Benchmarking. We hear that word all of the time in business in an array of strategic, project management, performance evaluation, and process improvement discussions. So that we have the same frame of reference under which to operate, a quick refresher: Wikipedia defines benchmarking as “the practice of comparing business processes and performance metrics to industry best and best practices from other companies." Although benchmarking can be an effective tool in helping companies improve many areas of their business, in regard to pricing and rates in the parcel world, benchmarking can be very misleading and actually harm a shipper's relationships with their carriers.
Benchmarking becomes problematic when evaluating a pricing agreement because the factors that make up the carriers’ cost to serve vary so significantly that it is highly unlikely that a carrier will offer the same pricing to any two shippers. This simple reality makes it impossible to compare contracts (i.e., "benchmark.") The inability to use benchmarking as a metric to effectively renegotiate a contract will hold true whether using the amount spent with the carrier, the number of packages shipped, or even using an agreement from another shipper within the same industry for comparison. A shipper comparing themselves to another will either feel they are not being treated well by the carrier, leading to contention, or they will unknowingly leave dollars on the table that they may have been able to keep.
The cost for a carrier to move shipments directly relates to the specific characteristics of the shipper's packages. Carriers have some very basic discounts they can apply based on the amount spent; however, an agreement with these basic discounts will only be competitive for the smallest shippers. Once a shipper spends $50,000 a year or more on parcel shipping, a carrier will want to tailor their proposal and ask for shipping details in order to be more aggressive and competitive. Shippers should always provide all details requested so carriers can fully determine their true cost to optimize the pricing agreement. It is vital to note that if another carrier is in consideration, the detail provided should not include what the shipper pays their current provider. However, the carrier will need origin and destination ZIP Codes, services used, actual weight, dimensions, residential indication, and the time period for the sample.
A few simple examples will help highlight the pitfalls of benchmarking for pricing. Each one will focus on only one or two aspects of shipment characteristics to better illustrate. In reality, the number of characteristics evaluated can, and will, compound the complexity exponentially.
Example 1. The transportation manager at Company A spends $1M per year on small parcel. She moves to Company B, which also spends $1M per year for small parcel. At Company A, she invested significant time negotiating with her carrier and felt she had a strong agreement in place. Once settled in at her new company, she reviews their carrier agreement, thinking it should be similar to what she had negotiated for Company A, only to find that discounts are much smaller. She determines that she can help Company B achieve an agreement similar to what she negotiated for Company A and show her new company her skills at driving down costs. Working with her carrier representatives, she receives proposals that improve the agreement a little but do not approach the levels of her agreement at Company A. She gets frustrated and starts to really hammer her current carrier threatening to leave and pushing the other carrier, saying they don’t seem anxious to “win” her business. Negotiations get tense and all parties are frustrated. Let's look at why this might have occurred.
- Company A manufactures auto parts, mainly metal fasteners such as screws, bolts, and clamps. Packages are typically less than a cubic foot and weigh between 15 and 25 pounds each.
- Company B also manufactures auto parts, mainly plastic and rubber molded parts such as air filter boxes, hoses, and door trim. Packages typically measure between two to three cubic feet and weigh between five and10 pounds.
- Carriers will have a higher cost to serve Shipper B because their packages consume more space in the carrier's vehicles while returning lower revenue for each package since rate is determined by weight.
If Company A were to send 100 shipments in one day, they would likely fit them in one package car. However, if Company B were to send 100 shipments, it might necessitate a second pick up. As a result, the cost to serve Company A is significantly lower, so the carrier can offer much better discounts.
Also, consider if the manager moved in the reverse direction, from Company B to Company A. She might find that the agreement at Company A was very similar to what she had negotiated at Company B. She would probably feel that Company A's contract was competitive and not push much with the carrier, not realizing that she missed out on the opportunity to drive costs down. In either scenario, benchmarking, based on the dollar amount spent, does not help the process.
Example 2. Company C and Company D both ship shoes and roughly spend about the same amount on parcel shipping. The operation managers at both companies meet up at several industry conferences and frequently communicate about many topics, including shipping. The managers determine that both typically ship one pair of shoes at a time, and packages are similar in size and weight. Attempting to benchmark with each other, they have learned that Company C has a lower average rate for shipping a pair of shoes. Like Example 1, the manager from Company D tries to work with the carriers to hit the benchmark set by Company C with little success. The carrier representative assures the manager that they are fighting for company D but will not budge on the shipping fees. The carrier rep is not even sure why. Our view from the carrier perspective (which most sales representatives will not know) shows the following:
- Company D ships mainly to individual consumers who receive one pair of shoes at a time delivered to their homes. The carrier's driver drives a significant distance to deliver just one package. Therefore, the total cost of the delivery must be attributed to that single package.
- Company C ships mainly to retail shoe stores located in shopping malls. Even if they only ship one package at a time, there are typically packages from other shoe companies delivered at the same store at the same time. Therefore, the cost of delivery is spread over multiple packages. In addition, the cost of that delivery is lower because the carrier's driver usually delivers to multiple stores in the mall without having to move his vehicle.
As with example 1, there is a difference depending on which manager works with the carriers. Benchmarking based on characteristics that seem similar to most people actually are not comparable to the carrier, in this case, what carriers call "delivery density."
In summary, because of the large number of factors that influence a carrier's cost to serve shippers, such as pick-up density, delivery density, weight, zone, cube, ground feed, air feed, and many more, pricing for small parcel does not lend itself to the practice of benchmarking. Effective pricing can only be done based on an individual shipper’s characteristics. Truly understanding specifics, and more importantly, how they match up with cost drivers for carriers, is essential for developing a strong business case to have a meaningful pricing negotiation that is productive for both shipper and carrier.
Carl Hutchinson has over 35 years in the transportation and logistics industry, both domestic US and international. Carl is Co-Founder and Chief Analytics Officer of iDrive Logistics, helping clients with spend management in all areas of the supply chain including USPS, parcel, LTL, fulfillment, warehousing, international, and more. Carl can be reached at 678.294.5724 or firstname.lastname@example.org.
This article originally appeared in the March/April, 2022 issue of PARCEL.