Let’s begin this article with something on which we can all agree – there is no shortage of recommendations regarding how to engage parcel carriers during procurement events. My goal here is to not only address parcel requirements specifically, but also to provide universal truths when engaging carriers of any mode during the procurement process. Let’s start from the beginning – a very good place to start. It is first important to determine if the procurement process, regardless of mode, should be facilitated in-house or by a third party. This would not be an article written by a consultant if it did not include the phrase “it depends,” so let’s get that out of the way now. It is this person’s opinion that parcel operates in a world of its own, much further afield from the likes of truckload and LTL transportation. If you are reading this to enable this decision, perhaps the intricacies of parcel fulfillment will help drive this decision.
The Universal Truths of Transportation Fulfillment
I have facilitated a significant number of procurement events up and down the supply chain, and there are a number of characteristics of a successful process that do not change:
1. Bad Data = Bad Procurement Event
Duh, you say, and you are correct. This should be obvious to all, yet time and time again companies rely on incomplete, unsubstantiated, or otherwise erroneous data to support their procurement events. The good news, other than the fact that everyone has this problem to some degree, is there are ways to mitigate the risk of responses not reflecting the needs of your business:
a. Development of a Quality Item Master
Having an item master is as important, or perhaps more so, than the volumes themselves. Today, companies can rent or lease equipment for quick documentation of weights and dimensions of SKU and SKU families. Strongly consider completing this process before starting your procurement event.
b. Descriptive vs. Prescriptive Data
Let’s say you have reliable, complete data regarding the origin-destinations, volume, and dimensions of your in-scope transportation. Coupled with the applicable service constraints, this should allow providers to return estimated costs with confidence. This portion of the bid allows for a descriptive bid response. In contrast, assume you have no reliable data on the number of historical claims. This drives the needs for a prescriptive approach, ensuring all bid respondents are using the same information on which to base their solutions (i.e. assume 500 claims annually with an average product value of $1,000).
c. Seasonality and Growth Factors
For companies in the retail sector, this is an obvious truth. Even for other industries, if access to a full year of shipping history is not available, it is important to provide visibility to the volume and duration of seasonal peaks and valleys. In addition, the procurement event should provide an estimate of annual growth for the duration of the initial contract length (again, to ensure bidders are working off the same information).
2. Separate The Bid vs. The Deal
What is the end in mind when companies run a procurement event? Most will say find the best partner at the lowest cost. The best way to accomplish this is to set up the bid package so procurement et al. can compare all the bidding companies in a fair and equitable manner. This is, pardon the metaphor, the “dating” portion of the process. Toward the end of the bid process, you will award the business and begin your prenuptial agreement and then get married. Development of that agreement should be somewhat separate from your dating life, except you will use the volumes from the bid to calculate your rates and accessorials for memorializing in your contract.
3. Managing to the contract
Far too often, I work with companies who spend an extraordinary amount of time developing agreements with their vendors, only to put the contract away until renewal time. The best way to ensure rates, accessorials and services commitments are adhered to is to compare invoices and service reports to the contract. Yes, audit companies should provide much or all of this information. Now put it to action during your QBRs and other correspondence.
The Truths of Parcel Fulfillment
As many of you know, a procurement event in the parcel space is much different than other transportation modes. Let’s look at some of the ways that make it unique:
1. Accessorials, Accessorials, and More Accessorials
This is where they get you. At the beginning of 2024, UPS alone raised the fees on more than 30 of its accessorial charges. In the bid document outlining all rules of engagement and the means by which the bidders should submit their proposals, companies must be very prescriptive on how accessorials should be addressed. State that accessorials will not be paid unless agreed upon in the initial agreement and throughout the contract term. Require the bidders to note in the response when accessorials would apply to the shipment history in the bid and why. Specific to fuel, require submission of a fuel surcharge table and specifically how those surcharges are calculated.
2. Claims Methodology
For those who find claims to be somewhere between a nuisance and a cost containment problem, determine the best way to balance the labor associated with filing and controlling those costs. Many carriers are amenable to a percentage rebate to cover estimated claims. This can be beneficial to both sides in terms of time saved and simplicity of implementation.
3. Zone Skipping – Build Your Own Scenarios
With the growth of regional parcel players, companies may find awarding business to multiple providers is the best overall solution to parcel optimization. Develop scenarios where you are injecting freight into those regional zones, along with the classic approach of awarding all business to the “main players.” Don’t forget, it is best to consider multiple scenarios when executing a procurement event. Mode conversion (i.e. linehaul freight to regional carriers) is often a better cost play than parcel rates. As long as you provide enough time for the responses, the more options to consider the better!
To summarize: Clean your data, separate the bid from the deal, consider multiple scenarios, and be very mindful of the accessorials. Good luck!
Brian Fish is Senior Project Manager at St. Onge Company. He has over 30 years of expertise in the transportation and supply chain sector.
This article originally appeared in the July/August, 2024 issue of PARCEL.
