How can a 3rd party help with parcel contracts?
There are several ways in which a 3rd party logistics partner can assist shippers in saving money on their parcel shipping, including identifying the best time to reassess existing agreements, implementing proven optimization strategies, optimizing mode mix, and providing benchmarks across a number of shippers instead of operating in a vacuum. Below are some points to consider regarding your company’s parcel contracts.
The standard parcel agreement term for FedEx and UPS small parcel contracts is 36 months. This leads many shippers to believe that they are “locked into” their agreement and are unable to make changes or negotiate with the carriers until the term of their agreement expires. In many ways, this can be a costly mistake for large volume parcel shippers.
Each January, both FedEx and UPS implement their annual General Rate Increase (GRI). Their analysis typically claims an “average” rate increase of 4% - 6%. However, many shippers may easily experience a price increase of 10% or more. One of the main challenges shippers face is the level of difficulty around accurately measuring how the GRI will affect them individually. No two carrier contracts are the same, and as the shipper, you can’t focus on what the carriers claim will be the “average” rate of increase across all customers. You want and need to know how the GRI will affect your shipping costs, and in turn, your bottom line.
As most shippers know, there are a plethora of factors that determine their true cost of moving their packages. For most large volume shippers, total transportation costs land in their top three line item expenses. When it comes to optimizing carrier contracts and stretching transportation dollars, most shippers don’t have the time, resources, or expertise necessary to achieve “best in class” pricing. If you have ever read through your parcel agreement from cover to cover, you know that there are typically at least 20 - 30 variables that can affect the pricing of an individual shipment. This is intentional, and it allows carriers to conceal increases by tweaking several variables that appear innocuous individually, but add up to a cost increase when assessed holistically.
When assessing a proposed new or revised parcel agreement, it is important to not only understand each of these variables, but to be able readily to scale those changes out against your historical shipping data to determine whether the changes proposed by the carrier rep will ultimately have a positive, negative, or neutral impact on your freight spend. Keep in mind: your carrier rep’s job is to pad the margins for their employer as much as possible.
How do you decide which mode to leverage for each of your shipments? What was once a very simple question has become much more complicated with the introduction of new service offerings by major carriers. My colleague Wes Hall wrote a deep-dive post on this topic: Thinking outside the box: LTL, Multiweight, Hundredweight, and Ground with Freight.
Many people pride themselves in their negotiation skills. If they are strong negotiators, they should be able to achieve as good or better results than anyone less savvy than themselves. However, when it comes to negotiating parcel agreements, another challenge shippers face is their lack of information and data. As a shipper, you can’t go to your competitor down the street and ask to see their carrier contracts. When negotiating carrier contracts, data and experience are king.
If I had a dollar for every shipper who has told me over the years, “We’re FedEx or UPS’s largest shipper in this area and we have the best rates around”, I would have a whole lot of dollars. Carriers do a great job convincing each customer that they’re receiving special treatment and special pricing. This brings us back to the main challenge I mentioned earlier; How do you know? How do you measure? How do you validate?
Working with a third party levels the playing field and arms you with historical data, a deep bench of industry expertise, and benchmarking from a broad scope of parcel agreements.