Negotiating a better parcel carrier contract

May 01, 2005 9:30 PM  By

Now that postal rates are likely to be going up next year (see cover story), it’s more important than ever to negotiate or renegotiatiate your parcel-carrier contract. Fortunately, according to Mike Erickson, president/CEO of AFMS Logistics Management Group, catalogers carry a fair amount of clout when it comes to such negotiations.

As Erickson explained at a session at April’s National Conference on Operations and Fulfillment, the major parcel carriers used to each have a niche. United Parcel Service specialized in ground delivery, for instance, while Federal Express focused on air delivery. But now each of the majors — UPS, FedEx, DHL, and the U.S. Postal Service — offers entire suites of air, ground, and international options. And not only do the major carriers offer similar services, but they also enhanced their capacity in recent years, despite all but flat growth in domestic package volume. To boost volume, therefore, carriers have to go after competitors’ clients — which means you have more negotiating power than you might have realized.

Because knowledge equals power, however, you need to arm yourself with as much information as you can before you sit down to negotiate. Here’s Erickson’s advice on how to do just that:

  • Have your carriers provide you with historical reports of the services you’ve used. These should go back at least two years.

    Zone reports, which show how much volume you ship to each zone, are among the key reports you need to review to negotiate the best deal for your needs. Another are geotype reports, which break out what portion of your deliveries go to superrural, rural, suburban, urban, and superurban locales. The carriers typically charge extra for deliveries to superrural and rural addresses, Erickson said, so if they account for a significant portion of your business, you may want to have the waiving or discounting of those fees as a negotiating point.

  • Compile your shipping invoices and electronic manifests from the previous month or two; the dimensions of your various packages; and a list of your shipping locations and affiliate companies. If your company recently acquired another firm, for instance, you want that new affiliate’s volume to count toward your aggregate volume for maximum volume discounts.

  • Be aware of how the carriers’ net minimums affect your portfolio pricing. “Portfolio pricing” refers to how the carriers bundle all their services within a contract and create revenue tiers that determine the size of your volume discounts. A contract can have as many as six tiers, or revenue bands, Erickson said. If you ship, say, 10,000 packages, you may receive a 5% discount; 20,000 packages, 10%.

    But the net minimums aren’t included in the discounted volume. Generally speaking, the carriers won’t discount below the rate of a zone-2, 1-lb. package, Erickson said. Say you negotiated a 30% discount based on shipping 50,000 packages, and you do indeed ship 50,000 packages — but 20,000 of them are 1-lb. packages sent to zone 2. As far as the carrier is concerned, you shipped only 30,000 applicable packages, and therefore it will not grant you the discount. Net minimums can apply to a variety of variables beyond zone and weight, including declared value charges.

  • Keep in mind that volume discounts are based on rolling averages — which is why you should sign a contract just prior to, rather than after, your peak season. Let’s say you get a discount based on shipping 520,000 packages within the next year. That means you need to ship 10,000 packages a week to get the discount. During your busy season, you can easily exceed that figure, so that by the time business slows you’ve exceeded the rolling average. During your slow season, however, you probably ship only a fraction of that average figure; therefore you won’t accrue enough volume to obtain the discount until the busy season approaches.

  • Focus on the key points. Erickson listed 20 key points to negotiating a contract with a parcel carrier. His top five:

    • Weekly volume by service type.

    • Delivery density — the number of packages being delivered to a destination; if you regularly ship large numbers of packages to certain addresses that others also ship to frequently, such as hospitals or convention centers, you should try to negotiate for some sort of discount.

    • Geographic delivery codes.

    • Retention/penetration/conversion pricing models — carriers tend to provide more discounts to new accounts they consider desirable than to long-time customers.

    • Package weight by service type.

  • Don’t think that you have to wait until your contract is about to expire before you can renegotiate it. Erickson said that contracts generally have a clause giving you the right to renegotiate throughout the year. Reasons to review your contract, he said, include significant changes in volume or the types of packages you ship and the addition or subtraction of the warehouses and locations covered.