Perhaps you negotiated your small parcel contracts awhile back. So you think those negotiations are in the past for now. Well, it’s quite possibly time to think again. With an economy that hasn’t been in this much turmoil in decades, coupled with the historic and rapidly increasing cost of oil, this might be the very best time to revisit those agreements, even if you’ve recently done so. Additionally, the recently announced airlift arrangement between DHL and UPS could have a significant impact on the competitive landscape, as its announced structure would remove a significant amount of excess air capacity that exists in today’s market. DHL’s current lift would go away completely, and much of UPS’ air capacity would be filled with DHL packages.
With the economy staggering, many shippers — large and small alike — have experienced rate increases in the neighborhood of 10% on ground shipments and 26% on express shipments in the past 12 months, when adding both the general rate increase and fuel surcharge (fsc) increases together. These increases are difficult to pass on, especially in a stagnant economy.
A 10 lb. Zone 6 UPS commercial ground package in July 2007 cost $7.52. That same package just one year later costs $8.28. Part of the increase is due to the general rate increase, which was five percent. However, an additional five percent is due to the increase in the fuel surcharge, which has gone up five percentage points since July of ’07 and another 3.25 percentage points since just January 2008. That’s a 52% increase on fuel in just seven months.
A 10 lb. Zone 6 UPS Next Day Air package in July 2007 cost $70.26. That same package just a year later costs $88.97. The general rate increase for air packages was 8.5%. However, the increase in the fuel surcharge adds an additional 18.1%. Taken together, that is a 26.6% overall increase over the past 12 months and a fuel increase of 66.7% in just the past seven months. This massive increase in cost is because the fsc has increased 19 percentage points since July of ’07, with 13 of those percentage points coming since just January 2008.
So what is the best course of action? A renegotiation of your existing carrier agreements for two main reasons — a compounded reduction in shipping charges and leverage with the carriers based upon current marketplace conditions, which are competitively favorable today, but may change significantly, at least on air parcel transportation with the pending DHL-UPS deal.
The transportation providers, shippers and consumers are all grappling with the unprecedented increase in fuel. The continued volatility, at least for the foreseeable future, makes fuel itself very difficult to negotiate and puts the carrier in position of vulnerability. This is not a great place to start a negotiation. However, with a careful renegotiation of your agreements, you can also reduce the amount of fuel surcharge paid. Since the fuel surcharge is a percentage added to both the base transportation charge and is also tacked on to certain accessorial charges, a reduction in either of those factors amplifies the savings.
UPS and FedEx stocks are both considered economic bellwethers of the US economy, and the stocks have suffered recently based upon poor domestic growth and their downgraded earnings estimates. Investors like to see growth, of course, which is tough to pull off in a contracting economy. Since growth is not happening organically, the carriers are left defending their existing business and trying to convert customers from their competitors. The carriers and carrier representatives are highly motivated to keep existing business and grow new business as well. In today’s times they are even more pressure to do so. The increased pressure for growth provides the opportunity for deeper discounts and more negotiating power, provided the competitive element is real. The carriers consider very carefully if there is any true risk to their business and price accordingly.
Of course negotiation for negotiation’s sake will most likely yield you some level of improved result; however, coming to the negotiation table well-informed and in a spirit of collaboration will provide you with the best return for your effort. Preparation is where the real money is saved in a negotiation. With the advent of shipping systems that capture package level detail and transmit it to UPS and FedEx, the carriers are able to more closely analyze all of the business that travels through their networks. What they can capture they can, and do, analyze in great detail. This analysis enables them to determine the cost to provide their services as a whole, but also determine costs down to the customer level by weight, zone, service and surcharge. They price these elements according to their cost and pass these charges on to the shippers.
The best way to level the playing field in your negotiation is to have a strong internal understanding of what your own business looks like and be able to articulate a number of important ideas to the carrier representative.
First, understand what your company is looking to gain from the negotiation. This may sound easy, but by asking the different departments within your company what they need (such as service, IT support, customer service, etc.) that picture may become more complicated. But it is important that those needs are conveyed to the carriers.
Second, you’ll also want to share information regarding any growth, acquisition or interest in a previously unutilized service the carrier offers. This will provide them with an opportunity to increase their business, increase your discounts and not simply dilute their existing revenue.
Finally, it is important to discuss leverage in more detail. In addition to understanding market conditions and what effect they have on what pricing the carriers offer, it is equally as important to understand what your business looks like to the carriers. Emphasize what elements are positive from the carriers’ perspectives in order to utilize that information to your greatest benefit. The sales person you are talking with must “sell” internally to get the pricing warranted by your package metrics. The more aggressive the pricing, the more internal selling must be done. By sharing with the carrier representative your company’s attractive package attributes, the more likely they are to be victorious on your behalf.
Yes, the United States is experiencing trying economic times. However, by using this time as a strategic negotiating period, you can assist your company in shouldering the increases in fuel and decreasing costs in order to weather any contraction in business. In addition to these benefits, the results from a renegotiation will assist your firm in maintaining or gaining a competitive edge. So even if you’ve negotiated a great deal, it might be the very best time to revisit, research and reap the rewards of a renegotiation.
Melissa Priest is Managing Director at AFMS. During Melissa’s tenure as a National Account Executive with FedEx, her strategic negotiating skills resulted in over $200 million in new business for the company. Contact her at melissa.priest@afms.com or 714-961-1160.
