If you have missed the recent earnings announcements from the parcel companies that are required to report, you see a very interesting trend. Here in chronological order are some of the public filings of the major parcel transporters.
FedEx March 19
"U.S. domestic package revenue declined 15%, driven by a 12% drop in revenue per package due to lower fuel surcharges, weight per package and rate per pound. U.S. domestic package volume declined 3%, despite the benefit of DHL exiting the U.S. domestic package market. FedEx International Priority (IP) package volume fell 13%, with declines in every international region. IP revenue per package dropped 8% due to lower fuel surcharges and unfavorable exchange rates.•bCrLf
UPS April 23
"The negative effect of economic conditions more than offset the company's market share gain due to the departure of a major competitor. Volume per day declined 4.3% during the quarter with Next Day Air down 0.7%, deferred down 1% and ground off 5%. Revenue per piece declined 4.6%, reflecting product mix changes, the decrease in fuel surcharges on all products and the continuing trend toward lighter weight packages.•bCrLf
TNT Express May 3
"Revenue decline of 15.5%, of which 5.1% due to lower fuel surcharge and foreign exchange•bCrLf
DHL May 6
"Revenue in the EXPRESS Division dropped by 25.9 percent to 2.5 billion Euros in the first three months of the year. The global economic crisis caused daily shipping volumes in the product area of time definite international to plunge 13.3 percent. Outside the United States, shipping volumes for the same product dropped 10.6%. Since the beginning of February, DHL no longer offers national express products within the United States. Combined with the weak economy, this change resulted in a 35.7% decrease in daily shipping volumes in the product area of time definite international in the United States.•bCrLf
USPS May 6
"SHIPPING SERVICES
Shipping Services revenue decreased $122 million or 5.9% in Quarter II compared to the same period last year, as volume declined 64 million pieces or 15.9%.•bCrLf
Ed Wolfe of Wolfe Research met with UPS senior management the first week of June. Ed repots that UPS management stated, "It is in UPS's best interest to prevent further volume declines from current levels, and management made it clear that the longer demand remains weak, the more share it will take from competitors which have lower margins and a smaller BS to work with.•bCrLf (Ed Wolfe, Wolfe Research 6/10/2009 Reflections on Meetings with Management)
So what does this mean to shippers, and why might this be important?
Parcel carriers have tremendous fixed costs to operate a national and global network so that you can tender a package to them and they can consistently deliver it at the other end, regardless of where that package is going. So air and ground hubs have to operate every day, regardless of the number of packages moving through that hub. Line haul trucks or planes have to leave on schedule to "make service•bCrLf whether the truck or plane is 90% full or 50% full. The terminal and pick up and delivery routes have to be maintained so that you can get the on-demand pick up and the consistent delivery you expect — everywhere.
When volume is down year over year, the network has to operate each day with tremendous excess capacity. FedEx and UPS don't have a fleet of smaller aircraft sitting around in the event that if volumes deteriorate they can just substitute a plane with less cube. Those planes have to lie at their designated time of departure to reach the hub at its anticipated slot so that the carrier can in fact provide that guaranteed service you have come to expect and now demand.
When you look at what's going on in the industry, for quite some time now, you see that organic growth is gone and from all prognostications is not coming back any time soon. A few months from now, "year over year•bCrLf comparisons may be easier to obtain but that still does not solve the issue of excess capacity that departs each night and can't be inventoried until they need lift at some point in the future.
Ergo, if you read between the lines of Ed Wolfe's statement, two orders come down from the top to sales and pricing. 1) Don't dare lose any existing accounts to the competition, and don't dare tell the corporation you lost a deal over price, because that, unlike the sagging economy, is something management can control. 2) When a competitor's account comes into play in the competitive bid environment, the carriers are going to price their value proposition and/or concessions to make it worthwhile for that shipper to make the switch to the competing offer.
What Does that Mean to You?
This need to feed the beast with packages each day will eventually turn, but right now it's the perfect storm, and management is articulating that they will price to convert a competitor's packages. And carriers are going to price to defend their accounts because in this environment it is tremendously costly to try to replace lost volumes.
Even if you are in the beginnings of a new contract with a parcel carrier, it's in your interest to place your book of traffic in the competitive bid arena and ensure your employer is enjoying absolutely the lowest costs available to you. Do not expect your sales representative to come in and proactively offer you lower prices even when he knows that smaller accounts than yours is receiving significantly lower prices than you.
Your carrier negotiates parcel contracts with shippers every day. You negotiate parcel contracts maybe every year, but if you are reading this article and have gotten this far, I suspect you negotiate a parcel contract every three or five years. Your carrier knows more about your book of parcel business than you do. After all their pricing department of your current carrier has all your shipping history. They know the good and bad attributes of your shipping profile and their margins. You don't. They say of attorneys that try to represent themselves in court that "they have a fool for a client.•bCrLf
I'm pretty certain you don't spend time meeting with other shippers of similar size than you and compare carrier offers. I'm pretty sure you don't know how low the market has gone right now (or how much more it might go if you have significant volume). Because of all the lay offs, what I am seeing is that most decision makers are wearing many more hats than they used to and putting out more fires because of the economic crisis. This is no excuse because your company needs you to competitively bid your business now or you are guilty of allowing your employer to overpay for its transportation. Most shippers don't appreciate that they have the right and the obligation to bid their business out now to take advantage of this situation or they are faced with the incitement of malpractice.
My 33 years on the carrier side of negotiations allows me to share that in every negotiation the carrier holds back many of the pricing concessions they have been granted, and when pushed, carrier management today will almost always cave to your demands if you know what to ask for and how to position your book of business. I'm not looking for any business. But you don't have to do the work to bid your business out right now. There are a score of seasoned parcel negotiating companies out there now, mostly staffed by managers from the parcel companies that have retired, quit or have been let go who have tremendous experience and knowledge of what the carriers are doing for your competitors out there. All of them will do deals strictly on gainshare, which means you don't pay them a dime for their services up front; you pay them out of the incremental savings they can obtain for you. It's all post process variable. Your employer does not have to write any checks to get this job done, and you get to outsource it and become a hero by delivering to your employer the savings.
There are some tricks to negotiating with the parcel companies so that you retain more of the gain, and I have it in a PowerPoint at my linkedin.com page. I think if you are registered with slideshare.com you can also find it. But if you send me a link request in Linkedin, then the Slideshare PowerPoint is there. There is also a PowerPoint with ideas and concepts on negotiating a parcel contract, just keep in mind that you are an amateur at negotiating a parcel contract, and I'm recommending you employ a professional. Lastly if you don't know who these firms are, I have a list of most of them at www.hempsteadconsuling.com.
Don't let this opportunity pass you and your company by. We are witness to historic times here, and this is the perfect storm to navigate your way to a significantly better parcel program.
Jerry Hempstead is president of Hempstead Consulting. He is a frequent speaker and lecturer on transportation and logistics and has written scores of articles on the subject. He is the past recipient of the Transportation of the Year award from Delta Nu Alpha, the Franklin Award from the Mail Systems Management Assn and the lifetime award of a Distinguished Logistics Professional (DLP) from the American Society of Transportation and Logistics. He can be reached at 407-342-3825,gmhempstead@aol.com or www.hempsteadconsulting.com.
FedEx March 19
"U.S. domestic package revenue declined 15%, driven by a 12% drop in revenue per package due to lower fuel surcharges, weight per package and rate per pound. U.S. domestic package volume declined 3%, despite the benefit of DHL exiting the U.S. domestic package market. FedEx International Priority (IP) package volume fell 13%, with declines in every international region. IP revenue per package dropped 8% due to lower fuel surcharges and unfavorable exchange rates.•bCrLf
UPS April 23
"The negative effect of economic conditions more than offset the company's market share gain due to the departure of a major competitor. Volume per day declined 4.3% during the quarter with Next Day Air down 0.7%, deferred down 1% and ground off 5%. Revenue per piece declined 4.6%, reflecting product mix changes, the decrease in fuel surcharges on all products and the continuing trend toward lighter weight packages.•bCrLf
TNT Express May 3
"Revenue decline of 15.5%, of which 5.1% due to lower fuel surcharge and foreign exchange•bCrLf
DHL May 6
"Revenue in the EXPRESS Division dropped by 25.9 percent to 2.5 billion Euros in the first three months of the year. The global economic crisis caused daily shipping volumes in the product area of time definite international to plunge 13.3 percent. Outside the United States, shipping volumes for the same product dropped 10.6%. Since the beginning of February, DHL no longer offers national express products within the United States. Combined with the weak economy, this change resulted in a 35.7% decrease in daily shipping volumes in the product area of time definite international in the United States.•bCrLf
USPS May 6
"SHIPPING SERVICES
Shipping Services revenue decreased $122 million or 5.9% in Quarter II compared to the same period last year, as volume declined 64 million pieces or 15.9%.•bCrLf
Ed Wolfe of Wolfe Research met with UPS senior management the first week of June. Ed repots that UPS management stated, "It is in UPS's best interest to prevent further volume declines from current levels, and management made it clear that the longer demand remains weak, the more share it will take from competitors which have lower margins and a smaller BS to work with.•bCrLf (Ed Wolfe, Wolfe Research 6/10/2009 Reflections on Meetings with Management)
So what does this mean to shippers, and why might this be important?
Parcel carriers have tremendous fixed costs to operate a national and global network so that you can tender a package to them and they can consistently deliver it at the other end, regardless of where that package is going. So air and ground hubs have to operate every day, regardless of the number of packages moving through that hub. Line haul trucks or planes have to leave on schedule to "make service•bCrLf whether the truck or plane is 90% full or 50% full. The terminal and pick up and delivery routes have to be maintained so that you can get the on-demand pick up and the consistent delivery you expect — everywhere.
When volume is down year over year, the network has to operate each day with tremendous excess capacity. FedEx and UPS don't have a fleet of smaller aircraft sitting around in the event that if volumes deteriorate they can just substitute a plane with less cube. Those planes have to lie at their designated time of departure to reach the hub at its anticipated slot so that the carrier can in fact provide that guaranteed service you have come to expect and now demand.
When you look at what's going on in the industry, for quite some time now, you see that organic growth is gone and from all prognostications is not coming back any time soon. A few months from now, "year over year•bCrLf comparisons may be easier to obtain but that still does not solve the issue of excess capacity that departs each night and can't be inventoried until they need lift at some point in the future.
Ergo, if you read between the lines of Ed Wolfe's statement, two orders come down from the top to sales and pricing. 1) Don't dare lose any existing accounts to the competition, and don't dare tell the corporation you lost a deal over price, because that, unlike the sagging economy, is something management can control. 2) When a competitor's account comes into play in the competitive bid environment, the carriers are going to price their value proposition and/or concessions to make it worthwhile for that shipper to make the switch to the competing offer.
What Does that Mean to You?
This need to feed the beast with packages each day will eventually turn, but right now it's the perfect storm, and management is articulating that they will price to convert a competitor's packages. And carriers are going to price to defend their accounts because in this environment it is tremendously costly to try to replace lost volumes.
Even if you are in the beginnings of a new contract with a parcel carrier, it's in your interest to place your book of traffic in the competitive bid arena and ensure your employer is enjoying absolutely the lowest costs available to you. Do not expect your sales representative to come in and proactively offer you lower prices even when he knows that smaller accounts than yours is receiving significantly lower prices than you.
Your carrier negotiates parcel contracts with shippers every day. You negotiate parcel contracts maybe every year, but if you are reading this article and have gotten this far, I suspect you negotiate a parcel contract every three or five years. Your carrier knows more about your book of parcel business than you do. After all their pricing department of your current carrier has all your shipping history. They know the good and bad attributes of your shipping profile and their margins. You don't. They say of attorneys that try to represent themselves in court that "they have a fool for a client.•bCrLf
I'm pretty certain you don't spend time meeting with other shippers of similar size than you and compare carrier offers. I'm pretty sure you don't know how low the market has gone right now (or how much more it might go if you have significant volume). Because of all the lay offs, what I am seeing is that most decision makers are wearing many more hats than they used to and putting out more fires because of the economic crisis. This is no excuse because your company needs you to competitively bid your business now or you are guilty of allowing your employer to overpay for its transportation. Most shippers don't appreciate that they have the right and the obligation to bid their business out now to take advantage of this situation or they are faced with the incitement of malpractice.
My 33 years on the carrier side of negotiations allows me to share that in every negotiation the carrier holds back many of the pricing concessions they have been granted, and when pushed, carrier management today will almost always cave to your demands if you know what to ask for and how to position your book of business. I'm not looking for any business. But you don't have to do the work to bid your business out right now. There are a score of seasoned parcel negotiating companies out there now, mostly staffed by managers from the parcel companies that have retired, quit or have been let go who have tremendous experience and knowledge of what the carriers are doing for your competitors out there. All of them will do deals strictly on gainshare, which means you don't pay them a dime for their services up front; you pay them out of the incremental savings they can obtain for you. It's all post process variable. Your employer does not have to write any checks to get this job done, and you get to outsource it and become a hero by delivering to your employer the savings.
There are some tricks to negotiating with the parcel companies so that you retain more of the gain, and I have it in a PowerPoint at my linkedin.com page. I think if you are registered with slideshare.com you can also find it. But if you send me a link request in Linkedin, then the Slideshare PowerPoint is there. There is also a PowerPoint with ideas and concepts on negotiating a parcel contract, just keep in mind that you are an amateur at negotiating a parcel contract, and I'm recommending you employ a professional. Lastly if you don't know who these firms are, I have a list of most of them at www.hempsteadconsuling.com.
Don't let this opportunity pass you and your company by. We are witness to historic times here, and this is the perfect storm to navigate your way to a significantly better parcel program.
Jerry Hempstead is president of Hempstead Consulting. He is a frequent speaker and lecturer on transportation and logistics and has written scores of articles on the subject. He is the past recipient of the Transportation of the Year award from Delta Nu Alpha, the Franklin Award from the Mail Systems Management Assn and the lifetime award of a Distinguished Logistics Professional (DLP) from the American Society of Transportation and Logistics. He can be reached at 407-342-3825,gmhempstead@aol.com or www.hempsteadconsulting.com.
