There is no question that the parcel industry is facing uncertain times. However, this uncertainty in our logistics environment is nothing compared to that faced by Europe in the early 1800s. In 1812, Napoleon was poised to consolidate his power by conquering Russia. However, this stretched his logistics tail to the limit. Russia exploited this weakness by refusing to engage Napoleon’s forces. Rather, they withdrew deeper into Russia, away from Napoleon. This served to stretch an already thin supply chain even further. The Russian forces also made a habit of burning their cities prior to abandoning them, denying the French forces the supplies and provisions they might have looted. Many historians suggest that had Napoleon’s logistics tail been thicker, or had the French forces been able to resupply from onsite resources, the outcome may have been very different. There are two important lessons to be learned from Napoleon’s example. First, uncertain times often result in unexpected results. Second, and more to the point, logistics is a crucial factor in the success of any organization.

Although the current economic turmoil may not be on the same scale as Europe during the Napoleonic Wars, it is having an unusual, and some say unprecedented, impact on companies worldwide. This is nowhere more true than in the logistics arena. In 2008, FedEx Express volumes were down 7.3% from 2007 levels. FedEx Ground, and indeed the entire parcel market, experienced similar declines. Moreover, without exception, every piece of market research I have seen in the last three months has projected continued weakness in parcel, truckload and LTL volumes.

From May 2007 to May 2008, the US Gulf Coast Spot Price of Kerosene-Type Jet Fuel increased by 82.8%. From May 2008 to December 2008, the price fell by 49.7%, falling to its lowest point since March 2007. Given that fuel is typically either the second or third largest single cost on parcel carriers’ income statements (second only to labor and occasionally purchased transportation), the effect of volatile fuel prices is predictable. While fuel prices are relatively low as of this writing, there seems to be no confidence that fuel prices will stabilize in the short to midterm. As a result, carriers are taking the standard approach of hedging in the options market. However, they are also hedging their bets by the way they approach pricing.

Changes in the Parcel Arena
What we expect to see in the coming months is a pendulum effect. We initially expect to see aggressive pricing from both UPS and FedEx in an effort to secure the majority of the DHL shippers, followed by more conservative pricing as both carriers respond to the reduced number of competitors in the market.

In November 2008, DHL announced that it would discontinue its intra-US services as of January 31, 2009. Since entering the domestic US market in 2003, DHL has been a destabilizing force in parcel pricing. Their initial US market strategy was to offer prices well below the market. This made sense at the time, as DHL needed to achieve a certain critical mass to sustain the growth of a national carrier system. However, this action disrupted the unspoken pricing truce UPS and FedEx had established. With DHL leaving the market, the not insubstantial volume DHL was carrying is up for grabs. What we expect to see in the coming months is a pendulum effect. We initially expect to see aggressive pricing from both UPS and FedEx in an effort to secure the majority of the DHL shippers, followed by more conservative pricing as both carriers respond to fewer competitors in the market. The short term feeding frenzy will surely be followed by calm waters in which both UPS and FedEx will re-establish the status quo.

What does this chaotic marketplace mean to you? The implications will be different for each shipper. However, two factors will be nearly universal. If you have been considering negotiating new agreements with your parcel carrier(s), now is the time to act. The market is still in flux. However, once a new equilibrium is established, I believe the trend will be toward more conservative discounts. The carriers are under tremendous earning pressures. With volumes down and most costs on the rise the carriers are struggling to meet Wall Street expectations. Although one could argue that the carriers run the risk of reducing volumes further by increasing costs, FedEx and UPS have been doing this long enough to know that shippers have nowhere else to go. They also realize that if they both take a disciplined approach to their pricing they can both enjoy increased per-package yields. In this case a rising tide really does raise all boats. 

As the economy and parcel volumes turn south you may fall out of your revenue tier, with a corresponding and sometimes dramatic discount reduction.

The second factor may be more important, and it’s the one that is most often overlooked. Too often shippers sign a new agreement and consider their pricing locked in for the term of the agreement. However, most parcel agreements today contain a revenue component. As the economy and parcel volumes turn south, you may fall out of your revenue tier with a corresponding and sometimes dramatic discount reduction. The importance of monitoring your revenue attainment cannot be overstated. Contact your carrier rep and request a weekly report showing your revenue attainment. Should your revenue attainment fall to a point where you are approaching the lower limit of your revenue tier, engage your carrier immediately. While your carrier will not be pleased to see your volumes falling, they will likely offer some flexibility so long as the decrease is not attributable to encroachment by another carrier.

The takeaway is this: even in these turbulent times, the basics still apply. Certainly as the risks are higher, more vigilance is necessary. However, good practice is always good practice. So long as you stay vigilant, manage based on quantitative data, and exercise good logistics practices, you should not find yourself at the end of a too thin logistics tail.

Joe Wilkinson serves as Practice Development Manager, Transportation at enVista LLC. He is a leading expert in parcel shipping and pricing practices and has negotiated literally hundreds of parcel agreements from both sides of the table; both carrier and shipper. His areas of expertise include transportation rating and analysis, shipping best practices, parcel market trends and developments, mode optimization, and transportation network and practice optimization. Joe can be reached at jwilkinson@envistacorp.com 
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