It is a common question heard throughout the parcel industry: Should I single source or dual source my network? The reality in today’s shipping environment is that the vast majority of shippers have chosen to single-source their domestic parcel network with either FedEx or UPS. And usually it is the shippers who are currently single sourced that are asking the question. All shippers dream of an environment where both carriers are engaged in supporting their network and good old fashioned competition keeps prices low and service high. And having the flexibility of a dual-sourced network sounds like a great idea to those shippers that are currently on the other side of the fence. But dual-sourcing is certainly not right for every shipper. By understanding the characteristics that determine whether or not a dual-sourced network can realistically be achieved, shippers will be able to more effectively develop their sourcing strategy.
The first characteristic that can drive a shipper to a dual-sourced solution is the shippers overall parcel spend. Typically when a shipper’s annual parcel spend reaches $70 Million, the shipper has the package volume to warrant a dual-sourced solution for their network without significantly impacting pricing. While it is very difficult for a $70 Million package shipper to move from a single-sourced to a dual-sourced solution, it is usually larger shippers who are engaged with both FedEx and UPS and are leveraging their overall volume to find ways keep both carriers as major players in their network.
The second characteristic is the volume of air versus ground packages. If a shipper has a significant volume of both ground and air shipments, they may be able to implement a dual sourcing model even though their overall spend is less than $70 Million annually. Selecting one carrier for Air shipments and a different carrier to handle the ground shipments is a viable strategy but only if the annual volume in each service type is significant. Discounts can be achieved with both carriers based on the service they are providing which would equal the discounts in a single sourced scenario. On the flip side, a shipper who has all their shipments centered in one service type (air or ground) would see a cost increase if they tried to split their shipments between 2 carriers. In addition, the operational complexities that can be required to support a dual-sourced ground network, for example, would be significant.
The primary driver of the procurement decision for many shippers is cost. How important is it to your organization to have the lowest possible cost structure? Is cost the primary criteria for making carrier choices? Or are you willing to implement a more expensive solution that provides superior customer service and is a better fit to your operational requirements? If cost is king, then you are most likely going to end up with a single-sourced solution. Carriers put a premium on locking out the competition and can provide an overall better value proposition for medium to small shippers if they are handling 100% of a shippers parcel network. If cost is not the primary carrier selection criteria, then dual-sourcing becomes a more viable option.
An interesting reason often given for entertaining a dual-sourcing solution is to mitigate risk. Back in 1997, UPS flirted with a labor strike that threatened the stability of the parcel market. Shippers went scrambling to FedEx for capacity, and for a brief period (15 days), the parcel world was sent into a tail spin. The impact of the UPS labor strike is forever etched into the minds of every shipping professional, and is often used as the evidence for a dual-sourced solution. Some shippers today choose to mitigate their risk by splitting their network across multiple carriers regardless of cost. While I understand the thought process, I believe that both FedEx and UPS have learned from previous history and have worked diligently to eliminate the risk of strikes and work stoppages across their operations. But, if redundancy is what drives your decision making processes, then you would obviously look to implement a dual-sourced solution.
Finally, it is important for a shipper to understand the impact that a dual-sourced solution would have on their own internal procurement process. In a dual-sourced environment, each carrier is constantly looking to gain additional business. Even if business has been awarded, and contracts signed, carriers will be providing additional proposals in hopes to gain the volume that is currently being shipped with the other provider. For some shippers, this can be a procurement nightmare. If you are used to managing your network with an annual bid process, then the constant evaluation of pricing proposals may not have an impact. But if your organization runs a standardized procurement process, awarding business on 24 or 36 month cycles, than a dual-sourced environment may create additional work and not be a fit for your organization. Most companies who operate in a dual-sourced environment are constantly tweaking the network for optimal efficiency. Volumes flow to and from carriers based on pricing, service requirements, capacity, and opportunity. Each carrier maintains a large portion of business but 20% of the shipper’s network is in a constant state of flux. Managing this flux is a process that not every organization can support and should be taken into consideration when making the decision on how to source your parcel network.
The first characteristic that can drive a shipper to a dual-sourced solution is the shippers overall parcel spend. Typically when a shipper’s annual parcel spend reaches $70 Million, the shipper has the package volume to warrant a dual-sourced solution for their network without significantly impacting pricing. While it is very difficult for a $70 Million package shipper to move from a single-sourced to a dual-sourced solution, it is usually larger shippers who are engaged with both FedEx and UPS and are leveraging their overall volume to find ways keep both carriers as major players in their network.
The second characteristic is the volume of air versus ground packages. If a shipper has a significant volume of both ground and air shipments, they may be able to implement a dual sourcing model even though their overall spend is less than $70 Million annually. Selecting one carrier for Air shipments and a different carrier to handle the ground shipments is a viable strategy but only if the annual volume in each service type is significant. Discounts can be achieved with both carriers based on the service they are providing which would equal the discounts in a single sourced scenario. On the flip side, a shipper who has all their shipments centered in one service type (air or ground) would see a cost increase if they tried to split their shipments between 2 carriers. In addition, the operational complexities that can be required to support a dual-sourced ground network, for example, would be significant.
The primary driver of the procurement decision for many shippers is cost. How important is it to your organization to have the lowest possible cost structure? Is cost the primary criteria for making carrier choices? Or are you willing to implement a more expensive solution that provides superior customer service and is a better fit to your operational requirements? If cost is king, then you are most likely going to end up with a single-sourced solution. Carriers put a premium on locking out the competition and can provide an overall better value proposition for medium to small shippers if they are handling 100% of a shippers parcel network. If cost is not the primary carrier selection criteria, then dual-sourcing becomes a more viable option.
An interesting reason often given for entertaining a dual-sourcing solution is to mitigate risk. Back in 1997, UPS flirted with a labor strike that threatened the stability of the parcel market. Shippers went scrambling to FedEx for capacity, and for a brief period (15 days), the parcel world was sent into a tail spin. The impact of the UPS labor strike is forever etched into the minds of every shipping professional, and is often used as the evidence for a dual-sourced solution. Some shippers today choose to mitigate their risk by splitting their network across multiple carriers regardless of cost. While I understand the thought process, I believe that both FedEx and UPS have learned from previous history and have worked diligently to eliminate the risk of strikes and work stoppages across their operations. But, if redundancy is what drives your decision making processes, then you would obviously look to implement a dual-sourced solution.
Finally, it is important for a shipper to understand the impact that a dual-sourced solution would have on their own internal procurement process. In a dual-sourced environment, each carrier is constantly looking to gain additional business. Even if business has been awarded, and contracts signed, carriers will be providing additional proposals in hopes to gain the volume that is currently being shipped with the other provider. For some shippers, this can be a procurement nightmare. If you are used to managing your network with an annual bid process, then the constant evaluation of pricing proposals may not have an impact. But if your organization runs a standardized procurement process, awarding business on 24 or 36 month cycles, than a dual-sourced environment may create additional work and not be a fit for your organization. Most companies who operate in a dual-sourced environment are constantly tweaking the network for optimal efficiency. Volumes flow to and from carriers based on pricing, service requirements, capacity, and opportunity. Each carrier maintains a large portion of business but 20% of the shipper’s network is in a constant state of flux. Managing this flux is a process that not every organization can support and should be taken into consideration when making the decision on how to source your parcel network.
The 5 characteristics that drive a dual-sourced solution:
Multi-carrier solution
--Spend over $70 million in parcel annually
--Have a large volume of both ground and air shipments
--Cost-conscious, but service is a primary concern
--Require flexibility and risk mitigation
--Entertain annual carrier bid events
Single carrier solution
--Spend less than $70 million in parcel annually
--Volume heavily weighted in either ground or air
--Cost is the primary carrier selection criteria
--Unconcerned with carrier service interruptions
--Make carrier awards on a three to five year cycle
Finally, let me say that there are many benefits to having multiple carriers engaged in your network. Each carrier has something unique that they can bring to the table and most companies would benefit from finding ways to engage multiple carriers in the overall network solution. Here are just a few of the advantages of operating a multi-carrier network:
• Support of customer choices
• Gain best pricing across entire network
• Ability to match customer’s service requirements to carrier’s strengths/products
• Ability to mitigate risk
In the end, shipper characteristics drive the single-source vs. dual-source decision process. If a shipper understands their network they are more likely to know if one carrier or multiple carriers is the right solution.
Mike Williams is Vice President of Consulting Services at Green Mountain Consulting, LLC, a spend management company focused on reducing cost services for large parcel shippers. You can reach Mike at (877) 397-2834 or via email at mike@gmcps.com.
• Support of customer choices
• Gain best pricing across entire network
• Ability to match customer’s service requirements to carrier’s strengths/products
• Ability to mitigate risk
In the end, shipper characteristics drive the single-source vs. dual-source decision process. If a shipper understands their network they are more likely to know if one carrier or multiple carriers is the right solution.
Mike Williams is Vice President of Consulting Services at Green Mountain Consulting, LLC, a spend management company focused on reducing cost services for large parcel shippers. You can reach Mike at (877) 397-2834 or via email at mike@gmcps.com.
