Mike Erickson, CEO, AFMS Global Transportation Consultants
Today’s UPS and FedEx contracts are more complicated and difficult to negotiate than ever before.
Several years ago, there were three full service carriers offering ground, air, hundredweight, and international services. FedEx and UPS are currently the last two carriers still servicing the entire U.S. with time definite deliveries. Both offer the same type of services and compete for the same clients. Five years ago, there were over 50 accessorial charges with the two major carriers. Now, there are over 200! The carrier’s new data capture technology has allowed them to more effectively charge accessorial charges that they physically couldn’t in the past.
Before we address the major issues affecting your carrier contracts and how you can successfully negotiate the best rates possible for your company, I would like to give you a brief background on AFMS and why our advice is worth reading.
Founded in 1992, AFMS is a transportation contract advisory and auditing firm, comprised of former VP’s, directors and managers from UPS, FedEx, DHL, USPS, and others. We specialize in showing companies of all sizes how to save money, improve service levels, and obtain better discounts. Our inside knowledge of the carriers pricing programs and models is unparalleled.
Along with that, all the changes that are happening today with UPS and FedEx and the levels of complexity surrounding today’s contracts. We have compiled the following information, to help you better manage your ongoing transportation pricing contracts and carrier contract changes:
Knowing what the carriers consider profitable freight and unprofitable freight as it relates to package characteristics, will determine what discounts the carriers can offer you. The metrics surrounding these pricing variables are complex and need to be reviewed prior to sitting with your carriers and negotiating a new agreement.
1. What has created these pricing changes? Technology improvements and better data capture capabilities by the carriers. The data capture technology carriers use has allowed them to bill for services and extra costs they physically couldn’t charge for a few years ago.
2. Why has this happened? The carriers have dramatically improved their cost-to-serve pricing models, generating billions in new revenue annually.
3. For shippers in 2018, this translates into hidden cost increases and more accessorial charges.
4. What can a shipper do to offset these new charges? Gain a better understanding of the impact these changes are going to have on your company. How much of your transportation spend is in accessorial charges or base rate charges?
5. Prior to negotiating, learn everything you can about your packages, shipping characteristics, and how they are used in the carriers’ negotiation process.
Perhaps the most important thing to understand in the freight negotiation process, is getting the carriers to see how valuable your shipments really are, based on package characteristic.
Carriers thoroughly analyze your company’s shipping profile to determine what discounts to offer. (i.e. is it the freight they want? Is it profitable and easy to handle?) That’s why it’s critical to know in your freight carrier’s own terms how profitable your shipments are to them. Heavier, dense products are very profitable to them, while shipping lamp shades or pillows is not.
Obviously, the more favorable your freight, the more demand there is for it, and in turn you receive better discounts and prices.
Carriers thoroughly analyze your company’s shipping profile to determine what discounts to offer
The integrated carriers are getting far more sophisticated in how they use internal pricing models and are trained more thoroughly to look at their costs before proposing rates. Following these important rules can help your company get the best rates possible. Companies that have not been monitoring these changes, and don’t understand why package characteristics are important, will undoubtedly pay more for their freight services.
All of the major parcel and LTL carriers—and many of the larger forwarders—have been reviewing their shipper contracts over the past few years to ensure that they are profitable. Shippers who do not go through the same exercise from their point of view may be leaving themselves at the mercy of carriers pricing policies and below market pricing.
How do you find what the market price is for your company? Before a shipper even starts to sit down and negotiate with potential carriers, a company needs to thoroughly analyze its shipping volumes and data as well as take a close look at its own shipping needs. You should benchmark your rates against the market to see where you stand. Contact a company like AFMS, to benchmark and evaluate your agreements.
The first step is deciding what services to focus on. A ground guaranteed service, an air express service, next day, two day, or an early AM or PM service. Ask yourself, why has your company selected the carriers currently in use? Is it because of the service they provide, on-time performance, cost, reliability, customer demand, or service requirements? If the choice was based on price, are you getting the service you need? And are rates that appear discounted becoming inflated with all the ancillary charges and annual rate increases each year?
Whether you’re a seasoned transportation manager, a director of purchasing, or a CFO, trying to understand the impact these new carrier cost to deliver pricing models and contracts are having on you will require some education and due diligence.
You don’t have to be a mathematician to understand the carriers pricing processes and their new pricing models. It’s not about Calculus formulas or Algebra, but more about understanding how package characteristics and the new carrier contract terminology is impacting the industry and you as a shipper.
Knowledge is power, understanding the terms and details around your contracts and how they impact your business can make a big difference in the carriers you choose and how those carriers price your shipments. Negotiate with your package characteristics strengths, the carriers sales people often are busy and don’t do the due diligence in analyzing a shipper’s package characteristics. This lack of analytical detail could cost you 10-20 percent in service discounts. Make sure you ask for competitive discounts on all the services you frequently use; even small volumes should be discounted.
The process shouldn’t stop once you’ve chosen a carrier and even signed a contract.
Quarterly reviews also help a shipper build a partnership with the carrier, so you can ask questions. You might ask, for instance: What kinds of packages are best for me? What would make my freight more attractive? Would smaller, denser boxes cut costs and bring a better discount? Can you add automation to the shipping process? When should you use an LTL carrier vs. a small package hundredweight program?
Even the best decisions and review processes won’t prevent mistakes. Use a freight bill auditor to review your invoices for errors. Millions of dollars’ worth of mistakes are made every day by the carriers on their invoices and are never caught by shippers. If you really want to control your shipping costs, stay informed and don’t be afraid to use outside help. More than 50 percent of all U.S. companies have outsourced some part of their distribution process, it may be more important to use a consultant to help you with your carrier selection, benchmarking, and negotiation processes. As transportation processes change with time, so must a shipper’s knowledge.
Knowledge is power; this is especially true when it comes to negotiating your carrier’s contracts.