Surveys show that market intelligence and benchmarking are the most valuable assets a shipper can have going into a transportation negotiation process. The information below will address how shippers can meet delivery expectations and requirements of customers, while receiving their fully discounted, carrier minimum package rate.

What is a carrier minimum package rate?

At its simplest definition, a minimum package rate is the lowest amount a shipper will pay to send a package. In practice, figuring out what that amount is can be confusing. For the big two carriers, the general default minimum is the Zone 2 (or equivalent), one-pound rate found in the current service guide for each specific service level. All shippers who have negotiated agreements with FedEx and UPS also have specified minimums per zone and service level.

What are the minimum package rates for your contract?
Let’s first look at an example. Hypothetically, a carrier’s Zone 2, one-pound rate for a new service level is $5.00. Within your agreement for this new service level, your contract states that the default minimum is reduced by $1.50. That would mean the smallest amount you would ever pay for this new service is $3.50. Once you have found the amount that the base package charge is reduced by (either percentage off or dollar reduction), you can calculate your minimum for each service level.

The two big carriers, FedEx and UPS, each use slightly different language in their contracts to specify minimum information. For FedEx Express, this information is specified as "minimum reduction amount." This can be located right next to the corresponding discount for the service level and package type. For FedEx Ground/Home Delivery/SmartPost, the reduction amounts are in a separate table. These reduction amounts can be very specific depending on the billing option (Prepaid, Third Party, etc.) or shipping location (continental US, AK/HI, etc.). The base package rate utilized to figure the minimum may also shift dependent upon the region being shipped from. For example, rather than defaulting to the Zone 2, one-pound rate, a package shipped to Alaska will be based off the Zone 17, one-pound rate to account for the additional shipping charges associated with these less popular zones. Instead of being called "minimum reduction amount" the Ground terminology is "$ decrease from base rate.”

FedEx International minimums are based off separately published Minimum Tables rather than the regular service guide rates. These tables can be found after the Export/Import discounts in your contract. The International minimums are zone specific and may vary widely from zone to zone.

Alternatively, UPS uses slightly more obvious language in its contracts: "minimum shipment charge" and "minimum net charge." UPS can also tend to be very specific as to which minimum is applied per zone, service level, and container type. Minimums for UPS are usually found in tables below the discounts for the corresponding service levels.

UPS International minimums are usually listed as a percentage off, while Domestic minimums are listed as dollar reductions. Just like FedEx, UPS International minimums are zone specific, but the percentage off on these minimums is usually the same across all service levels, such as 40% off, for example. FedEx International minimums are based off separately listed minimum tables; UPS International minimums are based on the published service guide rates.

What should you take into consideration to obtain the full discount?

Minimums are important to consider when negotiating your carrier agreements. You may think you are getting a great discount, but the minimum might cause you to receive less than you are expecting. Let's refer to the original example, a minimum of $3.50. Any discount negotiated on that service level larger than 30% may not be fully realized, depending on what the other zones' one-pound package rates are. Let’s look at some hypothetical rates and discounts to see how they are affected by the minimums.

If we apply the contract discounts (Table 2) to the hypothetical service guide rates (Table 1), we will get the rates listed in Table 3. As you can see, several of the rates come out to less than the established minimum of $3.50. For example, instead of paying $2.89 to ship a one-pound package to Zone 3, you would pay the minimum of $3.50 (see Table 4 for the actual rates after the minimum is applied). Effectively, the minimum reduction amount of $1.50 makes the negotiated contract discounts for several zones and weights much less. If you look at Table 5, you can see that the negotiated one-pound discount of 45% is only fully applied to the Zone 8 rate. You lose a full 15% of your discount in Zone 2, due to the minimum reduction amount being at $1.50. Simply by negotiating that minimum reduction amount up to $2.25, you can fully realize your discounts.

Now, these are all hypothetical numbers for a fictional service level. However, by applying this same logic to your existing contract, you can see how your minimums are affecting your discounts.

Elise Cogar is a Senior Audit Analyst at enVista, a global consulting and software solutions firm. She joined enVista in 2014, holding positions as a transportation coordinator, analyst, and now senior audit analyst. In her role, Elise is responsible for Global Freight Auditing, and custom client reporting.

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