Whether it was under duress (i.e. executive directive to cut costs), having seen industry analysts reports, or read trade journal articles about how soft the recent pricing environment has been, many shippers negotiated new carrier contracts in early 2009. A key aspect of parcel agreements is the correlation between incentives and the average weekly revenue, also known as the rolling average. So while congratulations may well in be order for what appears to be a successful cost reduction negotiation, have you asked yourself:

• Are you truly receiving all the anticipated benefits?

• Is your volume level keeping pace with the qualifier tier incentives?

• Are you even tracking your average weekly revenue?

• Do you know what is and what is not included in the calculation?

• Lastly, for those of you who are going to be entering a Q4 peak season, will you be receiving target incentives based on your peak volumes?

The average weekly revenue is recomputed regularly by adding the most recent week and dropping the oldest from the computation. The interval used for calculation in parcel is weekly with the duration being either 13-weeks or 52-weeks, 52 being the most common. More importantly, you need to clearly identify what charges are included and which are left out of this calculation. In your agreement look for how your carrier defines eligible services. It is typically a list of the transportation charges, both domestic and international, both ground and express, likely includes freight, but not accessorial charges. Check to make sure the list includes all possible services your company could be using to ensure you receive revenue credit in the calculation.

To understand the importance of knowing your average weekly revenue start by looking at Chart A below. This represents a six-tier incentive plan. Each band has a minimum and maximum revenue threshold with an applicable incentive for each band. The revenue mid-point in the fourth tier represents the targeted average weekly revenue. As the revenue increases, so does the discount level.

Chart A: Illustration of a six tier plan 

Tier               1          2               3                4                   5             6

Revenue       0        5,600.00     12,040.00   25,200.00    31,080.00  37,240.00
Revenue    5,599.99 12,039.99    25,199.99   31,079.99    37,239.99     plus

Target average weekly revenue: 28,000.00 

Incentive %   0         16.3            20.0             22.5              22.9         23.2

In Chart B you see examples of gross weekly transportation charges, the corresponding average weekly revenue calculation, and the incentive level that would be applied.

Chart B: Example of Gross Charge Impact on Average Weekly Revenue

Week    Gross Charges         Average Weekly Revenue       Applied Incentive
1               $11,987.66                    $11,987.66                          16.3
2               $12,087.60                    $12,037.63                          16.3
3               $17,311.52                    $13,795.59                           20.0
4               $21,730.88                    $15,779.42                           20.0
5               $26,543.12                    $17,932.16                           20.0
6               $29,687.43                    $19,891.37                           20.0
7               $31,006.23                    $21,479.21                           20.0
8               $31,498.34                    $22,731.60                           20.0
9               $33,674.08                    $23,947.43                           20.0
10             $37,221.42                    $25,274.83                           22.5
11             $37,853.79                    $26,418.37                           22.5
12             $38,767.02                    $27,447.42                           22.5
13             $26,487.84                    $27,373.61                           22.5

You would begin hitting target tier after Tier 4, and you would start qualifying for target incentive after Tier 9.

You can see the impact that a slow volume trend will have on the applied incentive. In this case, the low volume from only a couple weeks meant that there were five weeks where gross charges at or above the target tier did not receive target tier discount levels. For anyone anticipating a peak season this coming quarter who negotiated a new agreement earlier this year, have you been tracking your average weekly revenue trend and do you know the impact it will have on your peak season volume incentive?

Doug Kahl is Vice President, Strategic Initiatives for TranzAct Technologies, a logistics management solutions company that helps shippers reduce their transportation spend while providing the tools necessary to remain in control and make better business decisions on an ongoing basis. Contact him at KahlDouglas@tranzact.com.