How to Cope with Rising Shipping Costs

Jul 09, 2008 8:12 PM  By

Shippers have really taken a hit in recent years. For one, the general rate increase for each of the past two years has been the highest in more than a decade. What’s more, accessorial charges have increased and new ones are being added every year. While these surcharges are designed to address the carriers’ cost to serve model, they now account for up to 40% of overall freight costs. Fuel surcharges, perhaps the most substantial of all accessorial charges, have not surprisingly reached an all-time high.

So what’s a shipper to do? Here’s a few strategies that can help you reduce your shipping costs by as much as 10%:

Negotiate, negotiate, negotiate

Carrier sales representatives are partially paid on profit margin. Their job is to sell your account at the highest rates possible. As a result, three out of four carrier agreements could be improved by 10% or more.

Many shippers do a good job negotiating upfront discounts off list rates, but fall short of maximizing savings by failing to negotiate accessorial charges, fuel surcharges, GRIs and other fees. Despite what your carrier representative may tell you, all fees and terms are negotiable.

Increase competition by auditing invoices for overcharges and late shipments, conducting annual bids, splitting your business, and having frequent meetings with non-incumbent carriers.

Mitigate fuel surcharges

Large shippers may be able to negotiate a variety of discounts on the fuel surcharge including rate caps, a few points off the index, fixed fuel surcharges, or even “all in” pricing, inclusive of fuel and fixed for the term of your carrier agreement. You may even be able to negotiate a quarterly rebate with the carriers to offset rising fuel surcharges.

You can also reduce the impact of fuel surcharges by negotiating better upfront discounts and accessorial concessions. Your discounts are applied to fuel surcharges, so if you negotiate an additional 10% discount on your base freight rates, you’ll realize a 10% discount on your fuel surcharge as well.

The same concept applies to add-on charges like delivery area surcharges (DAS), residential fees, etc. Take the DAS fee for residential delivery as an example. Apply the 25% fuel surcharge to the $2.30 DAS fee, and you’re paying another $.58 in fuel surcharges. But if you negotiate a 50% DAS fee reduction, your fuel surcharge cost goes down to $.29, a 50% improvement.

And consider the advantages of ground over express services. Ground base rates are 30%-70% less than premium expedited services and fuel surcharges are a third the cost (7.75% vs. 25%).

Analyze your carrier invoices

If you’re not analyzing your invoices, you’re probably losing money. First, establish electronic billing with your carrier. Each of the carriers offers several electronic invoicing options. UPS offers a free weekly file called Billing Data. Multiple accounts can be combined into a single data file for a comprehensive view of your company’s global shipping costs, including domestic and import charges and LTL charges.

The billing data file can be integrated to streamline internal business processes, such as bill reconciliation, cost allocation and accounts payable. Use Billing Data in conjunction with UPS’s Billing Analysis tool to develop insightful reports to analyze your shipment activity.

Simple sorts of key columns can reveal significant opportunities for savings:

–Service description: Separate freight charges and accessorial charges. Identify charges like residential fees, Delivery area surcharges, declared value, weekly service fees and other handling charges. Quantify which accessorial charges have the greatest affect on your costs, and target these charges for waivers or reductions during negotiations.

–Discounts/incentives applied: By sorting these columns, you can quickly identify the actual discount received. You may be surprised to discover many shipments receive partial or no discounts.

–Billed weight vs. actual weight: Compare these columns to identify instances in which the billed weight is higher than the actual weight. It’s likely these shipments were affected by dimensional (DIM) charges or reweighs.

–Container type/packaging: Identify 1-lb. shipments that could have received the letter rate at savings of up 45%. Both UPS and FedEx offer unlimited weight envelopes that extend the 8-oz. letter rate regardless of actual weight.

–Zone: Sort expedited packages by zone to identify opportunities to reduce costs through modal optimization. Consider replacing next day, two day and three day air products with ground service.

–Account number/bill options: Sort by account number and/or bill option code to ensure authorized use of your carrier account. Pay careful attention to shipments billed collect and third party.

Rob Martinez is a partner at Navigo Consulting Group, a Long Beach, CA-based firm specializing in contract benchmarking, distribution analysis, and carrier negotiations.