Do you really understand the impact of the fine print in your carrier agreement(s)? If not, then you might want to take a closer look, because todays small package contracts are more complicated and difficult to understand and analyze than ever before. Its vital that you take the time to dissect your agreements so you really understand the impact it has on your business and your bottom line!
We have put the following information together to help you better manage the ongoing pricing and carrier contract changes that are happening today.
Changes for 2007:
1 Ground dimensional weight replaces oversize
2 Commercial delivery area surcharges up 10 to $1.40
3 Residential delivery area surcharges up 10 to $2.20 (there are 23,430 ZIP Codes for 2007)
4 COD charges are now a minimum of $8.50 (FedEx) or $9 (UPS)
5 Increase in dangerous goods service and signature requirement fees
6 New, higher minimums on ground shipments ($4.00 for commercial ground and $5.85 for residential ground) and declared value
7 Fuel surcharge applied to transportation related surcharges;
8 FedEx oversize charge up $10 to $40 to match UPS large package surcharge
Understanding why:
1 What has created these changes? Technology improvements and better data capture capabilities by the carriers. The data capture technology carriers use has allowed them to bill for services and extras they physically couldn't charge for a few years ago.
2 Why has this happened? The carriers have dramatically improved their cost-to-serve pricing models.
3 What does this mean to a shipper in 2007? Hidden cost increases and more accessorial charges.
4 What can a shipper do to offset these new charges? Become smarter and get help. Understand the impact these changes are going to have on your company.
5 Learn everything you can about your shipping characteristics and how they are used in the negotiation process.
Understand Your Shipping Characteristics
One of the most important points in the freight negotiation process is to understand how the carriers view your business. Are there particularly favorable or un-favorable elements to your business? Carriers thoroughly analyze your company's shipping profile to determine what discounts to offer. (i.e., is it the freight they want? Is it profitable and easy to handle?) It's critical to know in your freight carrier's own terms just how profitable (or un-profitable) your shipments are to them. Obviously, the more favorable your freight, the more demand there is for it, and in turn, you receive better discounts and prices.
The integrated carriers are now much more sophisticated in using complex internal pricing models and thoroughly understanding their costs before proposing rates. Following these important rules can help your company get the best rates possible. Companies that have not been monitoring these changes will undoubtedly pay more for their freight services.
All of the major parcel and express carriers and many of the larger forwarders have been reviewing their shipper contracts over the past few years to ensure that they are profitable. Shippers who do not go through the same exercise from their point of view may be leaving themselves at the mercy of carriers.
The true market price is for your freight. Before you ever sit down to negotiate with potential carriers, you need to thoroughly analyze your shipping volumes and data as well as take a close look at your own shipping needs.
Customers seldom realize it, but there are a number of things you can do to improve your characteristics. Here are a few ideas below:
>> Are you consistently four weeks or more out on your payments to carriers? Even if you've got a triple A credit rating, carriers start to get nervous when the unpaid invoices start piling up.
>> Analyze your cube. Generally speaking, the denser the box, the better your rates. This is because most carrier transportation (both trailers and airplanes) tend to cube out before they reach their maximum operating weight.
>> Are you fully automation-compliant with your carrier? Examples of non-compliance include hand-written air bills and incomplete manifest transmissions.
>> Data accuracy if you're receiving a lot of weight-based shipping charge corrections, the carrier is going to view your business less favorably since some of the corrections have to be done manually.
>> If you have a large number of lighter weight residential packages, you may want to consider switching these over to the postal service. The remaining packages will have a higher average weight and may look more favorable to the carrier.
Should you use a ground guaranteed service, an air express service, next day, two day, or an early AM or PM service? Ask yourself, why has your company selected the carriers currently in use? Is it because of the service they provide, on-time performance, cost, reliability, customer service or sales personnel? If the choice was based on price, are you getting the service you need? And are rates that appear discounted becoming inflated with all the add-on charges?
Whether you're a seasoned transportation manager, a director of purchasing or a CFO, trying to understand the impact the carriers new cost to serve pricing models and contracts are having on you will require some education.
Things Change
In the 1990s, there was only one full service carrier offering ground, air, hundredweight and international services that was UPS. Now both FedEx and DHL offer a full suite of these same services and compete for the same clients. The USPS has come on strong with a number of domestic and international offerings. Back then there were only a handful of add-on charges with these carriers, but now there are over 80, and new ones are being added each year! Why has this happened? The carriers new technology has allowed them to more effectively offer new services and charge for accessorial charges they physically couldn't in the past.
Knowing what the carriers consider profitable and unprofitable as it relates to package characteristics will determine what discounts the carriers can offer you. The metrics surrounding these pricing variables are complex. Find out what a profitable pricing metric is and what is not.
Knowledge is power; understanding the terms and details around your contracts and how they impact your business can make a big difference in the carrier(s) you choose and how those carriers price your shipments. Negotiate with your package characteristics strengths; the carriers sales people often are busy and don't do the due diligence in analyzing a shipper's package level detail (PLD). This lack of analytical detail could cost you 5-10% in service discounts.
Even the best decisions and review processes won't prevent mistakes. If you really want to control your shipping costs, stay informed and don't be afraid to use outside help. As transportation processes change with time, so must shippers. Knowledge is power; this is especially true when it comes to negotiating carrier contracts!
Michael Erickson is president and CEO of AFMS Logistics Management Group, a Portland, Oregon-based consulting company that specializes in helping shippers negotiate carrier contracts. AFMS is comprised of former VPs, directors and managers from UPS, FedEx, DHL, the USPS, Freight Forwarders and International Freight Brokerage firms. AFMS focuses on showing companies of all sizes how to save money, obtain better discounts and improve service levels. Mike can be contacted at 800-246-3521 or mike.erickson@afms.com. Visit www.afms.com for more information.
