Carrier Mix Optimization – When and Why It’s Worth It (Even for SMBs!)

If you ship all your packages with one carrier, you are a single-sourcer.

Single-sourcing isn’t necessarily bad, especially as a new company. It’s easy to process packages and it minimizes pick-ups, simplifies accounts payable, and concentrates your buying power to get the best possible incentives. But as your company grows, the risks of single-sourcing begin to outweigh these benefits.

Relying on a single carrier can expose your business to carrier-specific issues like strikes, capacity constraints, equipment failure, weather, complacency, excessive rate increases, or the carrier making a unilateral decision to cancel your contract. Contracting with multiple carriers, known as dual-sourcing or multi-sourcing, reduces the impact of such disruptions, but also comes with its own risks.

The process of minimizing these risks and maximizing the potential benefits of multi-sourcing is called carrier mix optimization, or CMO. The factors to consider are universal but prioritizing them comes down to your company’s unique situation.

Is Carrier Diversification Right for Everyone?

While all shippers should weigh the costs and benefits, it is generally easier for larger shippers to diversify their carrier mix. There are three main reasons: pricing, software, and locations.

PRICING: Shipping rates eventually hit a floor, regardless of how much a company spends. The typical UPS or FedEx pricing agreement includes spending tiers that provide additional incentives as new plateaus are achieved – for example, spending between $5,001 and $10,000 per week yields 50% off, while $10,001-$20,000 per week gets 52% off. There is, however, a limit to the savings. It’s impossible to spend so much that shipping becomes free.

For SMB shippers, tiers are relatively narrow with incentives increasing substantially at each new plateau. The incentives start much lower than those of their larger competitors, so racing to the next savings tier may be literally a matter of survival. In this case, concentrating volume with a single carrier may make sense until a minimally acceptable incentive is achieved, despite the risks.

For larger shippers, wider tiers come with smaller incentive gains, making it relatively easy to justify adding another carrier.

SOFTWARE: Routing decisions, the criteria used to select the best carrier and service for each shipment, become more impactful as options increase. Cost, time-in-transit, pickup time, where you stand with your contractual carrier commitments, and other factors are balanced to select the optimal carrier and service for each shipment. Once programmed with the proper decision criteria, computers do this much faster and more effectively than a human. (NOTE: To ensure you get the desired results, audit your systems periodically to ensure the accuracy of dimensions and other package characteristics.) Larger companies typically choose a transportation management system (TMS). A good TMS can easily cost six or seven figures, but it ties together multiple legacy systems and often pays for itself after only a few months. Smaller companies with simpler transportation requirements and fewer locations may find all the benefits they need in an inexpensive online platform. These platforms may also offer discounted pricing programs with the major carriers, making it easy to begin multi-sourcing.

LOCATIONS: The rise of e-commerce has given every online seller a national customer base, but fulfillment is increasingly a regional game. Some carriers (e.g., Better Trucks, CDL, GLS, LSO, OnTrac, Sonic, Spee-dee Delivery, UDS, and more) have excellent service at very competitive prices but deliver to a limited number of states. While it is possible to access these networks from other parts of the country, having a pickup location within their delivery territory is still the easiest way to use them, giving the advantage to shippers with fulfillment sites in multiple states.

The Right Time to Diversify Carriers

The best time to diversify is before something goes wrong. But even without the benefit of hindsight, understanding the potential trade-offs of multi-sourcing should enable most shippers to make the right decision before it’s too late.

Here are some of the main benefits of multi-sourcing, along with common challenges companies face when implementing more than one carrier for the first time:

Selling through an online marketplace illustrates how CMO provides a better experience for both the merchant and the end consumer, ultimately driving higher sales and even better margins. Almost half of US e-commerce gross merchandise value (GMV) currently flows through Amazon. As performance requirements evolve over time, using multiple carriers enhances the merchant’s ability to manage KPIs like time-in-transit, first scan visibility, carrier rating, and consumer experience. Solid carrier performance and a good consumer experience rating are vital to controlling the buy box, which snowballs into better visibility and topline revenue growth. Similarly, eBay punishes the merchant when their carrier performs poorly. The consequences are severe: losing a top-seller rating increases fees by as much as 10%.

How Do I Get My Carrier to Play Along?

The CMO process takes deliberate planning and consensus building, both internally and externally. Of all the parties and steps involved in the process, your current carrier may be the biggest hurdle. If possible, find a win-win scenario, or at least one where they maintain steady business, but don’t let a vendor stand in your way if they refuse to bend. You may have more options than you realize.

The Avoidance Option: Perhaps the easiest way to avoid a standoff with your current carrier is to siphon off any growth in package volume to a new carrier. Just be sure your current carrier agreement does not include an early-termination/minimum-commitment clause requiring you to send a certain percentage of package volume with the incumbent carrier. (And if you have one of these, seek more reasonable and enforceable terms the next time you renegotiate.)

The Win-Win Option: Creating a win-win with your current carrier usually requires allowing them to choose which parts of your business they wish to retain. Both UPS and FedEx have been actively curating their networks for years through the rates they charge. They may appreciate the opportunity to cherry pick the packages they want, especially if you have some big legacy discounts on surcharges or a high dimensional weight divisor. For example, your carrier may regret having waived Residential Surcharge for you a few years ago, and this might be your opportunity to find a carrier that doesn’t care about that designation. Or maybe there’s something about their network that damages one of your SKUs at a rate higher than normal. Your national carrier might happily offload those packages onto a regional carrier that uses fewer sorts to deliver your shipments (fewer sorts means fewer buildings, often with fewer belts, fewer slides, and fewer turns). They win, your new carrier wins, your customer wins, and you win.

Diverting problematic packages from your current carrier should improve their margin on your account, so it’s reasonable to insist they deduct any associated spend from minimum commitments and rolling average requirements without lowering your incentives or otherwise penalizing you.

The Business Realities Option (aka, Avoiding a Lose-Lose): The choice isn’t always between the status quo and some worse option. Your current carrier rep may need some education before they can sell this internally, but if the status quo has become unsustainable, you may be faced with the need to alter your carrier mix or face insolvency. Nobody wins if you can’t pay your bills. In these situations, it’s important to lay out the facts and give them the opportunity to solve the problem. Consider any proposal they give you but remember that you are not obligated to accept an offer just because it’s slightly less devastating to your business.

Marketplace sellers provide an easy example. If your current carrier cannot meet new time-in-transit requirements unless you upgrade to a service that eliminates your margin, you cannot afford to ship with that carrier. If you are not price competitive, you lose the sale, but if you try to subsidize the carrier’s rate to make the sale, you go out of business. There isn’t an option for them to keep charging the same rate and keep winning the business.

How Do I Find the Right Carriers to Add?

The dramatic growth in parcel shipping needs during the pandemic, coupled with the aggressively large rate increases imposed by the legacy carriers, funded the introduction of new carriers and the expansion and improvement of other pre-existing carriers. Depending on their needs, shippers today have dozens of options outside of UPS and FedEx. Each carrier has a slightly different profile of strengths and weaknesses relative to your needs. It takes time to meet them, get a quote, and analyze the true opportunity, but the payoffs can be huge. If you’d like to shorten your timeline and be confident that you’ve found a good fit, some consultants have established relationships with many of them already and can introduce you to the ones most likely to fit your needs.

By Josh Taylor & Zareh Ambarsoom

Josh Taylor is the Senior Director of Professional Services at Shipware, LLCHe previously spent 17 years at UPS in Revenue Management Strategy, Pricing, and Sales. He uses his broad industry knowledge and specific expertise in parcel pricing and services to help clients optimize their supply chain. He is a frequent speaker at industry conferences and webinars, and his opinions and articles are regularly published in industry-specific and mainstream outlets.

Zareh “Z” Ambarsoom is the National Director of Sales at Shipware. A 12-year veteran of UPS who led a team of sales professionals overseeing a book of business of $300M+/year. During his tenure, he helped in the successful negotiation, re-negotiation, and SOP development of $1.8B+ of shipper spend. Z has an intimate knowledge of logistics, carriers, e-commerce, and their respective inner workings, which he now leverages to help shippers and businesses level the playing field.

This article originally appeared in the September/October, 2023 issue of PARCEL.