In 1989, Robert C. Camp published a breakthrough book entitled Benchmarking The Search for Industry Best Practices that Lead to Superior Performance. That started a revolution from boardroom to shop floor and touched every department along the way. Benchmarking is an excellent management tool but, unfortunately, not when it comes to assessing parcel carrier incentive rates.
Why doesnt benchmarking work for assessing parcel carrier incentive rates, you ask? Because no other company has the same parcel characteristics that yours does. So comparing incentive rates may be fun to do at the annual traffic club meeting, but it is basically a waste of your time.
There are many factors to be considered in determining what incentive is warranted for your packages. These include such factors as the varying physical package sizes, weight distribution, zone distribution and packages per pick up and delivery stop. The list goes on. I can guarantee you that the company next door, or your competitor across the country, doesnt have the same package characteristics as you. Its that simple (or complicated depending on how you choose to look at it).
Lets consider just one variable, package size, to make the point. All other variables zone distribution, packages per pick-up, etc. are identical. Company As package size is one cubic foot while Company Bs is two. In comparing the cost to service for the two companies, a parcel carriers linehaul cost will be twice as high for Company B as it is for Company A. Therefore, again, all other things being equal, Company As incentive rate should be higher by that cost difference.
So what does this mean to you? For one thing, turn a deaf ear to all those consultants knocking on your door or inviting you onto their Web sites proclaiming that they can assess your current carrier incentive if you simply tell them how many packages you ship along with your incentive rate! It simply cant be done. Youd be better served by dusting off your Ouija board and dimming the lights. You wont do any worse in assessing your rates, but at least you have a chance of talking with Elvis!
One of the greatest myths perpetrated to you, the shipper, is that incentive levels are driven by volume. Nothing could be further from the truth. Do you think a carrier would offer an incentive to a shipper whose packages could not be serviced profitably? Of course not regardless of how much volume it had. The only thing that drives incentive levels is the profitability of your packages. If your package characteristics translate into a low operational cost for the carrier and a high profit margin, the carrier can discount its rates. Naturally, it is a great sales tool for a carrier representative to say, If you only had a little more volume, I could get you some more incentive!
Very few shippers are receiving an incentive rate that properly reflects the value of their businesses to the carrier because shippers lack an understanding of how their package characteristics relate to carrier costs. Carrier cost-based knowledge is required to accurately evaluate your incentive. Without this understanding, you will continue to overpay your carrier.
So the next time someone tells you he can assess your incentive levels, ask him how it will be accomplished. If the answer is a form of benchmarking, dont waste your time. Seek an engineered, cost-based approach if you want a reliable analysis. Remember that there are no short cuts to an accurate answer.