Negotiating parcel contracts for 2010

Feb 17, 2010 9:00 PM  By

With the 2010 FedEx and UPS general rate increases now implemented, many shippers are feeling the squeeze on their transportation dollars.

Needless to say, improvements to your carrier pricing can ensure greater profitability and marketplace competitiveness. While there are many strategies shippers can use to reduce shipping costs, we’ll focus on carrier contract negotiations. Here are five key areas to consider.

MINE YOUR DISTRIBUTION DATA
Before stepping up to the negotiating table, develop reports to understand service usage, seasonality, weight ranges, zonal distribution, nonfreight (accessorial) charges, cost per shipment, residential/commercial mix and other metrics.

While the carriers rarely offer accessorial concessions unless forced through competitive bidding, all accessorial charges are negotiable. In fact, some charges can be waived altogether.

If you lack internal reporting capabilities, request from your carriers or freight auditors monthly or quarterly reports to gain visibility into these charges. Your electronic carrier invoice is another great source of data as it offers detailed information on every package.

Regardless of the source of data, use the information to identify opportunities to reduce costs through operational changes, packaging modifications, and/or contract negotiations.

Mine the data to identify:

  • Actual discounts received: Many shippers are surprised to learn they are not getting the full discounts negotiated due to minimum shipment charges and other exceptions. You’ll find that many shipments receive no discount at all. Quantify the value of negotiated concessions and address shortfalls with your carrier.
  • Actual weight vs. billed weight: If total “billed” weight is significantly higher than “actual” weight, you may have an issue with inaccurate weight entry during shipment processing. Or you could be adversely impacted by dimensional rating or carrier reweighs.

    Work with your carrier to identify when and why shipments are getting a higher billed weight, and collaborate to find solutions to reduce costs. Strategies include correct identification of dimensional weight prior to shipment manifesting; investing in dimensioning and weighing technologies; modifying packaging to maximize shipment density; negotiating a higher dimensional factor; and/or negotiating a lower hundredweight factor.

  • Service usage: Develop a pivot table to quickly identify which services you most commonly use, their cost, and other important information. Many shippers have terrific incentives for services they never use. Focus negotiations on the services, weights and zones most utilized.
  • Accessorial charges: These surcharges on your carrier invoice—such as fuel surcharges, residential add-on fees, delivery area surcharges, weekly service fees, large package surcharges—account for as much as 30% of a shipper’s total invoice.

REVIEW ACCESSORIAL CHARGES AND TERMS
How large a shipper do you need to be to begin to negotiate accessorial concessions? If your business spends more than $500,000 a year and you’re not getting any discounts on surcharges, you’re probably spending too much.

We recently worked with a volume shipper that spent $288,000 in annual residential add-on charges. By negotiating a 35% reduction, the client saved more than $100,000 off that annual cost. That’s before we ever talked about rates.

Another shipper was offered a 50% reduction in the delivery area surcharge, which also amounted to a six-figure annual savings.

Don’t limit your negotiations to freight discounts and accessorial charges. You should also include carrier terms and conditions. Negotiable items include payment terms, revenue bands or tiers, annual rate increases, fuel surcharges, dimensional formulas, late payment fees, declared value charges, calculation of rolling averages, and many others.

Subtle changes to the carrier’s contract terms can result in huge savings. As an example, for another client we negotiated a higher factor—from 194 to 250—for calculating dimensional weight. This resulted in annual savings of more than $250,000.

Another client saved by renegotiating the carrier’s revenue tiers (typically based on a shipper’s average weekly expenditures). After adjusting the revenue bands, the client moved from the second to the third band, resulting in savings of more than $150,000.

LEVERAGE BENCHMARKS
It’s also worthwhile to identify external benchmarks. For example, most shippers have negotiated some level of discount with the carriers. But they don’t know how their discounts compare with other shippers. Are they poor, average, good, extraordinary?

Imagine the advantage for a shipper who knows that current carrier incentives are in the lower quartile of eligible discounts. What if the shipper also knew the maximum base incentive and specific accessorial discounts for which the company was eligible?

How do you obtain parcel rate benchmarks? Conduct research for shipper surveys published online. Collaborate with peer companies to conduct a formal benchmarking study. Interview other shippers at conferences and by using social media groups. Or consider hiring a parcel consultant. (For more, see “Benchmarking Transportation Rates and Services,” February issue.)

RAMP UP YOU RFP
Many shippers formalize contract negotiations through a request for proposal. The RFP should clearly state your company’s objectives, timelines and requirements. Requirements can include operations (pick-up time, trailer drop), representation (sales, driver, customer service), automation (manifesting, integration), carrier services and transit expectations, and even pricing.

Be sure to include summary tables of all analyses and a representative data sample, as well as evaluation criteria.

Leverage benchmarks to influence incentives and accessorial concessions before they are proposed. But understand that the carriers propose pricing based upon a complex “cost to serve” model, and that certain requests may not achieve acceptable profit guidelines to be approved.

So identify areas of opportunity and provide general guidance, but give the carriers latitude to achieve stated savings objectives as an overall effort. For example, while the carriers might not reduce the minimum shipment charge or offer concessions for an accessorial charge, they may offer savings through improved incentives, earned discounts or deferred rebates.

COLLABORATE WITH CARRIER
The most successful negotiations involve give and take. True collaboration cuts both ways. Ask your carrier to identify ways that you can help lower the carrier’s operating costs. Leverage your ability to reduce the carrier’s “cost to serve” in your negotiations.

For instance, give advanced notice of unusually high volume that requires additional equipment, drivers and/or processing time. Train staff to track packages online instead of using the carrier’s costly toll-free customer service resources. If not impractical, presort shipments for your carrier, and allow staged pickups or on-premise containerization.

You can improve your negotiation outcome in other ways. Create other opportunities for the rep to “win” by awarding a long-term contract, committing to use other carrier products like less-than-truckload, or offering to serve as a customer reference or site demo.

Apart from getting pricing approvals, carrier reps can access other resources to provide value. These resources include expert packaging analysis, warehouse operations study, professional review of automation needs, assistance with claims and loss prevention, supply chain optimization and more.

Reps aren’t motivated solely by commissions. Many simply appreciate recognition and acknowledgement. Others are motivated by seeing their name at the top of sales rankings, or winning a “president’s club” incentive.

Like any good negotiator, you should find out what’s important to your reps and try to help them achieve their objectives to ensure they help you achieve yours. Good luck!

Rob Martinez (rob@transult.com) is CEO of Transult, a supply-chain consulting firm that reduces costs for volume parcel shippers.