Shippers in todays environment are receiving increased pressure to reduce costs and deliver better results to company shareholders. Often, one of the first places they look is within the supply chain. Each year, supply chain executives are expected to reduce costs and offset increases that carriers continually make part of daily conversations. Negotiating your parcel contract can have a huge impact on the overall performance of your supply chain network. In fact, over the last four to five years, the negotiation process for parcel contracts has become an even bigger key to driving shareholder value than it ever has been in the past.
Negotiating with Parcel Carriers Is a Different Animal
When planning for your next parcel contract negotiation, it is important to realize that negotiating with a parcel carrier is much different than with an LTL, truckload or other thirdparty provider. The parcel carriers have arm-wrestled control away from the shipper and dictated how the parcel game is played. Parcel carriers make the rules, they have the data, and they set the shipping terms.
For example, parcel carriers control the format of the label that shippers must use to get packages moved. Each parcel carrier has its own proprietary label format. Whether it is the Astra label from FedEx or the Maxi-Code from UPS, label formats are unique to each carrier. In the truckload and LTL world, carriers are expected to use a UCC128 or other universal barcode format to manage shipment tracking and visibility.
The high volume of parcel transactions can put leverage into the parcel carriers hands. Shippers oftentimes rely on the carriers themselves to provide analysis or key data such as
performance reporting simply because the shipper does not have the technology to manage the transaction volume. This adds a level of complexity during the negotiation process, creating the need for additional performance clauses that can ensure a consistent level of service. An industry best practice for large shippers is to have an independent third party validate the on-time service level to your customers. Service level reporting should be set up to report a carriers service level with and without the carriers exception codes taken into account. After all, your customers do not care if the plane carrying their packages had a mechanical failure, only that the packages were not delivered on time.
Another difference between parcel shipments and other modes of transportation is the fact that parcel shipments are commonly excluded from the Optimization modules of Transportation Management Systems (TMS). The high volume of parcel transactions coupled with the complexities of rating systems make parcel shipments very difficult to optimize in a real-time environment. Without having a front-end system to manage parcel transactions, shippers are forced to be dependent on the carriers for the data management function. How ironic is it that many shippers have to ask their incumbent carriers for data in order to bid out their parcel business? Shippers should eliminate their dependence on the parcel carriers for data management. Companies who have the time and resources might consider building the infrastructure needed to manage their parcel transaction in-house. For those who want a best-of-breed solution with immediate results, a Tier 1 freight payment solution can fill the gap.
As parcel carriers expand their portfolios, there is an increasing trend towards single sourcing. Large companies have more commonly chosen a single parcel provider, so as to leverage the large amount of spend for a better contract or rate structure. It is not uncommon for a large shipper to spend $25 to $50 million with the likes of UPS, FedEx or DHL. But how many shippers put all their eggs in one basket for their truckload or LTL freight? By sourcing with a single parcel carrier, the carrier selection process has a huge impact across your organization. Being prepared for the negotiation process is the best way to ensure the provider you select is the best fit for all areas of your network.
Why Is Parcel Negotiation So Important?
The complexity of the average supply chain is increasing, not decreasing. When was the last time you made a change to your supply chain and sat back and thought to yourself, Now things will be so much simpler than before? Most of the solutions and cost reduction activities are difficult to manage and complex to execute. For most companies, the low hanging fruit were gone a long time ago. The next wave of supply chain savings is the hardest to get. And by having the right parcel carrier that can adapt as your business changes, you will be able to adapt and be ready to change at a moments notice.
If you are a large shipper operating a direct-to-customer model, chances are you manage a lot of small complex deliveries using a parcel carrier. LTL and truckload carriers are valuable parts of your supply chain network but often operate behind the scenes, invisible to your end customer. The performance of your parcel carrier can have a direct impact on how you are perceived by your customer. A late delivery or a damaged package will be a direct reflection on the performance of your companys supply chain.
Your parcel contract also impacts all areas of your organization. The corporate mail center, a distribution facility, a vendor drop ship program or the mechanic ordering spare parts for the corporate jet all have a vested interest in the service and cost provided by your parcel carrier. While you, as a supply chain executive, might be the ultimate decision maker, it is important to recognize that there are multiple stakeholders within your company that will be impacted by the carrier selection process and make sure the requirements of each area are considered in the negotiation process.
Competition between parcel carriers is heating up. The Oligopoly mentality is being challenged by DHLs emergence as a viable third player backed by the financially sound Deutsch Post World Net. Also, as competition increases, carriers are taking a focused approach, defining good freight almost in a dynamic environment based on current network performance targets. Today, Carrier A might be looking for ground business. Tomorrow, deferred air shipments might be more attractive.
Parcel carriers have also broadened their portfolios to include a wider range of services including warehousing, LTL and even consulting. Bundling additional services with your parcel business can drive additional value, increasing the impact of the carrier bid process to even deeper within your supply chain.
Swinging the Pendulum Back in Your Favor
When negotiating your parcel contract, there are three key factors that will drive success. First, allow ample time for the process. So many organizations try to execute a bid without allowing for the proper time for the carrier to respond. If you want the carrier to provide you with special concessions, then you have to allow the carrier additional time to get those special items approved within his or her organization. Using a consultant to help with the negotiation process oftentimes yields a higher return than going at the negotiation yourself. It is as much about the process that the consultant can deliver as it is their industry knowledge. Take your time and do it right.
The second key to a successful negotiation (and probably the most critical) is to know your data better than your carrier does. When negotiating a parcel contract, most transportation managers try to get a handle on what theyre spending, breaking out the base freight from the ancillary charges. But an often overlooked part of the data analysis is being able to quantify savings at the stakeholder level. This type of breakdown is not usually provided by looking at carrier reporting. It must be created internally. When the decision is made to switch to a new carrier, each business unit in your organization is going to ask the same question: How much am I going to save? You have to be ready to give them the answers. Part of knowing your data is understanding the amount of control or influence you have over your own ancillary charges. There are over 80 different ancillary charges and all 80 can be placed in one of the following five categories:
1 Additional options selected at shipping
2 The characteristics of the packages being shipped
3 The characteristics of the customer/destination
4 The service requirements of the shipper
5 Charges related to information issues
When determining the ancillary charges you should focus on during the negotiation process, think about the level of control you have over each charge. For example, you probably cant change where your customers are located. I would consider your customers location outside of your control. So a discount on a delivery area surcharge might make sense if your customers are located in primarily rural areas. But you at least have influence over an address correction charge. Even though you might be getting hit with a higher number of address corrections than delivery area surcharges, you might not push as hard for an address correction discount since you have options for reducing those charges internally.
The final key to successful parcel negotiation is to understand the carriers position, which will help you be prepared for the potential outcome of the negotiation process. It is important to understand that all parcel carriers are subject to market pressures and have shareholders to hold them accountable. In order to achieve market expectations, carriers may aggressively be pursuing different types of freight at different times. Carrier A might be looking for additional express packages but not very interested in additional ground business. Carrier B might be interested in both. The internal needs of each carrier can vary greatly from quarter to quarter and can influence your negotiation. Also, it is important to understand your impact on the carriers network. Where do you ship from? Is your volume clogging or using excess capacity within the carriers network? Are you providing leverage for the rest of the geographic region? You may be a $5 million shipper, but in your particular region, your volume makes you more like a $10 million player. The key is to understand how each carrier will view your business.
Gaining operating leverage by reducing shipping costs is a common challenge facing todays transportation executives. Depending on the amount spent, negotiating your parcel contract may be a source of an organizations much-needed savings. When negotiating your parcel contract, it can seem like the carriers hold all the cards. But, allowing ample time for the process, knowing your data and understanding the carriers position will put the leverage back in your hands. Keep the leverage on your side, and you will be able to achieve the cost and service targets of your organization year after year.
Mike Williams is Vice President of Consulting Services at
