Tackling Shipping Costs – Strategies to Save 10%

Jul 25, 2007 7:08 PM  By

For companies that rely on Web, print, or mail orders, shipping costs can significantly affect an organization’s profitability and ability to compete in the marketplace. Online orders are often lost at the last moment due to shipping costs. Moreover, carriers raise rates and add surcharges every year, and few shippers can pass these added costs along to their customers. For many companies, shipping has become a loss leader.

Best-in-class operations on the other hand use shipping as a strategic competitive weapon to attract new customers, improve sales conversion ratios and increase profitability. You can typically reduce shipping costs by 10% or more through carrier contract negotiations and other strategies.

Only four companies command more than $51 billion in the domestic express and ground parcel industry: FedEx, United Parcel Service, DHL and the U.S. Postal Service. Shippers that develop expertise or outsource contract negotiations with these carriers can realize significant savings.

Data Collection and Analysis

Before stepping up to the negotiating table, shippers need to collect and analyze usage, expenditures, accessorial charges, and other variables. Obtain data from any of the following sources: carrier’s electronic invoice, manifest and carrier management reports, enterprise resource planning, order management systems, and freight auditors.

Analyzing shipment data allows you to better understand expenditures. Develop reports to understand service usage, weight ranges, zonal distribution, accessorial costs, cost per shipment, and residential vs. commercial shipments. Look for opportunities to shift from costly premium services to time-definite but less costly deferred services.

This detailed analysis gives shippers a framework to request the discounts and pricing concessions with the most cost savings impact.

For example, identify the impact of accessorial charges such as residential surcharges, DAS, fuel surcharges, weekly service fees and other handling charges. There are more than 100 of these “add on” charges that make up to 30% of your overall shipping costs.

Quantify which accessorial charges impact your company the most and target these charges for waivers or reductions during negotiations. Regardless of what your carrier representatives tell you, ALL accessorial fees are negotiable.

Prior to carrier bids or negotiations, share your analyses and shipping sample, especially with non-incumbent carriers. The data sample enables the carriers to propose pricing with a “cost to serve” model and thereby extend their deepest discounts.

Rate benchmarking

Rather than simply asking the carrier to propose the best pricing possible, it is more effective to target specific discounts and concessions. If possible, conduct internal and/or external benchmarks to determine the range of discounts available.

Through rate benchmarking, you improve your negotiating position knowing how your carrier rates compare with best-in-class programs.

Negotiation strategies

The best carrier pricing programs are often obtained through competitive activity. If you haven’t changed carriers for some time, chances are you’re spending too much. Carrier sales representatives are commissioned in part on profit margin. Therefore, most reps are not willing to offer extensive discounts unless forced to compete for your business.

The use of leverage can be an advantage in your negotiations. Audit invoices for overcharges and late shipments. Increase competition by conducting annual bids, splitting your business, and having frequent meetings with non-incumbent carriers.

Contract strategies

Whenever possible, initiate contract discussions. Begin by telling the carrier you want to lower transportation costs a part of broader corporate cost savings goals. Let them know you will be bidding your business aggressively, and that you expect to realize savings of 10%-20%. Make the focus your company’s bottom line and not the carrier’s margins.

Small changes to your carrier agreement can have a large impact on overall savings. If your discounts are tied to rolling averages and revenue thresholds, make sure your distribution patterns do not adversely affect discounts. Seasonal shippers should negotiate 52-week rolling averages instead of the more common 13-week program.

Make certain your contract includes discounts for all services. For example, unless your contract specifically extends your prepaid discounts to shipments billed third party, you may be losing discounts you thought you had in place.

Minimum shipment charges can also negate savings. Understand the impact of these charges to your distribution. Volume shippers have successfully negotiated, reduced, or waived minimum shipment charges.

You may be able to negotiate caps to the annual rate increase. While the carriers prefer to offer discounts as a percentage off list rates, many large shippers have successfully negotiated maximum annual increases as a percentage above net rates.

Each of the carriers offers a variety of vehicles to improve base discounts and drive savings. Request quarterly rebates, earned discounts and other incentive programs.

Finally, pursue long-term contracts. While you reserve the right to negotiate your contract at any time, fixed term contracts offer shippers rate stability and cost predictability.

Other cost saving strategies

Centralize shipment distribution to maximize discounts with your preferred carrier. While that might not be possible in decentralized office environments, you can still maintain routing compliance by controlling desktop shipping.

Each of the carriers offers desktop shipping software. The software allows an administrator to control access to shipping and restrict service usage. For example, an administrator could set the system to allow the executive department to ship via premium services, while restricting the marketing department to deferred services.

With surcharges, higher list rates, and lower discounts, shipping costs for residential addresses cost significantly more than commercial addresses. Therefore, order entry instructions for all sales channels should request business addresses whenever possible.

Analyze carrier invoices to identify dimensionalized shipments. To avoid dimensionalization, redesign packaging, consolidate shipments, and/or negotiate a higher DIM factor.

Avoid address correction fees by making sure your receiver database is accurate. Instruct Accounts Payable to look for address correction fees on carrier invoices, and forward corrections as well as customer address changes to the shipping pepartment. Address verification software can “cleanse” a shipping list prior to distribution.

You can achieve lower shipping costs through distribution data analysis, rate benchmarking, contract negotiations and other strategies. Pocket the savings, or pass it along to customers as a strategic marketing plan to win new customers and compete more effectively. Either way, you win.

Rob Martinez is a partner at Navigo Consulting Group, a Long Beach, CA-based provide of shipping and mailing services.