The Parcel Contract Negotiations Handbook
The Parcel Contract Negotiations Handbook
1
The Parcel Contract Negotiations Handbook
Introduction
Your Budget Shouldn’t Be a Blind Gamble ?
In parcel contract negotiations, the deck is often stacked against you. It’s difficult to negotiate the best rates when benchmarking data isn’t easy to find and parcel carriers are constantly changing the rules of the game.
Then there’s the sleight of hand—the “added value,” “expanded services,” and “rebates” carriers will offer you to avoid addressing the issues that really impact your parcel spend. Trying to understand these complex issues while negotiating the best rates for your business can feel a bit like trying to count cards. Here’s the truth: when negotiating the best rates for your parcel spend, Lady Luck is not your friend. You need to come to the table with benchmarking data and insights into the negotiation process. In short, you need to know the game before you play. An Ace Up Your Sleeve is built on more than a decade of parcel logistics industry data and expertise to put the odds back in your favor.
2
Table of Contents
4
9
The House Always Wins Unless You Have Data Three Possible Outcomes of Negotiating a New Parcel Contract
Table Talk
Discussing the Parcel Contract Engineering Process with Two Experts
15
Ten in the Hand
18
Conclusion
19
About the Authors
10 Parcel Contract Negotiation Tips for Shippers
Your Money Shouldn’t Be Left to Chance—Or to Your Carrier
Andy Brueckner and Travis Rhoades
3
The Parcel Contract Negotiations Handbook
Article 1
The House Always Wins Unless You Have Data Three Possible Outcomes of Negotiating a New Parcel Contract There’s a saying that the house always wins. And while that saying may cause the flashing lights of Vegas to cross your mind, it is equally applicable to your parcel contract negotiations. The only difference is that in the world of parcel logistics, it’s the carriers who hold the cards and who can change the rules at any given moment. So how can you avoid losing your shirt when you sit down at the table to play the game? The answer is data—and not just any data. In today’s business world, the majority of successful parcel shippers already aggregate various forms of reportable data—but that’s no longer enough. To keep up with an ever-changing and competitive market, shippers need to utilize a deeper level of analytics that can only come from real-time actionable intelligence. Empowered with that data, your results will align with the desired outcome. Without it, you may find yourself on a losing streak as things go from good to bad to ugly. The following are three case studies that exemplify each outcome.
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The Good Result Cost per package and overall parcel spend both decrease.
The diagram above illustrates a parcel shipper experiencing an optimal outcome. This parcel shipper targeted and negotiated better contractual rates in areas that matched their specific shipping profile. The results were dramatic—cost per package decreased sharply once the new terms went into effect, thus driving hard dollar savings and directly impacting their bottom line. With thousands of negotiable elements within a carrier agreement, knowing which to target was key for this shipper. That knowledge empowered the parcel shipper shown above to succeed in executing sustained savings derived from a data-driven approach to negotiation. Finally, the customer experience between the shipper and the carrier was not negatively impacted.
Cost Per Package: A shipper’s average cost to ship one package, based on the total number of packages shipped within their overall spend.
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The Parcel Contract Negotiations Handbook
The Bad Result Cost per package and overall parcel spend both go up.
In this case, the parcel shipper lost the shell game. Based on a discussion with the carrier vs. analyzing their own data against that of their peers (benchmarking), they walked away from the negotiating table feeling like they received favorable rates; however, the business did not target discounts based on data derived from their specific shipping profile. Instead, the carrier used sleight of hand to design a contract that provided great discounts in service levels and surcharges that the parcel shipper seldom utilized. Likewise, the parcel shipper was given far less competitive discounts than they previously had for the areas in which they actually shipped.
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Benchmarking: In the parcel logistics industry, benchmarking refers to the act of comparing parcel shipping rates against those of your peers, often in direct relation to your size, industry, location, and spend. This information is not readily available and can usually only be obtained by partnering with parcel data analysis platforms and industry experts.
The Ugly Result Cost per package and overall parcel spend both do nothing.
This is potentially the worst outcome of the three. Why is this worse than the previous example? First, it’s misleading. It creates the illusion that no money is lost because the parcel shipper is not spending any more or less than they were before. Unfortunately, the buying process doesn’t come without costs—typically they come in terms of time spent and opportunity costs. Parcel shippers invest weeks and months into this process, with an opportunity cost for those resources being reallocated from core initiatives of that business. No change, whether good or bad, means the return on that investment is a whopping $0. Secondly, the chart above is dangerous because it potentially hides bigger problems that simply haven’t materialized yet. In this case, the parcel shipper’s cost per package and overall spend began trending up after 3–4 months on the new contract. By this time, the shipper had long moved on from the contract negotiation initiative, chalking it up as a non-event. Once the holiday season came, however, their costs began to rise. Why? The new contract didn’t account for shipping considerations that the old one did. All factors considered, their new contract was worse, but they didn’t realize it. Consequently, once the peak season (typically when a shipper is most reliant on competitive cost per package net rates) hit, this parcel shipper was left looking for the leak, with no insight into meaningful data that would provide that answer.
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The Parcel Contract Negotiations Handbook
Clearly, none of these parcel shippers set out to negotiate a contract that would have a negative outcome. Each of them, on the day they executed the agreement, probably believed they were saving money. So how can a company sit down to play the game of negotiations confident that the outcome will be positive? With thousands of unique points to negotiate, it starts with information and insight. Data-driven intelligence applied to a shipper’s unique shipping characteristics will inform the process, allowing the shipper the confidence that they are targeting negotiable components that will have the greatest impact on the contract. Rest assured, the carriers have the data and they will be using that data—your data—to negotiate in their favor. Information, in this case, is best accomplished by benchmarking the contract components against a field of peers. This can be accomplished through trade associations, extensive research of competitor’s costs, interviews, or third party logistics firms offering benchmarking information and consulting. However one manages their benchmarking, one thing is certain: once a parcel shipper has executed a new contract, a key tenet of successfully managing their parcel ecosystem is to monitor that contract through continuous benchmarking. Gambling with the carriers can be risky; they know every card in your hand, making it a difficult game to win. With no visibility into the strength of your own hand, it simply becomes a game of chance—and as we all know, the house always wins in the end. Unfortunately, this is often the reality of today’s parcel contract negotiating landscape, which is why it is so important for parcel shippers to empower themselves with the necessary data and analysis they need before sitting down at the table. Only with this data and analysis will parcel shippers walk away the winners.
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Once a parcel shipper has executed a new contract, a key tenet of successfully managing their parcel ecosystem is to monitor that contract through continuous benchmarking.
Article 2
Table Talk Discussing the Parcel Contract Engineering Process with Two Experts
A
Andy Brueckner
T
Travis Rhoades
Today’s parcel shippers face many challenges when playing the game of contract negotiation. Besides managing their actual business and steering it towards success, they must also navigate ever-changing surcharges and accessorials from their parcel carriers and assess how those changes will impact their general business initiatives. Keeping up can be difficult, especially when the rules are always changing. For parcel shippers attempting to get the best rates, it may even at times feel like the deck is stacked against you. To help shed some light on the process of negotiating better carrier rates, we interviewed two experts in parcel contract engineering: Andy Brueckner, who has over 25 years of experience developing strategies to optimize parcel carrier agreements for businesses, and Travis Rhoades, whose background is in using big data in operational decision-making while working for the federal government.
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The Parcel Contract Negotiations Handbook
What is parcel contract engineering?
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T
Employ Right Technology & Expertise
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Parcel contract engineering involves reviewing your business as a parcel shipper, validating and evaluating what your needs are, and then ensuring the solution put in place is effective and efficient. A thorough data-driven approach, and the ability to make sense of it all, is the key to optimizing your contract rates and discounts. One component of this approach is utilizing industry benchmarking which allows a shipper the visibility and insight to compare their UPS® and FedEx® rates to those of other shippers with a similar shipping profile. The other component is the ability to monitor and understand the carriers’ cost modeling and how a shipper’s particular shipment characters impact the carrier’s effort to optimize their own network.
With the right technology and expertise, shippers can look at their shipping contract, assess their current strengths and weaknesses, and use the knowledge gained from benchmarking data to compare against thousands of similar contracts. And with that, it becomes a lot easier for shippers to find the best areas to leverage their situation and get the best contract possible.
Analyze Current Contract
Assess Strengths & Weaknesses
Utilize Benchmarking Data
Why does it matter to a shipper’s business?
A
T
If the contract a parcel shipper has isn’t optimized and sytematically aligned to their specific business needs, then that’s just money flowing out the door. It adversely affects their competitiveness, not only in regards to shipping rates, but also their overall ability to thrive in today’s cutthroat market conditions.
The truth is, many parcel shippers don’t know how much their business is affected every day by not doing it. A lot of them will say, “Hey, my contract is good.” But at the end of the day, they really have nothing to compare their contract to other than previous contracts they’ve had with carriers. It’s not as if they can just Google “UPS best-in-class rates,” or “FedEx bestin-class rates” and get some type of answer that will tell them, for example, what the best–in–class rate for a ground five-pound package to zone 4 is.
So how does a parcel shipper know when they should renegotiate their contract?
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T
Often, shippers have no visibility into their parcel data or the fact that their cost per package or cost per pound has steadily increased since they last negotiated their contract. It’s amazing the number of shippers I’ve talked to with contracts that are more than five years old. When you realize all the changes carriers have implemented as far as pricing and the way shipment fees are calculated, there’s simply no way these outdated contracts can serve their needs today.
Right. And unless a shipper is continually monitoring particular Key Performance Indicators (KPIs) or metrics that involve their shipping or the cost of their shipping, it will be impossible for them to know when to renegotiate or what aspects of the contract to target when they do.
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The Parcel Contract Negotiations Handbook
And what are the KPIs that parcel shippers should monitor closest when determining whether or not to renegotiate their contract? KPIs are designed to work together for diagnostic purposes. So no single KPI can tell you the whole story, but if I had just a couple of things to monitor, I’d monitor cost per package within service types. Pairing that indicator with service type utilization visability, I would have the insight to know if my per package shipping rates were still meeting my business requirements, or if I needed to dig deeper into cost per package drivers like weight and zone to determine where opportunities exist to improve my contracted parcel rates.
A
Overall spend would obviously be a big one. If carriers’ general rates have only increased by 4.5–6%, but your shipping costs have risen by as much as 30% and 40% due to dimensional weight pricing or something similar, that doesn’t track. If you have seen a steady and unexplainable rise in cost per package, consider renegotiating and seeking deeper data analysis.
T
Total Spend
12
Dimensional Weight Pricing (DIM): A pricing technique for commercial freight transport (including courier and postal services), which uses an estimated weight calculated from the length, width and height of a package.
Number of Packages Shipped
Cost Per Package
What are some mistakes for parcel shippers to avoid making during the negotiations process?
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T
Often it starts at the beginning of the process. The old school way to begin negotiations is for a shipper to complete a full RFP for carriers, but today that method is less effective for two reasons: 1. Carriers will delay the process with the “value-added services” tactic. 2. The carrier proposals will be vastly different, making it almost impossible to compare rates and discounts. Instead, shippers need to use data gained from benchmarking information and ongoing monitoring to improve only in the specific areas that are going to impact them the most, rather than going out and getting a contract restructured from A–Z. That only adds time and confusion.
Minimum Package Charge (Minimum Spend): The minimum amount a carrier will charge a shipper. This floor-level price reflects the absolute lowest billed cost of a package, even despite any offered discount.
We see a lot of shippers who accept the first proposal from the carrier without fully understanding the little details that can have a huge impact on their overall business. One of the biggest examples of this is the application of minimum spend. For example, many shippers may be enticed by a 50% discount on certain packages, but if the base rate is $10 and the minimum charge is $7, they’re no longer getting that 50% discount. And that $3 multiplied by thousands of packages can have a real impact on budgets.
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The Parcel Contract Negotiations Handbook
If you could give a parcel shipper one piece of advice for parcel contract negotiations, what would it be?
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T
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The key is making sure that they not only have data, but a true understanding of that data and making sure they are focusing on the right aspects of their parcel spend— sometimes it’s underlying issues that have the biggest financial impact. Understanding the cost to ship a package is one thing, but understanding how that shipment fits within the carrier’s network is what is really invaluable. Once you start negotiating, it’s going to be hard enough to make sure that you identify and address the most important things. The carrier is going to be constantly making offers to distract you from what your focus really is; your new parcel shipping rates need to be competitive, meeting your business needs today and tomorrow.
Effective Discounts: The actual, realized discount applied to a package, frequently different from the amount listed in the contract’s discount matrix. Effective discounts are the discounts that matter and depend heavily upon such factors as Minimum Package Charges, weekly average spend, package count commitments, the use of electronic billing, etc.
I agree, and I also think understanding that there is a difference between the contracted discounts that you’ve negotiated with the carrier and what your actual effective discounts are, as laid out in the final contract. The effective discount may be far different from what the contract says the shipper should be paying. From base rates for certain zones to service tags to dimensional charging, the rules of the game are always changing. The only way to ensure you get the best deal and “win the game,” is to have an understanding of those ever-changing rules—or seek guidance from those who do.
Article 3
Ten in the Hand
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10 Parcel Contract Negotiation Tips for Shippers
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Consider all delivery options. Don’t limit yourself to the traditional domestic carriers—it’s not just about UPS and FedEx anymore. You don’t need to sign on the dotted line with another carrier, but it can sometimes help to drive UPS and FedEx to lower their prices. Leverage the power of more information.
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Include multiple carriers in the negotiation process. When entering into a contract negotiation experience, you always want to include both carriers on the bid. A lot of shippers say they only want to hear from the incumbent—the carrier they are doing business with today. By including both carriers, the best-case scenario is you may receive a better deal from the challenger; worstcase, you have more information and numbers to leverage in negotiations with your current carrier.
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The Parcel Contract Negotiations Handbook
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Don’t let the day-to-day carrier representatives lead negotiations. Many companies assign the duty of parcel contract negotiations to the employee who handles day–to–day carrier relations. Since they likely have the most detailed knowledge, this might seem like the best option; however, it can ultimately complicate or even undermine the process to have your usual company representative leading negotiations with your carrier.
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Don’t accept the first proposal. Often, carriers like UPS and FedEx will come into negotiations prepared to offer everything from value-added services to rebates to other upgrades that you won’t end up using. Don’t fall for sleight of hand, and don’t let them dictate the contract negotiations process. You may even consider asking for a proposal before meeting with the carrier.
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Always compare rates and rerate historical packages with the proposals. The idea that you can’t compare rates between UPS and FedEx, or even with other shippers, is false. If a carrier suggests that you cannot share your rates with other shippers or ask for theirs, don’t believe them—seek out a partner who can provide you with benchmarking information relevant to your size, location, and spend. Rerating a segment of historical packages to verify you achieve your targeted savings is also key.
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Don’t settle for a rebate in lieu of discounts. Carriers will sometimes offer a rebate of your annual spend in lieu of providing refunds for your future audits. This may deny you the opportunity to audit and then request refunds for things like service failures or overcharge fees. It’s important, however, to play the long game—you must retain the power to hold your carrier accountable or you will likely lose much more down the line than you will gain by accepting the rebate today.
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“Value-add” solutions don’t always add value. The numbers are clear—UPS and FedEx are making money. Every year, they’re setting their shareholders up for impressive returns. While there is nothing inherently wrong with that, it’s important to remember that the only reason they would offer you “value-add” solutions or rebates rather than addressing the issues that actually drive up your parcel spend is because they’ve done the math—and they already know it benefits them.
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FedEx and UPS know your cost—and your value. If your packages are easier to deliver, it will impact your contract. In terms of UPS and FedEx, their main concern is how much it costs within their networks. They have it down to a science, knowing exactly what it costs them and what profit margin they want to maintain. For carriers, it’s not about your size—it’s about how your specific packages travel through their network and how cost-effectively they are able to get them from point A to point B.
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Don’t be intimidated—everything is negotiable. Seriously—every single aspect of the contract is negotiable. If a carrier tries to tell you that they don’t discount surcharges or won’t improve your Dimensional Weight Pricing, that’s not true. With proper data and prior planning, every line item is an opportunity to improve your overall parcel rate.
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Compare, but have realistic expectations. You need to go into negotiations realizing that even if you get a proposal from both UPS and FedEx, it will never be an apples-to-apples comparison—that’s just not how they construct these proposals. You will need to look at the full picture of each contract and assess which will be the most beneficial to your business.
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The Parcel Contract Negotiations Handbook
Conclusion
Your Money Shouldn’t Be Left to Chance— Or to Your Carrier. No one said it would be easy—but that doesn’t mean it’s not worth the effort. Negotiating the best parcel carrier rates takes data, planning, and time, but it can reap huge rewards for your business.
Successfully engineering your contract to serve both your needs and your customers’ needs isn’t luck of the draw. It isn’t a roll of the dice. And it certainly isn’t a game of chance. In fact, it isn’t a game at all. But here’s what it is: It’s careful planning. It’s thoughtful consideration of relevant benchmarking data. Most of all, it’s continual monitoring, analysis, and holding your parcel carrier accountable to their promises. After all, no one should have to ante up more than their fair share.
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About the Authors
Andy Brueckner, Vice President, Business Solutions [email protected] Andy has dedicated over 25 years effectively managing projects to serve clients. For more than a decade, Andy has partnered with a wide variety of businesses with parcel shipping spend ranging from $100K to over $100M. By focusing on the specific parcel shipping needs of these businesses, Andy develops strategies to optimize their parcel carrier agreements in addition to creating efficiencies within their current shipping solution. Andy is the Vice President of Business Solutions with VeriShip.
Travis Rhoades, Director of Data Science [email protected] Travis developed an interest in how information supports operational decision-making during his time as a US Navy submarine officer. His experience also includes supervision of the counterintelligence and counterterrorism intelligence analysis programs within a division of the FBI and leading the Nuclear Regulatory Commission’s on-site inspection program for a commercial nuclear power plant. Currently the Director of Data Science at VeriShip, Travis is responsible for the creation of valuable information products from VeriShip’s vast data resources. Travis holds a B.S. in Physics from Baker University and completed graduate level programs in Mechanical and Nuclear Engineering.
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The Parcel Contract Negotiations Handbook
Improve Your Parcel Contract. No Dice Required. Contact VeriShip for access to proprietary benchmarking data and parcel contract negotiation experts. 800.903.3073 [email protected]
VeriShip is a cloud-based parcel audit and intelligence company providing innovative parcel audit, intelligence, and engineering solutions. More than 3,300 clients have uncovered significant cost savings using its turnkey software for real time analysis and benchmarking of parcel spend. www.veriship.com
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1
The Parcel Contract Negotiations Handbook
Introduction
Your Budget Shouldn’t Be a Blind Gamble ?
In parcel contract negotiations, the deck is often stacked against you. It’s difficult to negotiate the best rates when benchmarking data isn’t easy to find and parcel carriers are constantly changing the rules of the game.
Then there’s the sleight of hand—the “added value,” “expanded services,” and “rebates” carriers will offer you to avoid addressing the issues that really impact your parcel spend. Trying to understand these complex issues while negotiating the best rates for your business can feel a bit like trying to count cards. Here’s the truth: when negotiating the best rates for your parcel spend, Lady Luck is not your friend. You need to come to the table with benchmarking data and insights into the negotiation process. In short, you need to know the game before you play. An Ace Up Your Sleeve is built on more than a decade of parcel logistics industry data and expertise to put the odds back in your favor.
2
Table of Contents
4
9
The House Always Wins Unless You Have Data Three Possible Outcomes of Negotiating a New Parcel Contract
Table Talk
Discussing the Parcel Contract Engineering Process with Two Experts
15
Ten in the Hand
18
Conclusion
19
About the Authors
10 Parcel Contract Negotiation Tips for Shippers
Your Money Shouldn’t Be Left to Chance—Or to Your Carrier
Andy Brueckner and Travis Rhoades
3
The Parcel Contract Negotiations Handbook
Article 1
The House Always Wins Unless You Have Data Three Possible Outcomes of Negotiating a New Parcel Contract There’s a saying that the house always wins. And while that saying may cause the flashing lights of Vegas to cross your mind, it is equally applicable to your parcel contract negotiations. The only difference is that in the world of parcel logistics, it’s the carriers who hold the cards and who can change the rules at any given moment. So how can you avoid losing your shirt when you sit down at the table to play the game? The answer is data—and not just any data. In today’s business world, the majority of successful parcel shippers already aggregate various forms of reportable data—but that’s no longer enough. To keep up with an ever-changing and competitive market, shippers need to utilize a deeper level of analytics that can only come from real-time actionable intelligence. Empowered with that data, your results will align with the desired outcome. Without it, you may find yourself on a losing streak as things go from good to bad to ugly. The following are three case studies that exemplify each outcome.
4
The Good Result Cost per package and overall parcel spend both decrease.
The diagram above illustrates a parcel shipper experiencing an optimal outcome. This parcel shipper targeted and negotiated better contractual rates in areas that matched their specific shipping profile. The results were dramatic—cost per package decreased sharply once the new terms went into effect, thus driving hard dollar savings and directly impacting their bottom line. With thousands of negotiable elements within a carrier agreement, knowing which to target was key for this shipper. That knowledge empowered the parcel shipper shown above to succeed in executing sustained savings derived from a data-driven approach to negotiation. Finally, the customer experience between the shipper and the carrier was not negatively impacted.
Cost Per Package: A shipper’s average cost to ship one package, based on the total number of packages shipped within their overall spend.
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The Parcel Contract Negotiations Handbook
The Bad Result Cost per package and overall parcel spend both go up.
In this case, the parcel shipper lost the shell game. Based on a discussion with the carrier vs. analyzing their own data against that of their peers (benchmarking), they walked away from the negotiating table feeling like they received favorable rates; however, the business did not target discounts based on data derived from their specific shipping profile. Instead, the carrier used sleight of hand to design a contract that provided great discounts in service levels and surcharges that the parcel shipper seldom utilized. Likewise, the parcel shipper was given far less competitive discounts than they previously had for the areas in which they actually shipped.
6
Benchmarking: In the parcel logistics industry, benchmarking refers to the act of comparing parcel shipping rates against those of your peers, often in direct relation to your size, industry, location, and spend. This information is not readily available and can usually only be obtained by partnering with parcel data analysis platforms and industry experts.
The Ugly Result Cost per package and overall parcel spend both do nothing.
This is potentially the worst outcome of the three. Why is this worse than the previous example? First, it’s misleading. It creates the illusion that no money is lost because the parcel shipper is not spending any more or less than they were before. Unfortunately, the buying process doesn’t come without costs—typically they come in terms of time spent and opportunity costs. Parcel shippers invest weeks and months into this process, with an opportunity cost for those resources being reallocated from core initiatives of that business. No change, whether good or bad, means the return on that investment is a whopping $0. Secondly, the chart above is dangerous because it potentially hides bigger problems that simply haven’t materialized yet. In this case, the parcel shipper’s cost per package and overall spend began trending up after 3–4 months on the new contract. By this time, the shipper had long moved on from the contract negotiation initiative, chalking it up as a non-event. Once the holiday season came, however, their costs began to rise. Why? The new contract didn’t account for shipping considerations that the old one did. All factors considered, their new contract was worse, but they didn’t realize it. Consequently, once the peak season (typically when a shipper is most reliant on competitive cost per package net rates) hit, this parcel shipper was left looking for the leak, with no insight into meaningful data that would provide that answer.
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The Parcel Contract Negotiations Handbook
Clearly, none of these parcel shippers set out to negotiate a contract that would have a negative outcome. Each of them, on the day they executed the agreement, probably believed they were saving money. So how can a company sit down to play the game of negotiations confident that the outcome will be positive? With thousands of unique points to negotiate, it starts with information and insight. Data-driven intelligence applied to a shipper’s unique shipping characteristics will inform the process, allowing the shipper the confidence that they are targeting negotiable components that will have the greatest impact on the contract. Rest assured, the carriers have the data and they will be using that data—your data—to negotiate in their favor. Information, in this case, is best accomplished by benchmarking the contract components against a field of peers. This can be accomplished through trade associations, extensive research of competitor’s costs, interviews, or third party logistics firms offering benchmarking information and consulting. However one manages their benchmarking, one thing is certain: once a parcel shipper has executed a new contract, a key tenet of successfully managing their parcel ecosystem is to monitor that contract through continuous benchmarking. Gambling with the carriers can be risky; they know every card in your hand, making it a difficult game to win. With no visibility into the strength of your own hand, it simply becomes a game of chance—and as we all know, the house always wins in the end. Unfortunately, this is often the reality of today’s parcel contract negotiating landscape, which is why it is so important for parcel shippers to empower themselves with the necessary data and analysis they need before sitting down at the table. Only with this data and analysis will parcel shippers walk away the winners.
8
Once a parcel shipper has executed a new contract, a key tenet of successfully managing their parcel ecosystem is to monitor that contract through continuous benchmarking.
Article 2
Table Talk Discussing the Parcel Contract Engineering Process with Two Experts
A
Andy Brueckner
T
Travis Rhoades
Today’s parcel shippers face many challenges when playing the game of contract negotiation. Besides managing their actual business and steering it towards success, they must also navigate ever-changing surcharges and accessorials from their parcel carriers and assess how those changes will impact their general business initiatives. Keeping up can be difficult, especially when the rules are always changing. For parcel shippers attempting to get the best rates, it may even at times feel like the deck is stacked against you. To help shed some light on the process of negotiating better carrier rates, we interviewed two experts in parcel contract engineering: Andy Brueckner, who has over 25 years of experience developing strategies to optimize parcel carrier agreements for businesses, and Travis Rhoades, whose background is in using big data in operational decision-making while working for the federal government.
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The Parcel Contract Negotiations Handbook
What is parcel contract engineering?
A
T
Employ Right Technology & Expertise
10
Parcel contract engineering involves reviewing your business as a parcel shipper, validating and evaluating what your needs are, and then ensuring the solution put in place is effective and efficient. A thorough data-driven approach, and the ability to make sense of it all, is the key to optimizing your contract rates and discounts. One component of this approach is utilizing industry benchmarking which allows a shipper the visibility and insight to compare their UPS® and FedEx® rates to those of other shippers with a similar shipping profile. The other component is the ability to monitor and understand the carriers’ cost modeling and how a shipper’s particular shipment characters impact the carrier’s effort to optimize their own network.
With the right technology and expertise, shippers can look at their shipping contract, assess their current strengths and weaknesses, and use the knowledge gained from benchmarking data to compare against thousands of similar contracts. And with that, it becomes a lot easier for shippers to find the best areas to leverage their situation and get the best contract possible.
Analyze Current Contract
Assess Strengths & Weaknesses
Utilize Benchmarking Data
Why does it matter to a shipper’s business?
A
T
If the contract a parcel shipper has isn’t optimized and sytematically aligned to their specific business needs, then that’s just money flowing out the door. It adversely affects their competitiveness, not only in regards to shipping rates, but also their overall ability to thrive in today’s cutthroat market conditions.
The truth is, many parcel shippers don’t know how much their business is affected every day by not doing it. A lot of them will say, “Hey, my contract is good.” But at the end of the day, they really have nothing to compare their contract to other than previous contracts they’ve had with carriers. It’s not as if they can just Google “UPS best-in-class rates,” or “FedEx bestin-class rates” and get some type of answer that will tell them, for example, what the best–in–class rate for a ground five-pound package to zone 4 is.
So how does a parcel shipper know when they should renegotiate their contract?
A
T
Often, shippers have no visibility into their parcel data or the fact that their cost per package or cost per pound has steadily increased since they last negotiated their contract. It’s amazing the number of shippers I’ve talked to with contracts that are more than five years old. When you realize all the changes carriers have implemented as far as pricing and the way shipment fees are calculated, there’s simply no way these outdated contracts can serve their needs today.
Right. And unless a shipper is continually monitoring particular Key Performance Indicators (KPIs) or metrics that involve their shipping or the cost of their shipping, it will be impossible for them to know when to renegotiate or what aspects of the contract to target when they do.
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The Parcel Contract Negotiations Handbook
And what are the KPIs that parcel shippers should monitor closest when determining whether or not to renegotiate their contract? KPIs are designed to work together for diagnostic purposes. So no single KPI can tell you the whole story, but if I had just a couple of things to monitor, I’d monitor cost per package within service types. Pairing that indicator with service type utilization visability, I would have the insight to know if my per package shipping rates were still meeting my business requirements, or if I needed to dig deeper into cost per package drivers like weight and zone to determine where opportunities exist to improve my contracted parcel rates.
A
Overall spend would obviously be a big one. If carriers’ general rates have only increased by 4.5–6%, but your shipping costs have risen by as much as 30% and 40% due to dimensional weight pricing or something similar, that doesn’t track. If you have seen a steady and unexplainable rise in cost per package, consider renegotiating and seeking deeper data analysis.
T
Total Spend
12
Dimensional Weight Pricing (DIM): A pricing technique for commercial freight transport (including courier and postal services), which uses an estimated weight calculated from the length, width and height of a package.
Number of Packages Shipped
Cost Per Package
What are some mistakes for parcel shippers to avoid making during the negotiations process?
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Often it starts at the beginning of the process. The old school way to begin negotiations is for a shipper to complete a full RFP for carriers, but today that method is less effective for two reasons: 1. Carriers will delay the process with the “value-added services” tactic. 2. The carrier proposals will be vastly different, making it almost impossible to compare rates and discounts. Instead, shippers need to use data gained from benchmarking information and ongoing monitoring to improve only in the specific areas that are going to impact them the most, rather than going out and getting a contract restructured from A–Z. That only adds time and confusion.
Minimum Package Charge (Minimum Spend): The minimum amount a carrier will charge a shipper. This floor-level price reflects the absolute lowest billed cost of a package, even despite any offered discount.
We see a lot of shippers who accept the first proposal from the carrier without fully understanding the little details that can have a huge impact on their overall business. One of the biggest examples of this is the application of minimum spend. For example, many shippers may be enticed by a 50% discount on certain packages, but if the base rate is $10 and the minimum charge is $7, they’re no longer getting that 50% discount. And that $3 multiplied by thousands of packages can have a real impact on budgets.
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The Parcel Contract Negotiations Handbook
If you could give a parcel shipper one piece of advice for parcel contract negotiations, what would it be?
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The key is making sure that they not only have data, but a true understanding of that data and making sure they are focusing on the right aspects of their parcel spend— sometimes it’s underlying issues that have the biggest financial impact. Understanding the cost to ship a package is one thing, but understanding how that shipment fits within the carrier’s network is what is really invaluable. Once you start negotiating, it’s going to be hard enough to make sure that you identify and address the most important things. The carrier is going to be constantly making offers to distract you from what your focus really is; your new parcel shipping rates need to be competitive, meeting your business needs today and tomorrow.
Effective Discounts: The actual, realized discount applied to a package, frequently different from the amount listed in the contract’s discount matrix. Effective discounts are the discounts that matter and depend heavily upon such factors as Minimum Package Charges, weekly average spend, package count commitments, the use of electronic billing, etc.
I agree, and I also think understanding that there is a difference between the contracted discounts that you’ve negotiated with the carrier and what your actual effective discounts are, as laid out in the final contract. The effective discount may be far different from what the contract says the shipper should be paying. From base rates for certain zones to service tags to dimensional charging, the rules of the game are always changing. The only way to ensure you get the best deal and “win the game,” is to have an understanding of those ever-changing rules—or seek guidance from those who do.
Article 3
Ten in the Hand
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10 Parcel Contract Negotiation Tips for Shippers
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Consider all delivery options. Don’t limit yourself to the traditional domestic carriers—it’s not just about UPS and FedEx anymore. You don’t need to sign on the dotted line with another carrier, but it can sometimes help to drive UPS and FedEx to lower their prices. Leverage the power of more information.
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Include multiple carriers in the negotiation process. When entering into a contract negotiation experience, you always want to include both carriers on the bid. A lot of shippers say they only want to hear from the incumbent—the carrier they are doing business with today. By including both carriers, the best-case scenario is you may receive a better deal from the challenger; worstcase, you have more information and numbers to leverage in negotiations with your current carrier.
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The Parcel Contract Negotiations Handbook
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Don’t let the day-to-day carrier representatives lead negotiations. Many companies assign the duty of parcel contract negotiations to the employee who handles day–to–day carrier relations. Since they likely have the most detailed knowledge, this might seem like the best option; however, it can ultimately complicate or even undermine the process to have your usual company representative leading negotiations with your carrier.
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Don’t accept the first proposal. Often, carriers like UPS and FedEx will come into negotiations prepared to offer everything from value-added services to rebates to other upgrades that you won’t end up using. Don’t fall for sleight of hand, and don’t let them dictate the contract negotiations process. You may even consider asking for a proposal before meeting with the carrier.
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Always compare rates and rerate historical packages with the proposals. The idea that you can’t compare rates between UPS and FedEx, or even with other shippers, is false. If a carrier suggests that you cannot share your rates with other shippers or ask for theirs, don’t believe them—seek out a partner who can provide you with benchmarking information relevant to your size, location, and spend. Rerating a segment of historical packages to verify you achieve your targeted savings is also key.
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Don’t settle for a rebate in lieu of discounts. Carriers will sometimes offer a rebate of your annual spend in lieu of providing refunds for your future audits. This may deny you the opportunity to audit and then request refunds for things like service failures or overcharge fees. It’s important, however, to play the long game—you must retain the power to hold your carrier accountable or you will likely lose much more down the line than you will gain by accepting the rebate today.
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“Value-add” solutions don’t always add value. The numbers are clear—UPS and FedEx are making money. Every year, they’re setting their shareholders up for impressive returns. While there is nothing inherently wrong with that, it’s important to remember that the only reason they would offer you “value-add” solutions or rebates rather than addressing the issues that actually drive up your parcel spend is because they’ve done the math—and they already know it benefits them.
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FedEx and UPS know your cost—and your value. If your packages are easier to deliver, it will impact your contract. In terms of UPS and FedEx, their main concern is how much it costs within their networks. They have it down to a science, knowing exactly what it costs them and what profit margin they want to maintain. For carriers, it’s not about your size—it’s about how your specific packages travel through their network and how cost-effectively they are able to get them from point A to point B.
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Don’t be intimidated—everything is negotiable. Seriously—every single aspect of the contract is negotiable. If a carrier tries to tell you that they don’t discount surcharges or won’t improve your Dimensional Weight Pricing, that’s not true. With proper data and prior planning, every line item is an opportunity to improve your overall parcel rate.
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Compare, but have realistic expectations. You need to go into negotiations realizing that even if you get a proposal from both UPS and FedEx, it will never be an apples-to-apples comparison—that’s just not how they construct these proposals. You will need to look at the full picture of each contract and assess which will be the most beneficial to your business.
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The Parcel Contract Negotiations Handbook
Conclusion
Your Money Shouldn’t Be Left to Chance— Or to Your Carrier. No one said it would be easy—but that doesn’t mean it’s not worth the effort. Negotiating the best parcel carrier rates takes data, planning, and time, but it can reap huge rewards for your business.
Successfully engineering your contract to serve both your needs and your customers’ needs isn’t luck of the draw. It isn’t a roll of the dice. And it certainly isn’t a game of chance. In fact, it isn’t a game at all. But here’s what it is: It’s careful planning. It’s thoughtful consideration of relevant benchmarking data. Most of all, it’s continual monitoring, analysis, and holding your parcel carrier accountable to their promises. After all, no one should have to ante up more than their fair share.
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About the Authors
Andy Brueckner, Vice President, Business Solutions [email protected] Andy has dedicated over 25 years effectively managing projects to serve clients. For more than a decade, Andy has partnered with a wide variety of businesses with parcel shipping spend ranging from $100K to over $100M. By focusing on the specific parcel shipping needs of these businesses, Andy develops strategies to optimize their parcel carrier agreements in addition to creating efficiencies within their current shipping solution. Andy is the Vice President of Business Solutions with VeriShip.
Travis Rhoades, Director of Data Science [email protected] Travis developed an interest in how information supports operational decision-making during his time as a US Navy submarine officer. His experience also includes supervision of the counterintelligence and counterterrorism intelligence analysis programs within a division of the FBI and leading the Nuclear Regulatory Commission’s on-site inspection program for a commercial nuclear power plant. Currently the Director of Data Science at VeriShip, Travis is responsible for the creation of valuable information products from VeriShip’s vast data resources. Travis holds a B.S. in Physics from Baker University and completed graduate level programs in Mechanical and Nuclear Engineering.
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The Parcel Contract Negotiations Handbook
Improve Your Parcel Contract. No Dice Required. Contact VeriShip for access to proprietary benchmarking data and parcel contract negotiation experts. 800.903.3073 [email protected]
VeriShip is a cloud-based parcel audit and intelligence company providing innovative parcel audit, intelligence, and engineering solutions. More than 3,300 clients have uncovered significant cost savings using its turnkey software for real time analysis and benchmarking of parcel spend. www.veriship.com
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