Service Level Optimization - Getting the Best Bang for Your Buck

Author: Rich Harkey
May 11, 2016

Not many shippers know that almost all UPS and FedEx service levels have time in-transit delivery guarantees. Crazy, right? Even ground services have a guarantee to be delivered within a certain time frame.  If a shipment is even one minute late, you are most likely entitled to a refund. While a parcel audit will find and recover these on-time delivery failures, many shippers can significantly reduce shipping costs by improving their organization’s policies and practices related to carrier service level selection for any given shipment.

A primary goal for all shippers looking to reduce costs should be to maximize the use of a short zone distribution model. “What is a short zone distribution model?” you might say. Well, don’t worry, here’s the definition lifted straight from Wikipedia… JK. Here’s how our team of experts define a short zone distribution model:

First of all, the higher the zone number, the higher the cost to ship a package to that zone. The goal of a short zone distribution model is to position your distribution center based on your customers’ geographic location so as to minimize zone density. If most of your customers are on the east coast, put your DC closer to them. If they’re split between east and west coasts, put your DC right in the middle. Get it? Good.

Despite how expensive it may be to move, reallocate, or close distribution centers, the potential cost savings from maximized zone density (and in turn, optimized service level selection) can be astronomical, taking very little time to recoup costs. With this goal in mind, a relatively easy strategy would be to ensure that deferred services (like ground or three-day) are used instead of a costly express service like two-day or overnight when the same time-in-transit guarantee is there.

So, now that you’ve got your DC(s) positioned where you want them to minimize zone density, now we need to make sure you’re selecting the appropriate (smart!) service level to get your shipments to your customers on time, for the best possible price. For example, for shipments originating out of southern California the entire states of California, Utah, Arizona, and most of Nevada have a guaranteed two-day delivery transit time. Why would you send a shipment via a two day express air service when you can get it there just as fast via a ground service for less than half the price?!

All that said, there are definitely a few ways to work towards a short zone, service level optimized distribution model. Here are a few best practice suggestions to take to heart:

  • Conduct a study of your company’s outbound shipments to determine if your distribution center is in the right location based on your customers’ locations. If not, consider adding or re-allocating goods to another DC to achieve a short zone distribution model
  • The above study will also help determine which packages can be shipped via a ground service and still accomplish the equivalent express service transit time guarantee, making sure your service level selection is optimized
  • Do not ask your customer to select the carrier service level. Instead, ask them when they want to receive their package.  With your company’s transit time study and a relatively small amount of IT programming you should be able to significantly reduce shipping costs and possibly create a profit center out of your shipping department
  • Create a company-wide routing guide so shippers at your stations will make the smartest service level decision, time after time
  • Use a transportation management system (like Intelliship) to automate service level optimization, among a slew of other awesome things.
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