The Idiot Index

Are you overpaying across your supply chain?

I came across a concept called the idiot index, and found it extremely telling.

It’s a ratio to measure how much markup you’re paying for a product or service. For example, if you buy a cotton shirt for $200, and the raw materials only cost $5, that’s a 40:1 ratio. Not ideal.

Applied to shipping, ask yourself, What is the actual cost of delivering my packages?

The costs consist of 4 major processes - first mile, sorting, line-haul, and last mile.

The first leg in this journey is first mile delivery, which is the leg of the journey where packages are collected from warehouses and manufacturers to be delivered to sort centers.

From a cost perspective, the more packages a single driver is able to pick up and drop off in a day, the cheaper the cost per package. There are other factors, like local labor and fuel costs, but we’ll get into that later.

For now, let’s focus on quantity.

A driver in an area like Vernon, a 5 mile pocket of Los Angeles known for its high industrial density, is going to be able to process many more packages per day compared to a driver in rural New Mexico. 

Mr. Vernon might be able to make 50 stops per day, while Mr. Rural  might only make 10 stops per day. Mr. Vernon also might pick up 1000 packages per stop, while Mr. Rural might only pick up 100 packages per stop. 50k packages vs. 1k packages. That’s a 50x difference. 

Let’s call the costs per day (driver wages, fuel, maintenance, depreciation, insurance) $500, ignoring fluctuations between regions for simplicity. I’m using rough math obviously.

Mr. Vernon costs $0.01 per package, while Mr. Rural costs $0.50 per package. 

Similar economies of scale exist across sorting, line-haul, and last mile.

So if there are routes that are 50x more or less efficient than others, that means there are customers that are 50x more or less profitable than others.

So then, how do national delivery companies like FedEx, USPS, and UPS price?

They’re not pricing 50x higher for unprofitable customers. They are subsidizing their unprofitable customers with their earnings from highly profitable customers. 

And in a market with such a wide range of profitability per customer, that creates an opportunity to slice and dice up the business.

Regional carriers like UniUni, OnTrac, GLS are clear beneficiaries. Rather than service 100% of the population, they start up by cherry-picking the most profitable customers, regions, and package types, and since they don’t need to subsidize unprofitable customers, they are able to win business and move business away from national carriers towards their own networks.

Now, what would make the 50x less profitable customers even worse for the national carriers? 

Simply put, if they were a pain to deal with. There is nothing worse for a carrier than having an internal account rep and pricing team dedicated to a low volume, unprofitable account. This creates opportunity in the market as well.

Shopify apps such as Shipstation aggregate volume across lower volume shippers. Some accounts are unprofitable, but others are highly profitable, and overall their book of business is profitable. They manage the customer relationships at scale with software, and share the profit with the carriers, who are much happier with this arrangement than dedicating their internal staff to account management for unprofitable, low volume accounts.

So, what does this mean for brands who are looking to pay lower shipping costs?

I would say, you need to understand your point of leverage.

If you are a low volume, rural area shipper, your point of leverage is to find a group purchasing organization or network of some kind that you can “piggy back” off of. 

If you are a “golden goose”, high volume, great location shipper, your point of leverage is understanding that your account might literally be 50x more profitable than others in the carrier's network. Your current carrier, or other carriers likely have a ton of room to improve your pricing.

Most founders and ops leaders are so busy running their business that they don’t have time to dive deep on last mile shipping. As a result, many brands lack leverage in this area.

Do you know your unique point of leverage?

If not, you probably have a lot of room for improvements, and that’s good news.