Logistics Series – Blog 4 - When Shipping, What Is It That You Are Actually Paying For?

com·mod·i·ty

/kəˈmädədē/

noun

1.       a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.

"commodities such as copper and coffee"

2.       a useful or valuable thing, such as water or time.

"water is a precious commodity"

If you walk into a Home Depot or a Walmart or decide to utilize the technology readily available and shop online at Amazon or Wayfair, the transaction tends to be a simple one. The price of the item purchased is what you pay for. Of course tax and/or shipping can also come into play but for the most part, the economics behind the sale is simple; ‘Here is an item for $40, you give $40 and then you receive that item’. You are buying a commodity by the first definition above. 

So when you spend money in logistics, what are you buying? This falls more in line with the second definition above. You are not buying time or water, but you are buying space. Depending on how much space is available and how your products fit into that space determines what you pay. No matter which mode of transportation you are shipping in, Small Parcel, LTL (Less-Than-Truckload), FTL (Full-Truckload), Ocean Freight, Air Freight or even Intermodal, there is a finite amount of space for freight to move in.

Common bargaining chips for reducing spend may not always apply.

In Small Parcel, there is greater ability to apply common cost reduction best practices (supplier consolidation, increased volumes, etc) because the amount of space is vast. UPS and FedEx are always willing to take on more business. They have a massive network in which to operate and they basically have a duopoly so they know by gaining business, it directly means the other is not getting that revenue.

In other modes like LTL and Ocean Freight, the amount of space either in the back of a truck or on a container ship is not nearly as great as in small parcel. Container ships often operate at 98-99% capacity meaning the ability to add more freight to a ship is simply not there. A willingness to pay more money to get a container on a ship could help but in most cases, a 25-50% mark-up on the container is not uncommon.

A 53 foot trailer, which is the common sized trailer for a LTL truck, contains approximately 3,500 cubic feet of space. The better the freight fits in the trailer, like a puzzle piece, the more freight a carrier is able to haul which increases their profitability. This allows them to charge you less to move your freight. The more difficult your freight is, the more a carrier needs to charge because they will need to be less efficient with their pick-ups and deliveries. Just because you have more freight for a carrier to take, does not mean it will be cheaper. Carriers need to plan the most efficient ways to move freight in their network and a large delicate sculpture will not work as well for the carrier as square tiles on a standard skid that allows other freight to be stacked on top.

It is important to understand that anytime you are doing a freight based RFP or a larger logistics sourcing event, the product you are ultimately purchasing is space. Making sure the freight you have is something the carriers are going to actually want to move for you is critical.