There is an age-old procurement debate over the merits of sourcing with a single supplier vs. multiple suppliers. In the world of parcel carrier services, which is best?
Those in favor of single sourcing-or limiting the number of suppliers for a particular service or commodity to as few as possible-believe there are enormous advantages gained, including reduced costs and improved efficiencies. There’s less management, less complexity, and economies of scale are leveraged to get the best deal possible.
Shippers who favor multisourcing argue that no single company can handle all your needs, and that it is not prudent to “put all your eggs in one basket.” Proponents of the multisource strategy believe you should contract with specialized companies to take a best-in-breed approach.
Moreover, they believe that competition keeps the suppliers honest, and you end up with the best deal possible.
Each group believes its strategy results in lower costs. So who’s right? Let’s take a closer look at this debate as it relates to parcel carriers.
Your incumbent carrier would like to be your sole source provider. If you are a volume shipper, chances are your carrier has offered special incentives to capture as much of your shipping business as possible.
There’s a lot to be said for the convenience of working with a single carrier: one sales contact, one driver, single pickup, one set of supplies, manifesting automation and package tracking technology, one invoice and so on.
Certainly, the carriers promote themselves as a sole source solution. In recent years, FedEx and UPS have bolstered ground and air parcel delivery services with ocean, less-than-truckload (LTL), truckload, brokerage, freight forwarding, mail services, returns, retail, supply chain and other services.
These services fulfill multiple transportation solutions, which position the carriers as one-stop shops, not only adding convenience for customers, but also generating new streams of revenue for the carrier.
In addition to promoting convenience, the carriers encourage single sourcing through contract terms and pricing incentives. Carriers offer “portfolio pricing,” whereby additional incentives are extended for using multiple services.
For example, if you are a user of ground services principally, portfolio pricing enables you to contractually improve your ground discounts when coupled with other services like domestic or international express.
Another carrier strategy is to offer customers escalating discounts for increased usage. Many carrier contracts offer “revenue band” pricing in which discounts are based on revenue: The higher the revenue average, the greater the incentive.
For example, let’s say you enjoy a 40% incentive based on parcel expenditures of $50,000 a week. Once your revenue averages $60,000 a week, those incentives improve to, say, 50%.
A UPS program to promote single sourcing is called the “deferred threshold tier incentive,” more commonly referred to as a “partnership rebate.” It’s similar to revenue band incentives in that it rewards higher-volume, select-volume shippers, who receive a rebate check based on the total quarterly freight revenue. Again, the more you spend, the more you’ll get back.
The pitch to shippers is all positive: 1) Use our other great services and get better discounts across our portfolio of products; 2) All of your discounts improve as your volume grows; 3) Grow with us in partnership and we’ll thank you with a quarterly check.
But there are several drawbacks to these single-sourced programs. While it’s true that additional revenues often mean improved incentives, the opposite is also true. If volume decreases, incentives decrease. In fact, if your volume falls below a certain threshold, you could lose all your discounts.
With the rebate program, the carrier holds on to your money for a quarter. Most financial professionals would agree that it’s more advantageous to realize those savings upfront, not on the back end.
More important, in order to keep these higher incentives, shippers often source to a single carrier. Even if a nonincumbent carrier offers competitive pricing, these shippers are reluctant to try the service because any volume that is peeled away will not contribute to their main contract and could adversely impact their rates. The shipper becomes the rat in the wheel, running faster and faster with no exit.
Of course, a decision to go single or multisource is not just about pricing-there are multiple service considerations as well. A shipper might abandon one carrier’s specialized services (later pickup times, earlier delivery times, “white glove” services, etc.) to support its primary volume-based carrier contract.
Making it multiple
The alternative, of course, is sourcing to multiple carriers. The proponents of multisourcing claim that competition drives cost improvement and service performance, even at the cost of added program management.
One set of multisource proponents simply refuse to put all their eggs in the same basket. What if one carrier’s manifesting equipment fails to operate? What if there’s an accounting problem and one carrier refuses to pick up shipments? And remember the UPS strike in 1997?
Moreover, relying on one carrier can lead to vendor lock in. Many shippers believe they are so entrenched (systems integration, hub-based distribution, etc.) with one carrier that they could not possibly switch to another.
And what happens to service and price when a carrier feels it can’t lose the business? If not motivated to continuously perform at a high level, a carrier is likely to focus its attention on those accounts in which its competition is making serious inroads.
Following years of overreliance on a single carrier, those shippers tend to have the worst carrier pricing incentives and contract terms. In fact, the carriers segment clients into three classes: retention, penetration or conversion.
Retention customers have been loyal single-sourcers, awarding most or all of their business to one carrier. Penetration customers give two or more carriers a near-equal split of their parcel business. And conversion customers represent an opportunity to take business away from a competitor.
Guess who tends to get the best rates, the loyal retention customer or the prospective customer currently shipping with a competitor? You guessed it, the best incentives are offered to prospective customers.
That said, if a shipper spreads it business out to too many vendors, it is likely to lose carrier rep responsiveness and receive substandard discounts across the board. Similarly, too many solutions can make it difficult to manage integration, execution, relationships, contract compliance, etc.
So which is the right approach? Ultimately, both single sourcing and multisourcing strategies have their flaws. Both can fail, and both can be successful.
At some point, there is a floor to pricing. Does a $40 million shipper get 25% better pricing than a $30 million shipper? Generally not.
If your parcel expenditures reach into the tens of millions, you might be wise to spread your business to multiple carriers. If you give each carrier enough business, you will increase the carrier’s attentiveness to your needs and are unlikely to sacrifice discounts.
But if you are a smaller shipper, say a few thousand dollars annually, does spreading your volume to multiple carriers make sense? Not if you want to negotiate discounts of any significance.
Regardless of which option you chose-single or multisource-to get the best pricing, evaluate your options regularly and keep your primary carrier’s competitor close by.
Rob Martinez is president/CEO of supply chain consulting firm Transult.