In the daily conversations I have with shippers across the country, including customers and prospects, there is increasingly a feeling that something fundamental changed. Many, particularly industry veterans who refined their expertise over decades, consider the carriers they do business with true partners and extensions of their distribution centers and warehouses.
That feeling is often even stronger among shippers at small businesses, where FedEx and UPS are not known as conglomerates or by their stock price, but instead by the drivers and sales reps they know by name and care about. Many are friends they’ve worked with for years.
Over the past two decades, I’ve seen these sentiments influence many negotiations. Most shippers wanted the best deal they could get, but they wanted it to be fair.
It is for precisely these reasons that the current shipping landscape – one in which carriers’ revenues are skyrocketing and even long-term relationships are being jettisoned in the name of network efficiency – is more than a business challenge. It’s often personal.
Shippers in every industry are encountering a new reality. Our largest carriers are doing three things with unprecedented regularity: First, they are increasing their prices more and with greater frequency than ever before. Second, they are making it more difficult for shippers to know exactly what their costs will be by being less transparent. Third, they are actively walking away from business, even accounts that have been in place for many years.
Most strikingly, they are willing to do this when it causes real harm to the customer. No shipper wants to consider a scenario when holiday purchases, packaged up and ready to go, remain on a loading dock because the carrier won’t pick them up. But that’s a possibility more than a few shippers encountered in conversations with their carrier rep last winter.
As for price increases, the proof, as they say, is in the pudding. Last fall, our data scientists analyzed how much the 5.9% rate card increases FedEx and UPS announced for 2022 would really cost businesses when you included the numerous new surcharges, fees, and rules both carriers unveiled the year before, but did not include on their rate card. When we ran the resulting model on shipments our customers made the year before, the results were eye-opening. They were also accurate, as we now know.
What did we find? Fewer than three percent of shippers will see their costs increase by 5.9% – the annual rate card increase – or less this year. The average company using UPS will see an increase of 10.25% and the average company using FedEx will see an increase of 12.86% in 2022. Some businesses will also be hit much harder. Those that use FedEx Ground Economy, previously the most affordable option for many small businesses, will see a whopping 26% increase this year.
All of this is reflected in earnings. FedEx achieved its highest operating income ever this past December, a point driven significantly by higher revenue per piece (RPP) – in other words, price increases. UPS achieved its single highest quarterly profit ever in Q4, with an RPP that increased 10.5%. And the increases continue. In its last earning report for Q1 2022, UPS’s RPP grew by 9.5% in the domestic market.
Notably, nothing is off limits in the quest for profits. FedEx recently changed the table used to calculate its fuel surcharges – a move that, on its own, delivered another 1.75% of revenue on top of the fuel surcharges the company already unveiled since the war in Ukraine began.
The takeaway is that shippers absolutely have to renegotiate with their carriers if they don’t want to absorb what has become an unprecedented and seemingly never-ending litany of overt and hidden price increases. When, though, should you renegotiate your contract, and, more precisely, what circumstances should prompt shippers to do so?
When Is It Time to Renegotiate?
Every business has a unique shipping profile that should be optimized by the shipping contract it finalized with its carrier. For that reason, every shipper should renegotiate whenever and as often as it makes sense. There are, however, times and events when all organizations should immediately endeavor to renegotiate their contract, and, if needed, change carriers altogether.
- Annually when the new rates come out: General rates are usually announced in the fall. Ideally, shippers should begin creating their business case for negotiations as soon as the new rates are known to ensure that they begin the year with negotiated prices, terms, and conditions in place. Remember, though, that you can and should renegotiate at other times, too. The release of the general rate card is but one lever you can use to lower your shipping costs.
- A merger and acquisition occurs: More than a few savvy shipping departments have found the exceptional contracts they negotiated negated by a merger or acquisition. The occurrence of either should prompt shippers to immediately renegotiate their contracts, and importantly determine whose terms will be in effect until a new agreement is made.
- Whenever contract terms expire: It’s crucial to remember that shipping contracts are not “one” agreement, but instead are a series of agreements in the fine print of lengthy documents. They often include terms that expire before the contract does. I have met with many shippers who did everything right, but forgot, for example, that the surcharge discounts they secured expired after six months, not a year.
- A new surcharge: The unveiling of any new surcharges should prompt shippers to look at their shipping data to see if and how it impacts them. Use this information to pinpoint surcharges that are most applicable to your business, and act accordingly. For example, you may frequently ship a product impacted by a new oversized package fee – something that warrants looking not only at the new surcharge, but also whether the dimensions of what constitutes oversized changed and warrant an exception.
- Pricing floors and minimums: If you consistently come in under minimum spending amounts or price floors, it’s too high and needs to be looked at and renegotiated.
- Dimensional divisors: Carriers use many complex dimensional divisors to standardize their pricing by size and weight. Shippers should consider them in depth. For example, if you are shipping a lightweight, but large parcel, you may actually be paying far more because of its dimension weight, or the amount of space it takes up, rather than if it was calculated by weight.
By not only negotiating effectively, but knowing when to do so, shippers can ensure that they are getting the best possible prices, terms, and conditions available – not only subjectively, but in comparison to their peers at other organizations with a similar shipping profile. Ultimately, all negotiations should also include the potential of changing carriers altogether. One of the most important steps businesses can take today is to take steps to become carrier agnostic.
Josh Dunham is founder & CEO of Reveel. Visit www.reveelgroup.com for more information.
Sidebar:What Should You Ask in An RFP With A New Carrier?
In negotiations, knowledge is power and data is leverage. Before starting any RFP with a new carrier, it’s imperative to make sure that you come to the process with the shipping intelligence needed to make a compelling business case. This includes having your shipping vital factors: service spend, surcharge spend, the average cost per shipment, dimension weight, minimums and average zone.
Notably, the carrier will definitely come prepared. UPS, for example, just equipped its reps with Deal Manager, a new analytics tool. In the words of CEO Carol Tome during the company’s Q1 2022 earnings call, it “is providing pricing analytics to our sales team as they go about negotiating deals.” You don’t want to show up to a gunfight with a knife.
In addition to making sure you have everything you need in the actual negotiations, you also want to ask operational questions that could influence your business and then write related terms into the contract. Some of these include:
- What are your capacity constraints and capacity guarantees? Even the best discounts, terms, and conditions are irrelevant if your packages remain on your loading dock.
- When will the pickup be each day? It’s imperative to confirm that the pickup time works well for your business and your warehouse operations.
- Will you leave a trailer or trailers at my facility for loading each day, and, if so, when? While this is not relevant to all businesses, for some operations having trailers onsite at set times each day is important and can impact how some distribution centers operate.
- What is the current percentage of deliveries that are on time? We are seeing service levels slip on some shipping products. Negotiating on-time deliveries is a great way to get in front of it.
- Will you guarantee delivery service levels and delivery times? Although related to the point above, it’s especially important for e-commerce companies to ensure that rigid guarantees are in place for on-time deliveries. In the eyes of the consumer, your carrier and brand are inextricably linked. Late deliveries will reflect poorly on your company.
- What days on the weekend do you deliver? E-commerce customers want to know when their purchases will arrive and often prefer weekend deliveries. Make you address your prospective carrier’s weekend delivery schedule and write it into the contract.
This article originally appeared in the July/August, 2022 issue of PARCEL.