fuel as a part of their linehaul rates. The market changes in fuel costs were for the trucking companies to worry about. The impact of fuel was something left to maybe negotiate at year’s end, or perhaps as part of a contract renewal. The shipper’s perspective was that managing fuel costs were a trucking company’s problem to understand and account for. Since that time, the burden of dealing with market changes in fuel costs has shifted from the trucking companies to shippers.

With fuel surcharge making up 30-40% of a typical company’s logistics costs it important for managers in both operations and finance to know how fuel surcharges are calculated and how the diesel market affects their freight spend. These days shippers are directly exposed to the potentially budget crushing fluctuations in fuel costs and the curiously structured surcharge matrices. Theoretically the fuel surcharge tables that most carriers use are a direct representation of actual fuel costs to calculate the fuel surcharge but I have yet to be given an explanation that makes me feel comfortable that the matrices are more than just an extension of a carrier’s line haul costs. This is not to say that fuel costs are not a major cost factor for carriers, I just disagree that the tables represent the impact of fuel accurately for a carrier from an operating perspective. There is too great of a difference from carrier to carrier for it to be a true representation. This tells me there is a “fudge” factor built into the numbers allowing carriers to hide operating costs beyond just fuel in the fuel surcharge matrix.

An ecommerce company shipping from a order fulfillment operation? For small package shipping, companies are at the mercy of UPS and Fed Ex for not just air and ground services and pricing, but to both company’s own fuel surcharge tables. There is not a lot to understand about small package fuel surcharge other than to know you have to think of the cost as an extension of their pricing and pay attention as the fuel prices change – for better or worse.

For truckload and LTL shipping, you’ll see fuel surcharge matrices calculated as both a per mile and a percentage of line haul cost basis. In both cases – the fuel surcharge table will be based on the US Governments Diesel Fuel Index (posted on the DOE website). It is updated weekly and is also calculated on a regional and national basis. Depending on the footprint of your trucking company either type of fuel index could apply. The “per mile” basis is simply calculated by adding the per mile charge on top of your line haul rate, then multiplied by the number of miles shipped. The “percentage” type surcharge takes the cost of the shipment (for LTL, the discounted tariff rate and for TL, the linehaul portion) and adds the percentage of cost derived from the table on to that. Just like you audit line haul costs on freight invoices, it is also important to audit fuel surcharges.

Fuel matrices are generally built to adjust with every $.05 increase or decrease in the DOE diesel fuel index and are effective for any shipments tendered in a given week’s period of time.


Ken is a 15 year veteran of logistics and supply chain operations. He has founded companies in the ecommerce order fulfillment and transportation management system markets.

Startup Order Fulfillment and Social Media for Logistics

Three benefits to automating your freight invoice audit process

Reduce Freight Costs:

First off - the reality is a lot of freight invoices are incorrect, so they all should be checked. Mileage calculation errors are common and the complexity of fuel surcharge matrices mean that the applicable surcharge changes week to week. Do a spot check of some invoices and I can promise the wrong surcharge is getting applied on some shipments. Partnering with a resource to help automate this auditing process will make it simple for you. Most freight invoice auditors will claim a freight savings of 2-6% off your logistics spend. I can’t verify that either way, but I do agree an opportunity for savings exists. On the high end, you should expect to pay $.80-.85 per invoice, but much less with higher volumes of invoices or using EDI to facilitate the process. This would involve getting each of your carriers to interface electronically with the freight payment company. This is a bit complicated to get started with but will become relatively simple to maintain once the whole process is in place.

Reduced Shipping Administrative Expenses:

Companies conducting their freight invoice audit in-house are using expensive employee resources to ensure carrier invoices are correct - and probably not very effectively. Realistically, a manual freight audit is not able to uncover the same number of carrier audit billing errors and shipping service failures that an automated freight invoice audit process is able to identify. Automating the invoice audit process will eliminate the excessive time currently allocated to these tasks and as a result generate additional cost reduction in time saved. Think about it – how are your carrier rates sheets organized right now? Hardcopy print outs in a drawer? Maybe a spreadsheet attached to an email in someone’s inbox? How efficient or accurate is it for someone to be auditing each carrier’s invoice by referencing one of those sheets, running the miles, adding stop charges, and accesorials – and doing it correctly? Plus – they need to check this week’s fuel surcharge from the DOE website, reference yet another table provided by the carrier, and add that amount to the carrier charge. You do all this for one truckload, when you can automate the process in a way that eliminates the work and the potential errors.

Freight Management & Carrier Reporting:

From a business management standpoint, this is the possibly the most valuable benefit of automating freight invoice audit. Information. The importance of knowing all your freight data is accurate and accessible allows for effective business reporting and use of that data. Understanding your logistics and supply chain costs in detail is vital to effectively running a business. Attempting to manually audit and collect freight data is too time consuming and very error prone. Think about the valuable components of freight spend data. The better you understand the cost components that make up your freight spend, the better you manage your business. If you keep getting hit with detention a particular consignee you what to know about… if freight costs are going up because of fuel, you want to know about that too. Good information is vital to making your business run better.

Ken is a 15 year veteran of logistics and supply chain operations. He has founded companies in the ecommerce order fulfillment and transportation management system markets.

The Benefits of Saas for Logistics Management

Benefits of SaaS (Software as a Service) for Transportation Management
In the old way of thinking, companies were used to buying, building, and maintaining their IT infrastructures despite exponential costs. SaaS gives companies an alternative to those headaches. Now, a company can plug in and subscribe to services built on shared infrastructure via the Internet. The SaaS model has gained popularity in recent years because of the many benefits it offers to businesses of all sizes and types, but it also begs several questions and considerations to be thought of as well.

The main benefits that are attracting businesses customers to take advantage of SaaS solutions for Transportation Management:

Higher Adoption Rates: SaaS applications are easily accessible from any computer or any device—anytime, anywhere. Because most people are familiar with using the Internet to find what they need, SaaS apps tend to have high adoption rates, with a lower learning curve.

Lower Initial Costs and Easier IT Implementation: SaaS applications are typically subscription based. No license fees mean lower initial costs. Having the SaaS provider manage the IT infrastructure means lower IT costs for hardware, software, and the people needed to manage it all.

Automatic Upgrades: Because the SaaS provider manages all updates and upgrades, there are no patches for customers to download or install. The SaaS provider also manages availability, so there’s no need for customers to add hardware, software, or bandwidth as the user base grows.

Seamless Integration: SaaS vendors with true multitenant architectures can scale indefinitely to meet customer demand. Many SaaS providers also offer customization capabilities to meet specific needs. Plus, many provide APIs that let you integrate with existing ERP systems or other business productivity systems.

Items to think about when considering a SaaS solution:

Data Security is more than just user privileges and password policies. It’s a multidimensional business imperative, especially for vendors responsible for customer data. Make sure any provider you’re considering has solid policies and procedures in place to guarantee the highest possible levels of security. Carrier and order fulfillment services contracts need to be kept safe.

With on-demand applications, customers rely on their providers to keep systems and data available. You need to trust your SaaS provider to meet your business requirements, so expect them to communicate with you as a partner in your business. You need to have access to your transportation data and systems from anywhere.

Scalability is important. With any utility, customers benefit from the scale of the supplier. Scale provides a larger customer community that can deliver more and higher-quality feedback to the vendor to drive future innovation. And a larger customer community provides rich opportunities for collaboration between customers. Make sure the vendors you’re evaluating provide:

Any vendor providing on-demand services should be professionally paranoid, considering every potential disaster, and being prepared for anything.

Data backup procedures should create multiple backup copies of customers’ data in near real time at the disk level. The strategy should include a multilevel backup strategy that includes disk-to-disk-to-tape data backup where tape backups serve as a secondary level of backup, not as their primary disaster recovery data source. Failover should cascade from server to server and from data center to data center in the event of a regional disaster, such as a hurricane or flood.

Any provider offering SaaS applications needs to be able to deliver very high availability. A detailed history should be available. Vendors should provide availability data on the entire service, not just on individual servers.


Kenneth Kowal is a logistics professional with over 15 years supply chain management experience. He has founded two companies: TMS logistics solution provider and startup ecommerce order fulfillment company FillShip.com.