The pandemic’s effect has had a considerable impact on most businesses, but few as visible as the effect on the small parcel shipping industry. Prior to the pandemic, most of the customer and carrier relationships revolved around contract negotiations, quarterly updates, and annual business reviews. Since then, interactions between carriers and shippers have increased exponentially – many of which have been carrier-favorable conversations about how shippers will face incremental surcharges or reduced capacities. The semi-balanced relationship dynamic of the past has certainly swung in the carrier’s favor, and shippers are trying to navigate how to be successful within this carrier favorable environment.
For decades, mega-shippers have shipped the overwhelming majority of their parcels with either FedEx, UPS, or USPS. When capacity was challenged, shippers typically defaulted to shift volumes between one of these three options. Post-pandemic, shifting volume is no longer viable, and we’ve seen new tactics arise, ranging from package consolidation, earlier or more frequent promotions outside of peak timeframes, and encouraging buy online, pick-up in store (BOPIS). All these solutions have helped shippers mitigate some of the capacity constraints that carriers have imposed. I believe if you ask shippers what they’ve learned from their carrier relationships post pandemic, they would say overwhelmingly that the rules of engagement have changed and shippers must be more creatively strategic to be successful.
We’ve seen our customers struggle to change their mindset in response to this evolving landscape.
But once these changes are accepted within the organization, the next logical step is to truly partner with carriers to solve capacity constraints. So, what do some of these creative and strategic solutions look like in practice?
Ask for potential fees for over-capacity thresholds. FedEx & UPS have both said on their earnings releases that they are prioritizing high-yield shipments. Many mega-shippers have skillfully negotiated rates that are near best-in-class over long-standing partnerships, and with the increased expenses that carriers are facing, many shippers are eroding profit margins with their aggressive rate structure. The drawback of best-in-class shipping rates is that when there are capacity concerns, the low-yield shipments are the first ones to get constrained. Shippers may find success by partnering with their account executives and negotiating a fee for shipments over the carrier-imposed caps. While this is an unpopular option (and should not be utilized until after carrier caps are presented) it may be more cost-effective to pay a fee per shipment over a threshold than to potentially lose a customer over a missed commitment.
Seek to separate capacity constraints by service level to increase capacity. Carriers are not strained equally across all service levels. Typically, the lower price point services are where we have observed most caps imposed on shippers. The postal-insertion and ground services are also where we generally start to see the on-time delivery percentages drop. One solution shippers may want to explore is to partner with carriers to negotiate a cap by service class. By monitoring your on-time delivery and shifting volumes into higher-yielding express services when approaching these caps, shippers may get incremental capacity available to them in a more premium class. Again, this is at an incremental expense to shippers, but it could open capacity that is difficult to secure during peak season.
Target capacity constraints by day of week. Carriers are not immune to facing staffing challenges. In the US, most shipments are placed over the weekend, meaning the beginning of any given week is the most constrained. Some shippers have found it valuable to dig into the data further and partner with carriers to increase capacity during off-peak times. For example, imagine you ship 20,000 packages per week and your carrier capped you at 15,000 shipments per week. A 25% reduction in capacity can be crippling to a business. If a carrier was approached and asked what days of the week they could take extra capacity (Wednesday to Friday usually), then one could request additional volume on those days and tailor their online commitment to delay one to two days to get shipments flowing in this off-peak timeframe. Although most of this work would be put on a shipper, it is an option to explore if you need capacity and do not have the ability to add a carrier.
Encourage commercial pickup locations. Outside of labor challenges, we have heard carriers consistently say that the unprecedented residential volumes have been a challenge as it is lowering their efficiency due to a lower density of shipments per stop. While consumers are very accustomed to a convenience factor of having items delivered directly to their doorstep, they also might be enticed to pick up at a commercial pickup location, particularly if someone in their neighborhood had something stolen recently. FedEx & UPS have partnered with businesses across the country to set up secure pickup locations for shipments. Partnering with the carriers to increase volume into these facilities is mutually beneficial for all. The carrier increases its density per stop and does not need to make as many residential stops. The shipper will typically pay less for this type of delivery as it is considered a commercial delivery vs. a residential delivery. The commercial pickup location will typically see an organic increase in sales due to a customer setting foot inside the location.
Integrate same-day couriers. Same-day carriers are also growing in popularity with our customers. While these carriers are typically crowd-sourced and less cost-effective, they can be a lifeboat if it is critical to have your shipments arrive on time. Today, the options for national same-day carriers are limited, but this is one of the fastest growing segments in small parcel, and I expect to see it continue for some time.
The capacity constraints in parcel and LTL shipping networks can be difficult to navigate. We’ve seen some shippers successfully overcome these challenges by creatively using their network and carrier data to pinpoint optimization opportunities. A common theme is seeking a plan or budget for probable scenarios, helping to not only mitigate risk but control some of the unavoidable expense. There’s no question that the carrier-shipper dynamic has changed indefinitely, and shippers must rethink and create new strategies to move forward in a way that serves their network and customers for the future. Those that do this successfully have a firm grasp of their network’s realities and shortcomings, and they can utilize network data to see the big picture.
Justin Guthrie is a Solutions Manager at Green Mountain Technology (GMT), where he partners with clients representing nearly $1B in parcel spend to provide GMT’s strategic Parcel Spend Management solutions – Network Optimization, Spend Analytics, and Contract Management.
This article originally ran in the January/February, 2022 issue of PARCEL.