Advantage: Shippers

When multichannel marketers negotiate with parcel shipping companies, who has the advantage: carriers or shippers?

Current market dynamics make today the best time to bid your business. Recent earnings disclosures by FedEx and the United Parcel Service indicate a slowing or decline in their domestic parcel businesses, making them hungry for new business and willing to fight to keep existing accounts. Slow domestic growth rates in the transportation industry means promoting competition among parcel carriers is a winning strategy in managing your shipments for lower unit costs.

Carriers’ Upper Hand
However, initiating a competitive bid process in today’s parcel environment is a complex process where carriers have a distinct advantage that must be overcome to force transportation costs down. Is it the right strategy for you?

First, consider why carriers have the advantage when it comes to negotiating. They’ve made the rules and set the structures. It’s their game. Their complex rating structures and fees were born out of the carriers finding ways to make money by having the inside track on all costs involved. This gives them a better understanding of the “cost to serve.”

Consider the following contractual structures that have evolved in recent years:
1. incentive and penalty revenue tiers tied to volume commitments;
2. prices that are based on rolling volume averages;
3. zone-based pricing;
4. per-piece minimums;
5. “base-plus-tier” additive percentage structures;
6. bundling of different services for discount determination; and
7. increasing complexity of assessorial fees.

Of course, none of these seven structures were developed by a shipper. They’re all tactics geared toward protecting the revenue needs of carriers.

The Information Gap
Second, carriers have more data about each shipment than shippers do. Those scanning devices couriers carry are more than just a way to capture transit information and proof of delivery signatures. The information these devices gather provides valuable insight into the cost of delivery for each individual package. It shows the following:

● Was the delivery residential or commercial?
● How many times was a package handled by the carrier between pickup and final delivery?
● How many packages were delivered at a given stop?
● Did the courier have to make more than one delivery attempt?
● Was the address correct?

This data — as well as the standard profiling of each shipper’s business in terms of volume by service, weight and zone — is used when evaluating cost to serve.

The carriers have the ability to analyze this data and leverage it in negotiations. They've developed package-level detailed, global profitability analysis systems. These produce a profile for a given shipper. Meanwhile, sophisticated modeling can determine how well a shipper fits into the carriers' service portfolios. They know how profitable you are to them and what characteristics about your business are favorable or unfavorable. With that in mind, they negotiate accordingly.

For catalog and multichannel shippers, the general productivity benefits inherent in high volume shipping locations can be offset by the high cost of delivery to residential customers in rural areas.

Assessorial charges for selected ancillary services mount when making residential deliveries due to this high cost to serve. These include residential delivery fees, delivery area surcharges, Saturday delivery, address correction fees, COD and asset protection, among other fees — all of which are more prevalent in residential delivery than in commercial (B-to-B).

Myriad Options
Catalog shippers have more service choices to achieve their delivery goals through postal consolidators and postal hybrid services provided by the major integrated parcel companies. It’s no longer a simple choice of ground vs. second-day air vs. overnight delivery.

Also, new technologies for shippers to optimize service and costs allow the shipper to approach service selection in a mode-agnostic way. With this in mind, catalogers should avoid selecting the service type. Instead, you should select the lowest-price service that will get the package to customers within the chosen delivery commitment.

A ground delivery to a nearby destination can run one-third the cost of a next-day air shipment.

Negotiate Knowledgeably
To gather knowledge about carriers’ systems, first you must develop an equal understanding of your business. Develop your knowledge in these two critical areas to prepare for negotiating a parcel agreement:
1. understand how the carrier views your business; and
2. have a granular understanding of your current contract.

This isn’t as easy as it seems. To understand how carriers view your business, develop a detailed profile of your total parcel portfolio. This includes air, ground, international and less than truckload (LTL) minimum charge shipments. The LTL minimums can often be leveraged into parcel contracts for lower prices on individual shipments. In addition, the volume may help cut prices on your entire portfolio.

This profile should include every outbound, inbound or third-party shipment where you pay the freight bill. If you don’t include all the revenue you provide, carriers may not give you the best price. It should also contain your small package characteristics, including weights and zones by service mode.

Other Considerations
Changes to your distribution environment are also important. For example, carriers will be very interested if you’re opening a new distribution center that will change your mode and zone profile. They’ll want to know whether your percentage of residential deliveries increased or declined.

Next, understand your current and proposed agreements so you know how proposed pricing will impact cost. Ask the following questions, and evaluate their answers based on your agreement, factoring in more than simply the transportation rates.

● Are you getting discounts on all the services?
● Are the most prevalent assessorial charges discounted?
● Are all of your shipping locations included in the agreement?
● Are annual increases inherent in the agreement?
● Does the contract provide an incentive if your business grows during the contract period?

Another critical issue for catalog shippers with seasonal sales spikes is the timing of new contracts. Seasonal spikes in business can create counter-seasonal rate implications if rolling averages in tiered contracts aren’t negotiated for the correct time frame and implemented at favorable times to shippers. Understanding all the implications of the various rating and discounting structures that fluctuate with time and/or volume are critical to understanding the total cost over the life of the agreement.

Once you understand your business profile and how you can best position your business volumes and characteristics with a carrier, decide whether you want to negotiate a new agreement with your incumbent or ask for competitive bids from different carriers.

Perhaps the most important tactic a shipper can use to cut its rates is opening its parcel portfolio up to competitive bids. Renegotiation with your current carrier can be the path of least resistance, but it won’t produce better prices than asking for competitive bids.

Conclusion
A well-prepared, well-managed bid process is your best bet. Take the time to develop the information necessary to position your business as an attractive prospect for carriers before entering into negotiations.

Mike Erickson is president/CEO of AFMS Logistics Management Group, a Portland, Ore.-based consulting firm that helps shippers negotiate carrier contracts. You can reach him at (800) 246-3521 or info@afms.com.