The COVID-19 pandemic caused peak level volumes in Q2 and Q3 that resulted in carrier surcharges along with the suspension of delivery guarantees. As we continue with peak season 2020 and volume ramps up again, that’s going to continue to be the case, and shippers everywhere are facing a rising capacity challenge as carriers continue to have more volume than they can handle. 70% of UPS deliveries are residential, which is up from 50%, and residential deliveries are less profitable than commercial deliveries. This will continue to be relevant as even more people are projected to order gifts online this holiday season. The result is shippers getting hit hard with surcharges that range from 30 cents per package to $31 per package. At the same time, carriers have more business that could ask for and are putting shippers on capacity allocation. If you are getting ready to enter negotiations, it’s important to let go of traditional tactics and utilize creative solutions.
70% of UPS deliveries are residential, which is up from 50%, and residential deliveries are less profitable than commercial deliveries.
Start with carrier negotiation basics
Don’t forget that January is not the only time carrier contract negotiation can occur. The uncertainties of the coronavirus pandemic are changing the landscape of contract negotiation entirely. This means that new challenges are presented that impact the shippers’ leverage for rate negotiation along with the opportunity to reassess expectations and negotiation strategies. Before you begin, make sure you completely understand your shipping contracts, measure the impact of shipping processes, and gather benchmark data to understand what is available in the marketplace. Finding the benchmarking data is the hardest part since many companies don’t know what their new shipping normal will look like. Things to look at for at this stage include shipping characteristics such as the percentage of packages charged by actual weight vs dimensional weight, those charged at minimum cost, and which accessorial charges are the most common. All this information will allow you to make a competent argument as you negotiate new rates.
Finding the benchmarking data is the hardest part since many companies don’t know what their new shipping normal will look like.
Increased volume no longer means better rates in the current situation. You have two main options here: diversify carriers or laser focus on your specific shipping needs. Carrier diversification sounds easy, but regional carriers are already overwhelmed as well, so we are in the same boat with them as well. More volume does not mean better rates, so how do you get better rates? It’s very important to consider what really matters to your customer but be careful not to confuse this with what really matters to you. Are your customers in specific zip code pockets? Can you package some orders differently for them? The customer-centric solutions are going to be at the forefront of rate improvement.
What elements are up for contract negotiation?
Here is a quick reminder of some cost elements to consider outside of straight-up discounts that may help with the cost:
- Minimum charges: most shippers focus on obtaining higher discounts on already published rates, but it’s important to look at other carrier revenue enhancers like minimum charges (which have increased over the years) for discounts on those, too.
- Dimensional prices: package costs generally depend on whatever is greater: actual weight or DIM weight using a standard 139 divisor, which has decreased in recent years. The lower the divisor is, the worse cost impact on shippers. It’s vital that shippers understand what proportion of their packages are subject to DIM weight so they can negotiate this divisor and get a better rate.
- Accessorial costs: these costs are common with major carriers and can include surcharges for residential deliveries, deliveries outside of major areas, oversized packages, fuel, handling costs and more. Accessorial fees can add as much as 30 percent spend with carriers. Sometimes, carriers introduce these charges temporarily, but they often become permanent—something that will likely happen with COVID surcharges.
- Revenue bands: freight contracts are complex and conditional, featuring a large variety of moving parts. Rates are tied to revenue bands with specific discounts based on spend. Agility is important, especially as we head into an undoubtedly busy peak season where demand exceeds supply, but revenue bands make it difficult for shippers to optimize price. There are large discrepancies in penalties and advantages for switching revenue bands. If shippers decrease spend going into a lower revenue band, they could lose 20 percent of its discount while a shipper doubling their business into a higher revenue band might only increase their 70 percent discount to 71 percent. None of these circumstances favor shippers, which truly illustrates the importance of understanding your supply chain and negotiating well.
- Early termination: this is a landmine you need to avoid. Carriers often offer large discounts to tie shippers in during contract periods. However, if that contract is terminated early, an early termination agreement may allow the carrier to back charge the shipper for 2-2.5 percent of the previous 52 weeks of revenue. You need to understand the terms and conditions of your contracts to avoid penalties like this.
Accessorial fees can add as much as 30 percent spend with carriers. Sometimes, carriers introduce these charges temporarily, but they often become permanent—something that will likely happen with COVID surcharges.
Approaching the contract negotiation table
Shippers often leave carriers for service and price issues. These reasons should be woven into the business case that you present to the carrier when requesting decreased rates. Your business case should include your anticipated future shipping needs, your customer needs, changes such as an increase in ecommerce business, new product arrival, new packaging, and more. As a shipper, you can continue to optimize carrier pricing throughout the life of your contract, This negotiated rate can be tied into the general rate for the previous year. However, it’s important to be cautious about the balloon approach to pricing, where shippers push for one concession but lose concessions elsewhere and the price actually remains the same instead of decreasing. Make sure any concessions you ask for are financially meaningful and are solution-focused. It’s worth noting that smaller shippers often have a harder time negotiating these charges than larger shippers. This can be remedied if small to medium-sized businesses utilize a 3PL that is able to negotiate rate discounts on their behalf.
Additional ways to decrease your costs outside of carrier negotiation
Rate negotiation is just one way to lower your shipping costs. Here are a variety of alternatives.
- Modal optimization: when doing your initial research and analysis, you might determine that using different shipping methods can help you save money. Sometimes time-sensitive packages arrive at the same time or sooner than using UPS or FedEx. This is especially true as we are still experiencing a lack of delivery guarantee times due to the pandemic. Rates are very important, but so are service offerings and reliability. Shop around and compare what different carriers offer and pick the one that aligns best for your business.
- Regional carriers: COVID has forced many shippers to face a rising capacity challenge, which cannot be solved if you use one sole carrier. Now is a good time to pursue increased carrier diversification to limit the impacts (though not remove them completely) of the high capacity that’s being experienced across the industry. Generally, regional carriers can have fewer surcharges, simpler invoices and more capacity.. Using both regional and national carriers could be more cost-effective regardless.
- Audit recovery: By utilizing a third-party automated recovery system, you can track and recover money for service guarantee failures and incorrect surcharges and billing. When service guarantees are in effect, shippers can see 1 – 10 percent increase in savings per week. This type of software looks for incorrect rates and surcharges in invoices, packages delivered to a commercial address with a residential surcharge and labels printed but not shipped.
When service guarantees are in effect, shippers can see a 1 – 10 percent increase in savings per week.
Rate negotiation with ITS Logistics
Shippers that consider contract negotiation as a component to parcel success instead of as the success will fare better than those who do not. Signing on with a 3PL can give you a great advantage when it comes to rates. At ITS, we are proud to offer many of our customers shipping rate discounts on their behalf. Learn more about how we can help today!