You just finished a grueling negotiation with your parcel carrier. A consultant may have helped you in your efforts to attain the best terms and conditions possible. Perhaps the process this time was more involved as senior leadership came to understand over the past year what you’ve known all along: the shipping operation and the contract you secured with your carrier plays a crucial role in the success of the business.
The negotiation was a win. Your carrier retained your valuable and growing business and you achieved the terms and per-parcel costs you expected. Now it’s time to celebrate, relax and reap the benefits of your hard work for the coming year, right?
Wrong. If only it were that simple…
I was recently reminded of this in a meeting with a company that did almost everything right. Their online business for consumers and businesses was booming and the shipping team was savvy. Their last carrier contract was exceedingly competitive with terms, conditions and performance guarantees that most of its competitors would welcome.
There was, however, one problem hidden in the fine print of the contract: the reduced surcharges the company negotiated did not last the length of the contract. By the time this realization occurred, the damage was done. When the company received its bill, full surcharges were in place for an entire quarter and it was on the hook for more than $500,000 more than expected.
Unfortunately, this is not an isolated occurrence. Many of the benefits gained when you negotiate a strong carrier contract begin to evolve and decay from the moment you sign it. And even in a perfect scenario, macro-economic trends and changes in your own business can decrease the effectiveness of negotiated items. To put this in context, consider a few of the reasons it’s important to treat your carrier contract as a living document that needs to be continually monitored and improved.
● Carrier pricing changes often and is rarely transparent: A great example is the recent cost increases enacted by FedEx and UPS that were made in the form of new surcharges, fees and rules on everything from parcel dimensions to zones. These were not included in the 5.9% general rate increases both companies announced and then introduced for 2022.
To identify the real, cumulative impact of these increases, data scientists at Reveel created a model that includes the surcharges and then ran it against shipments our customers made the previous year. Based on that comparison, we found that the actual impact of UPS’s new 2022 rates, surcharges, fees and terms will be a 10.25% increase for most companies – not the 5.9% increase reflected in its 2022 rate card. FedEx customers will pay even more. Most companies will see a 12.86% increase in their parcel shipping costs.
This is important for several reasons. First, it demonstrates that you must consider numerous factors in your negotiation, not just the official “pricing.” Secondly, you must absolutely know the vital factors of your shipping operation and negotiate with them. These factors include your total shipping spend, surcharge spend, average cost per shipment, weight – including average weight and the percentage of packages billed at their dimensional weight – the percentage of shipments that hit carriers’ minimum charges, and which zones you ship to most. This data is required for building the business case that is absolutely crucial in carrier negotiations.
● Carriers are laser-focused on profitability: In Q4 of 2021 UPS achieved its most profitable quarter ever. And in December of 2021, FedEx achieved the highest operating income in its history as noted in its last earnings release. Most of these profitability gains were made by increasing per-parcel delivery prices. Even so, both companies negotiated with customers who demanded it and did so with a clear understanding of their carrier’s business goals. The takeaway is clear. Carriers will negotiate, but if you aren’t negotiating and providing a compelling business case, your costs will absolutely go up.
● Your competitors may have a better deal: It’s also important to know how the contract you negotiated compares to those of companies with a similar shipping profile, your peers, so you can immediately renegotiate when needed. For decades, carriers benefited from the lack of transparency that cloaked the industry, but with data that’s no longer the case. Now information is available and negotiating a competitive contract is no longer optional. When “free” shipping, or more accurately your organization’s ability to absorb cost increases, is crucial for success online, a well-negotiated carrier contract is synonymous with business success.
● Your business doesn’t stay the same: Businesses are continually evolving, new product lines are launched and old ones retired, and while success often means increased volume, market challenges (like a global pandemic) occur and can have the opposite impact. Perhaps your business grows non-organically with acquisitions that impact product lines and volume. All of these things will have an effect on your bottom line and pricing tiers subject to criteria like shipping volume. It’s also equally important to make sure you are not penalized by new criteria – such as new parameters for parcel dimensions that suddenly subject you to overages.
● Carriers don’t always keep their promises: Carriers don’t always meet their obligations specified in your agreement and you may be entitled to refund credits. They’re not going to keep track for you so audits should be undertaken on a regular basis. A thorough one will typically uncover savings of one to three percent on everything from late deliveries to erroneous surcharges. Carrier invoices are complex, but software options now exist that automate the audit and enable shippers to keep 100% of these recovered funds.
● Not all terms survive the duration of the contract: Like the expiration of surcharge discounts mentioned above, the fine-print details in any carrier contract can have dramatic implications, particularly when discounts end or new fees begin before it expires. This is another area where technology – specifically AI – is absolutely crucial. Today’s parcel shipping contracts are complex legal documents that include numerous variables and dependencies. When combined with even more complex shipping networks and many millions of shipments, there’s no way for even the most astute shipping teams to confidently stay abreast of all contract terms. Agreement monitoring is crucial.
● Unnecessary spending is hidden in the details: Carrier invoices are just not designed to be easily read and analyzed. That’s why using data science to find the “needle in a haystack” can uncover areas to save money. Some of the unnecessary spending areas are things like recurring address corrections or expensive service levels like one-day priority when ground would arrive at the same time.
These are some of the many reasons that negotiating your carrier contract is a year ‘round endeavor – one that regrettably offers little room for a “set it and forget it” approach. With a clear understanding of the myriad variables at play within it, and alerts that apprise you of important developments and parameters, contract negotiations are no longer an annual undertaking. Now they are a continual opportunity for you to generate savings, performance guarantees and more. Now they are opportunity to demonstrate the important impact that shipping professionals have on the bottom line.
Josh Dunham is CEO and co-founder of Reveel.