For anyone operating in the rapidly expanding world of e-commerce, shipping and transportation play a vital role in the overall scheme of your business and can, to a large degree, determine success or failure.
You need your products shipped from the manufacturer to your warehouse or distribution center and you need to be able to deliver those products to your customers and expect them to arrive in a timely manner. This co-dependent relationship is significant, especially when you consider the fact that shipping accounts for up to 45% of a retailer’s operational budget.
Because of this, accepting the status quo relative to carrier mix simply because it’s easier than considering a change or because they have the lowest rate might end up hurting your bottom line in the long run.
If you own a business or are in position where you’re responsible for shipping and logistics, then it may behoove you to re-examine your current parcel pricing and carrier selection criteria to ensure that it is what’s best for your company
Parcel contract optimization and negotiation can be a tricky subject to efficiently handle. Doing your due diligence in order to better understand parcel carriers and the language they use in their pricing agreements will help you come to the negotiating table with more leverage and a more robust set of bargaining tools at your disposal.
Below, we will discuss at length how you can master the art of parcel contract negotiation in supply chain management.
Tips for Renegotiating A Parcel Contract
Perhaps you are satisfied with your parcel carrier, the service they provide to you and the agreed upon pricing terms. But, then again, maybe you’re not. Whether you are or not, it is crucial that you are fully aware of what was agreed to when you signed your current agreement.
Unless you have language in your parcel agreement or in a subsequent addendum to that agreement that locks you into an agreed upon set of contract terms for a period of time and prohibits you from terminating the agreement prematurely, you can re-negotiate with your carrier at any time. Remember, everything in that prior agreement is negotiable.
Delving Into The Parcel Contract
Assuming that you already have an existing parcel contract and desire to re-negotiate, the first step should be to go through every aspect of your agreement with a fine-toothed comb. If you do not understand the language, enlist the help of someone who does.
Get feedback or opinions from contacts in the industry with whom you feel comfortable to discuss such details. When delving into the contract, create a checklist so that you can see whether your carrier is complying with the terms of the agreement and is living up to their end of the bargain.
Do your best to understand carrier fees that are often hidden within the invoice. Referred to as Value Added Services, Optional-service fees or surcharges, these are simply additional accessorial charges that a carrier adds on top of the transportation fee which can be as high as 50% of the agreed upon base rate.
These additional charges include residential delivery charges, Delivery Area Surcharges, Additional Handling Charges, and weekly pick up fees as well as a long list of others. If you see that you are getting hit particularly hard with fees by your carrier, you can negotiate a parcel contract with the carrier to either provide discounting (or deeper discounting) on some fees or, in some cases, get them to drop the fee altogether.
Explore Alternative Carriers
Shippers should avoid becoming too reliant on their current carrier or carrier rep. Carrier reps want to earn larger commissions and you want to reduce your company’s shipping costs; these two goals do not generally align. Carrier reps receive compensation for selling to you at the highest possible margin. Depending on your rep to go to bat for you internally during contract renegotiation could be a mistake.
Another mistake many shippers make when negotiating is failing to bring alternative carriers to the table. The idea is similar to that of salary or wage negotiation. If there is no threat of you taking your skills elsewhere, where is the incentive for your boss to give you a raise? The same concept applies to negotiating shipping contracts. If there is no threat of you moving your volume to another carrier, what is your current carrier’s motivation to lower their costs? As a matter of fact, shippers that regularly utilize multiple carriers often achieve better pricing.
Carriers regularly classify pricing requests into one of three customer categories:
- Retention: The current carrier keeps the vast majority of the available business.
- Penetration: The carrier already has the majority of the business but has the chance to gain more volume.
- Conversion: A new customer where the carrier has little to no presence.
Conversion customers, those who are prepared to move their volume from one carrier to another, are given the largest discounts as means of enticing them to move their business. Often loyalty goes unrewarded or unnoticed, so it behooves you to unsettle your current carrier and make them work to retain your business.
If you do not wish to use one of the big two private parcel companies, FedEx or UPS, or if you wish to gain leverage when negotiating with either, it would be wise to at least consider alternative carriers.
The US Postal service is a viable option, primarily if you regularly ship lightweight, non-urgent parcels to residential addresses or if you’re paying dimensional weight pricing with your current carrier. USPS shipping and package services, in fact, saw 4% growth last year with parcel return and select parcel growth nearly hitting 20% YOY.
There are a host of regional carriers like OnTrac, Spee-Dee Delivery, Pitt-Ohio Ground, LaserShip, Dicom, Lone Star Overnight and others who offer excellent parcel delivery options, often at lower shipping rates and faster transit time than the national carriers.
Another option is a parcel consolidator such as DHL Ecommerce , Blue Package, or Newgistics. If the majority of your shipping is done within the geographic footprint of a regional carrier or if your package characteristics and product type fit the consolidator mold it may make sense to consider one of these options.
Even if you do end up selecting one of the national carriers, using benchmarks and rate quotes from smaller carriers can give you added leverage when pursuing UPS or FedEx for shipping contract renegotiations or DHL contract negotiations.
Lowering the cost profile of your business via, pickup consolidation, package tender material improvements, online self-tracking services, automated tender, package optimization and changes to pick-up schedules and delivery routes. By doing this, you can save yourself and the carrier money.
Stepping Into The Arena
Once you have exhaustively researched your company’s shipping goals, needs, and current costs, you are now prepared to enter into your carrier contract negotiation. That said, it would also be wise to consider your temperament and how aggressively you intend to approach the discussions.
Many view negotiating as a boxing match of sorts, a contest of wills where each side exchanges blows until one gives in. However, this is not a wise approach to parcel contract negotiations. Remember, this is not a fist fight. Rather, it should be a cordial exchange where two parties meet with the goal of crafting an agreement that can provide mutual benefit.
The way you approach negotiations can have far-reaching impacts on your future working relationship with your contract carrier. You must be able to deal with uncertainty, especially in such a volatile supply-demand industry where the scales in the balance of power between shipper and carrier are continually tipping one way and then another.
Knowing that this pendulum can and likely will swing each way, it is vital that you keep in mind that there is benefit here for both parties.
If you approach the bargaining table with a chip on your shoulder and make unreasonable demands, odds are that the discussion will not result in the desired outcome. While your primary goal should always be what’s in the best interest of your company’s bottom line, negotiation requires a give and take; it necessitates concessions being made by either side.
Remember, cost is not the only consideration during contract discussions There are other factors to consider such as the viability of your working relationship with your carrier rep and satisfactory pickup and delivery times.
While you should approach carrier contract negotiations with an open and flexible attitude, be wary when the carrier attempts to divert your attention from the matter at hand (the agreement) and toward their “value proposition.”.
A good carrier sales rep will want you to focus on the things that they can do for you from a service perspective that other carriers can’t. The goal is to show you how they add “value” beyond the rates.
The carriers absolutely provide a valuable service, one that your business cannot live without. It is absolutely critical to understand the level of customer service you can expect from a given carrier, how their technology may or may not integrate with yours and the degree of collaboration that they may offer relative to efficiency improvements.
But it is important to remember that these things are largely independent of pricing and that if you are willing to do your homework, maintain a firm negotiating position and understand carrier negotiating tactics, you can take steps to land a great parcel contract deal.
Similar to the advice above, after your meeting, it is wise to treat parcel contracts like you would any other purchase. Odds are, you did not walk onto a car lot, select one and buy it on the spot. Rather, you did your research online about what is the best type of car for you, you spoke with friends who had that car or brand and got their input. After doing that, you likely looked at blue book prices, at online vendors and then went around town to either used or new car lots.
The same should go for your parcel contracts. Reach out to any and every carrier who might be able to help you. Do not settle for a carrier just because you are busy, or it would check something off your long list.
Prepare an RFP (request for proposal) and share it with other carriers. Compare the prices and services being offered with those received by other businesses similar to yours. Reach out to associates in the business and ask them who they use and why they chose them. Again, being cautious and approaching this process in a calculated manner will aid you and your company.
Make Time For Carrier Meetings
The bond you create with your carrier does not form immediately. Like any relationship, it takes time and effort to nurture it so that it grows and develops. Make time to meet with your carrier rep and allow them the opportunity to demonstrate additional value.
All too often shippers only reach out to reps when there is an issue or when they need something. One-sided relationships such as this do not prosper in the long run, nor does it give your rep any incentive to help you cut freight costs.
There is plenty of value to be found in scheduling routine meetings where they can help you leverage technologies, value-added services, and best practices, to make your operation run even smoother and more efficiently.
We all want to get the best deal possible on any product or service on which we spend our hard-earned money. When it comes to parcel contract negotiation, the sentiment is the same. To prepare yourself for negotiations or re-negotiations, do your research.
Come into the negotiations knowing what you ship, when you ship it, and how much you ship. Understand, to the best of your availability, carrier contracts and pricing agreements as well as the impact of hidden fees and surcharges.
Research alternative carriers and be prepared to bring them to the negotiating table. Speak to colleagues and associates in your space prior to beginning carrier conversations and seek their input. Proper preparation can result in a big win for you and your company.