What are Shipping Zones and Why Do They Matter?
Shipping zones are geographical areas that carriers use to categorize destinations based on their proximity to the origin of a shipment, typically the warehouse or 3PL fulfillment center. The United States is typically divided into several shipping zones, with Zone 1 being the closest to the origin and Zone 9 the farthest. The farther a package has to travel, the higher the shipping cost tends to be.
The importance of understanding shipping zones lies in its impact on shipping costs and delivery times. Brands that ship products to distant zones may incur higher shipping expenses, potentially eating into their profit margins. Additionally, delivery times can vary significantly between zones, affecting customer satisfaction, loyalty, and repeat purchases.
How are Shipping Zones Calculated?
While shipping carriers, such as USPS, FedEx, and UPS, have proprietary algorithms for determining shipping zones, the general calculation is based on the distance between the origin and destination ZIP Codes. They each have a slightly different model, but all carriers typically use USPS's shipping zone structure as a foundation for their own. Here's an overview of how it works:
- ZIP Code Prefix: Carriers use the first three digits of the ZIP Code to identify the general region or sectional center facility (SCF) where the address is located. These three digits form the basis of the shipping zone calculation.
- Zone 1: 1-50 miles
- Zone 2: 51-150 miles
- Zone 3: 151-300 miles
- Zone 4: 301-600 miles
- Zone 5: 601-1,000 miles
- Zone 6: 1,001-1,400 miles
- Zone 7: 1,401-1,800 miles
- Zone 8: 1,801 miles or greater
- Zone 9: US territories & some Military addresses
- Zone Boundaries: The carriers have predefined boundaries that separate each zone based on the distances between SCFs or regional hubs. As packages move further from the origin SCF, they enter higher-numbered shipping zones.
- Regional Infrastructure: Carrier networks and transportation infrastructure are considered when calculating shipping zones. The availability of direct shipping routes, transportation hubs, and logistics efficiency all play a role in determining the most cost-effective zones.
- Historical Data: Carriers analyze historical shipping data to fine-tune their zone calculation algorithms. Past shipping patterns, delivery times, and costs are considered to optimize zone assignments.
The Impact on Your Shipping Strategy
Understanding shipping zones empowers businesses to make informed decisions in their shipping strategies. The data can be retrieved and downloaded from your shipping software or warehouse management systems, whatever your source of truth is for shipping. At a minimum, you should include data points such as destination zip code, state, weight, dimension, quantity of items in shipment, label cost, zone, carrier, method and shipment date. With this data, you can generate pivot tables or write formulas in Excel to generate KPIs in the form of count and percentage:
- by state
- by zone
- by weight class
- average number of shipments per order
- average number of units per shipment
- label cost by method
- division and percentage of methods and carriers
- cost by carrier and method
... and many other KPIs that can be derived from these data points. Here's how this information can benefit your operations:
- Cost Optimization: By knowing the zones where your products are most frequently shipped, you can negotiate better shipping rates with carriers and implement cost-saving measures. The shipping carrier typically only extends the well-deserved discounts if the shipper fully understands their shipping analytics. Shipping carriers aim for low-dimension divisors and shallow discounts on more frequently shipped zones to maximize profit. It is up to the shipping to understand their data analytics and firmly negotiate.
- Delivery Time Planning: With knowledge of shipping zones, you can set accurate delivery expectations for customers, enhancing their experience and satisfaction with your brand.
- Packaging and Inventory Allocation: Understanding shipping zones allows you to optimize packaging sizes and weight, reducing shipping costs and enhancing inventory allocation for different regions. Not all brands can disperse inventory in multiple nodes. For example, most apparel brands cannot allocate inventory to various shipping locations because they have a wide assortment of SKUs, but not deep enough inventory levels. In this situation, if inventory is allocated to multiple locations, out-of-stock levels will cause multiple shipments per order. The opposite is true for brands with low SKU counts and high levels of inventory, but managing inventory, replenishment stock, and allocating the amount per warehouse creates import and inventory allocation challenges.
- Market Expansion: Analyzing zone distribution helps identify potential new markets with higher customer demand, guiding your expansion plans strategically. This is especially critical for brands with brick-and-mortar stores. The shipping data shows customer concentration. Where e-commerce orders are thriving, adding a brick-and-mortar location enhances the customer's experience and creates a significantly higher customer lifetime value (LTV) compared to only e-commerce.
Conclusion
Shipping zones are an integral part of the shipping process that can significantly impact your business's bottom line and customer satisfaction. Familiarizing yourself with the concept of shipping zones and how they are calculated empowers you to make smarter shipping decisions, optimize costs, and deliver products efficiently to your customers. Shipping cost is one of the profit and loss statement's most significant line item. By staying informed and leveraging this knowledge, your business can gain a competitive edge in shipping and logistics. An experienced e-commerce 3PL can certainly provide great value by resolving outbound shipping, zone skipping, shipping methods, and cost optimization.
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