In basic terms, the standardized (and ultra-frank) formula for negotiating contracts is this:
Company A wants to renegotiate its carrier agreement.
Company A compares its basic shipping profile to Company B.
Company B looks a lot like Company A.
So, Company A pursues pricing based on what Company B has.
In other words, Company A uses a benchmark approach to renegotiate its carrier agreement, and determines “fair” pricing based on the deal Company B received.
Is the “I’ll have what he’s having” approach the best way to determine what’s suitable for your company?
A rarely-utilized approach to renegotiating carrier contracts is based on comparing the granular details of Company A’s shipping profile with the carriers’ costs to serve those packages. It’s not about benchmarking Company A to Company B and other similar shippers. It’s about weighing Company A’s unique shipping characteristics against carrier cost drivers that correspond to Company A’s shipment-by-shipment details, e.g. The Cost Model Approach, which saves Company A significantly more in their agreement.
With the primary objective to maximize concessions from both sides, the “total package” cost-modeling analysis looks at the company’s shipping characteristics, the carrier’s cost drivers, language of the agreement and its structure as well as discounts available. This is beneficial to both parties because the shipper maximizes available concessions and the carrier concedes in areas they can afford, while not getting beat up over an area they couldn’t.
Package-level detail is key with the cost model approach. Cost modeling requires an in-depth understanding of what drives cost for carriers. More than knowing the carrier’s cost to ship from Point A to B, it means knowing where the carriers have the highest margins and the amount they are able to concede in order to maintain profitability.
Since specific knowledge of carrier cost models is scarce in the consulting space (or anywhere outside the carriers’ top-level corporate pricing executives), renegotiating carrier agreements is—in large part—limited to benchmarking. Yet, by developing a stronger understanding of carrier cost models, more and more companies are seeing the cost-reduction benefits of the cost model approach.
In next Thursday’s live webinar, Carl Hutchinson—COO of iDrive Logistics and former-corporate pricing executive for UPS—will provide the details on how you can cost model your way to a better contract. He will discuss negotiation strategies, carrier pricing, carrier cost drivers and how to leverage your knowledge of carrier cost models.
To learn more and to register for this educational webinar, click here. You may also contact Matt Simmons with questions about this article and about the live webinar taking place one week from today.
Shipping Contracts: How to Negotiate a Better Deal
Thursday, December 17 @ 2pm EST