These are troubling times for everyone. While we’re all focused on staying healthy and managing through this crisis until it passes, businesses must simultaneously be focused on doing everything that they can do put themselves in a position to come out favorably on the other side.
Parcel shippers especially are in a unique position. Many shippers who specialize in consumer products will find volumes spiking and will be in the enviable position of trying to keep up with demand. Other parcel shippers, however, will be faced with declining demand and, therefore, declining parcel volumes. Shippers who fall into the latter category should immediately take steps to mitigate the impact that declining volumes could potentially have on their carrier pricing and discount structure.
Most shippers, whether they ship primarily with UPS or FedEx, know that there is likely a component of their carrier pricing that is determined by volume and spend. UPS “Portfolio Tier” discounts and FedEx “Earned Discounts” are based on spend. Rebates are based on spend. Certain surcharge and accessorial pricing can be based on spend or volume. In addition, many shippers have made commitments to the carriers in exchange for certain pricing that are spend or volume-based commitments. As shippers experience declining volumes due to the virus outbreak, they’ll be also experience rising parcel costs unless they take some important steps.
An important thing for shippers to remember as they prepare to have conversations with their carrier reps is the following: Volume or spend based pricing is not designed by the carriers to be penal in nature. It is designed to ensure that the carrier is the primary carrier and that the shipper is not diverting volumes to other carriers by choice. In fact, some carrier language related to minimum volume commitments include caveats that ease the burden on the shipper if volumes decline due to circumstances beyond the control of the shipper.
Let’s look at some areas that shippers should be focused on in the very short term.
Portfolio Tier and Earned Discounts
These are the discounts that shippers receive from the carriers based on a certain level of spend. As spend increases, so do the discounts and vice versa. With both carriers, these discounts are almost always based on gross, pre-discounted spend. UPS calculates the spend on a weekly average basis, using a rolling weekly average over a period of time. That period of time could be 13, 26, 52, 156 weeks or any other number of weeks agreed upon when the agreement was negotiated. FedEx calculates the number on an annual basis based on the number of weeks since the agreement was implemented or using the previous 52 weeks once 52 weeks have passed. Shorter time period calculations (13 weeks, for example) benefit shippers whose volumes are rapidly growing. For most shippers in today’s environment, the longer the time period used in the calculation, the better.
As shippers find themselves in a declining volume and spend scenario, they’ll likewise see an erosion of discounts. Every pricing agreement is different, and every shipper will see a different level of erosion. For some shippers, dropping one tier in their agreement could result in drastic loss of discounting. For others, it might require dropping several tiers before a significant impact is felt. Even for shippers in the latter category, the time to act is now.
This would be a great time for shippers to ask their carrier rep to extend the time period used in the spend calculation. But there’s a potential trap in doing so: When pricing agreements are recreated to allow for a change such as this, the carriers, by default, will often begin that spend calculation from the time the new agreement goes into effect. That could be counterproductive and even disastrous in today’s environment. Shippers should request that the carrier continue to use the rolling average number already established by recent history or they should ask for a lengthy Grace Period.
When a new pricing proposal is implemented by either carrier, the Portfolio Tier and Earned Discount calculation, in most cases, will include a Grace Period. The grace period is a period of time during which the discounts will be calculated using a pre-determined level of spend. The grace period could be as short as 4 weeks or as long as 26 weeks or longer. Shippers who are seeking concessions based on declining volumes should seek the longest grace period that the carrier will allow and should ensure that the grace period discounts are appropriate. (Grace period discounts should be equivalent to the discount that the shipper will settle into once volumes have stabilized.)
Shipper who have negotiated rebates with either carrier often have done so in lieu of deeper discounting. Rebates are almost always based on achieving a certain level of spend, either on a net or gross perspective, and can be calculated quarterly, bi-annually or annually. As volumes decline, rebates will be in jeopardy. Now might be the time for shippers to talk to their reps about moving the rebate percentage into the up-front or base discounts. (Important that the percentage does not get moved into the portfolio tier or earned discounts for reasons outlined above.) Another approach to protect a rebate might be to seek a longer calculation period. This quarter and next are in jeopardy. Seeking an annual rebate calculation could be a solution.
Minimum Commitment Language
As mentioned previously, some shippers have agreed to achieve a minimum of volume or spend with their carrier in exchange for certain pricing concessions. These provisions allow the carrier to charge a financial penalty if the commitments aren’t met. But they also usually come with a caveat that says that penalties will not be charged due to volume or spend declines beyond the control of the shipper. A global pandemic would certainly qualify. Expectations are that neither carrier would make this an issue but there’s no harm in shippers reviewing these provisions if they have them and getting out in front of a conversation with their carrier reps.
These are crazy, uncertain times. Shippers can make them less uncertain by taking steps in the very short term to stabilize their parcel pricing. A very careful review of pricing agreements with shipping consulting is an essential first step. Shippers should identify those aspects of their pricing that could be negatively impacted by declining volume and spend and should begin immediately scheduling discussions with carrier reps and employing some of the strategies outlined above.