We've all had this happen—we get a great coupon for a product we love.• Almost free! Who can pass that up? Then we read the fine print—only valid on this product, on this day, during this hour. Gotcha! Shippers can fall into the same trap when negotiating new carrier agreements. We focus on better discounts and fail to understand the impact on our shipping and business profiles. We extend agreement terms and overlook constrictive contract language. Both which can quickly negate anticipated savings. One potential pitfall during carrier negotiations is misunderstanding the terms of the deferred incentive.
The deferred incentive, more commonly known as a rebate, is a quarterly incentive program that offers shippers payment as a percentage of net transportation spend. The incentive is generally structured as a percent back at a certain tier level. Shippers have two tier options with respect to money back in their companies—the portfolio tiers and/or the rebate. With the portfolio tiers cumulative gross transportation spend, based on a 52 week rolling average, determines the discount off base rate. This spend does not include surcharges—no fees, no fuel. The discount at this tier is additive to the weight break discounts, though (and this is also where we want to watch minimums—another potential •gotcha').
Rebates reflect incentive off net transportation spend, less fuel surcharges paid. Generally tiered, the revenue bands are determined by a customer's weekly average net transportation charges—these charges being based on the 52 week rolling average. The spend excludes surcharges and any applicable accessorials. The incentives are calculated quarterly, and within 30 days after the end of period, UPS sends a check to the customer—if incentive has been earned.
We negotiate spend levels to ensure we achieve incentive so how wouldn't we earn the incentive? With the rebate, the culprit can be the minimum. Packages that hit the minimum net package charge will contribute to the deferred rebate revenue tier calculations. However, the minimum language stipulates the rebate amount will not be paid on these packages. The rebate incentive is subject to all applicable minimums in all active agreements.
What does that mean? Let's say we receive a deferred agreement offering a 4.8% rebate off the net spend. Our net spend, with all transportation spend included, is $667,106. Removing the net spend impacted by the minimum yields a total $536,205 counting towards the rebate. We expected a rebate check for $32,021. Instead we receive $25,737. Certainly not a small sum, but if we are earmarking our rebate checks for salaries or technology growth, we may miss our targets and KPIs.
Can we negotiate around this impact? Yes, we can. We can proactively remove the impacted spend during our negotiation so we are better prepared to discuss the rebate threshold. While this can be the most immediate way to offset the impact, calculating your impacted spend is not always the easiest method for mitigation.
We can negotiate the verbiage in the addendum—removing the clause about the minimum. We can negotiate the spend that contributes to the tier calculation so accessorials and surcharges are included. Multiple tiers can be considered so we have flexibility in spend should shipping profiles or commodity metrics shift.
Addressing the minimum itself can be the best way to mitigate impact. The less volume hitting the minimum = the more spend contributing to your tiers. If you are a lightweight shipper the rebate is not the only potential issue with your agreement. Actual versus effective discounts should be reviewed. Looking at the 2015 Zone 2, 1lb. minimum for Ground we see $6.61. If we ship a 4lbs package to Zone 4, and see a 40% discount on our agreement, our net rate is $5.59. Good rate, except your minimum kicks in, and your shipment is now $6.61. One dollar may not seem too polarizing—unless 14,000 shipments hit that minimum. The structure of the agreement may not have been intended to getcha, but it gotcha. And at $14,000, plus any risk to the rebate, it gotcha good.
Brittany Beecroft, Director of Parcel Pricing, AFS, oversees Parcel Cost Management and RFP processes for the purpose of negotiating and retaining best-in-class client-specific pricing. She also provides training and guidance to sales and the support staff to manage parcel cost reduction and optimization services. Prior to joining AFS, she spent 12 years as a Strategic Pricing Analyst at FedEx. Brittany consults regularly with some of the largest shippers in the world and is a sought-after speaker and consultant. Contact her at firstname.lastname@example.org