If you own a business, whether it’s online or brick and mortar, you likely are all too aware of how expensive shipping and transportation can be. Oftentimes, it accounts for more than a third of a retailer’s operational budget. The cost, as well as the countless hours spent researching and renegotiating, could explain why contracts sit at the crux of the transportation management process.
Many analysts agree that customers often sign carrier pricing agreements because they think they have negotiated a reasonable pricing program and/or due to carrier loyalty. In most cases, customers aren’t digging into the data and negotiating for price reductions that would benefit them the most.
Carrier contracts can be very dense and bewildering, as they are filled with unfamiliar language, details, and sub-clauses. Negotiations can be an intimidating process that will require countless hours and resources.
For a long time, the process of carrier rate negotiations, like UPS freight contract negotiation or DHL contract negotiations, were a one-sided affair where the customer all too often ended up on the losing side of the deal (without even knowing it!). Carrier contract management and contract negotiation in supply chain management can be a daunting process, but it is essential for any customer who wants to remain in control of their company’s shipping costs.
What would the carriers be without customers? You are valuable to them, and this puts you in a fantastic position to review your current contracts and renegotiate for savings. Keep in mind that it’s not going to be as simple as meeting with a carrier, them naming a price, and you agreeing. You actually have to negotiate a parcel contract if you want the best rates. Below we will discuss the importance of carrier contract management and negotiation and the steps in the contract process.
How Amazon and the E-Commerce Boom Changed the Game
Before we dive into carrier contract management and negotiation, it is essential to understand the relationship between e-commerce and shipping. In recent months, Amazon’s market value has surpassed Microsoft and now sits just behind Apple and Alphabet Inc. (Google) as the third most valuable company in the world.
What once was a humble online bookstore has seen massive, almost supernatural, growth with prices of Amazon stock surging 85% in the last year. Today its stock market value sits just shy of $800 billion. The giant of e-commerce completely changed the face of retail, and the e-commerce boom began.
As we continue through this rapidly developing e-commerce world, we are witnessing a developing trend. There has been a shift in the way business has always been done, with retailers and other businesses following the Amazon model of abandoning brick and mortar stores in favor of an online market. While brick and mortar will likely never fully fade, gone are the days of shopping malls and department stores. As more businesses shift their focus to the online market, the world of shipping and freight has adjusted with massive changes.
How This Affected Shipping
The growth of e-commerce has much to do with its symbiotic relationship with the freight industry; as one grows, so too does the other. As more and more people buy online, more and more goods need to be sent out.
Amazon, for example, sells approximately 600 items every second, and many of those items must be delivered to the customer within 48 hours. In today’s marketplace, cost-effective and prompt shipping is vital for the continued development of the online retail world.
Thanks to economic growth far surpassing analyst expectations, regulatory cuts, and a 14-point decrease in the corporate tax rate, the freight shipping world is expecting a record-breaking 2018.
Concordant growth is expected across the board for all types of freight, including less than truckload, full truckload, partial truckload, air, sea, rail, and intermodal. The growth of e-commerce has resulted in a shortening of supply chains, a focus on lighter, smaller packages, a tighter capacity, and faster delivery times.
At the same time, freight is becoming more and more expensive, which makes it all that more important for you to level up your negotiation skills to negotiate wisely with your carrier(s).
Examining the Contract
Whether you wish to shop around for the best contract or if you have a pre-existing contract and your intent is to re-negotiate, it is vital that you review every detail of your current and/or proposed contract.
When examining the document, be sure that contract compliance is followed by both you and the carrier. This includes sections on: Pricing, Service Guide, Payment Terms, Automation, Confidentiality, Term, Termination, Offer Expiration and Prior Agreements. Take note of all aspects of the agreement.
Are all services included? Are there surcharge reductions? Are you signing away your right to guaranteed service refunds? Bring any questions or concerns to the attention of your sales representative.
Know the fees
It’s likely that you’ve seen charges on an invoice that you are unfamiliar with and a total cost per shipment that’s larger than expected. This is just another reason why it is crucial that you know your shipper profile and how it relates to your carrier pricing.
Be aware of all the fees that might be charged and why they are being assessed. The following section provides information that you need to know if you are going to effectively negotiate your carrier contract with FedEx, UPS, DHL, or a regional carrier.
Value Added Service
Carriers assess surcharges (also referred to as value-added service fees) that you won’t find on your contract unless you are receiving concessions. You will need to consult the current rate guide for a full list of fees.
All too often retailers are unaware of these assessed fees and end up paying 20%-50% over their original base rate. Some common fees are:
Courier and Documentation Fee
This often gets added to the invoice even though it is not included as a line item in the transportation proposal.
This fee is charged when a customer’s shipment is packed onto a carrier owned pallet, so it’s best to avoid shipping non-palletized cargo and to use your own pallets in order to avoid incurring this fee.
Cargo Ready Date
A CRD is the agreed upon date between shipper and retailer or manufacturer when cargo will be ready for transport or delivery. If the cargo is not ready by that date and time, not only does it lead to delays, it also results in additional fees.
A late CRD can create a logistical traffic jam. If your proposal has an incorrect or modified CRD, you could wind up paying hundreds more than you planned to.
General Rate Increase
A GRI, referred to by some carriers as a GRR (General Rate Restoration) is an increase to the carrier’s list or base rates. Some freight companies do not tell customers about GRI’s until after booking, so make sure your shipping company is being transparent and surcharges are shown on the proposal.
Sitting Down at the Table
After analyzing your current contract for any issue, you must seize the opportunity to optimize your current pricing and create a negotiation strategy around that. A starting point may be setting up a call with your sales representative and proposing a follow-up face-to-face meeting.
In most cases, this will open the door to a renegotiation via an RFQ/RFP (Request for Quotation or Request for Proposal). This will include negotiation points such as rates, packaging options, delivery schedules, fees, contract terms, conditions, etc. The goal of an RFQ is to acquire a comprehensive pricing program that effectively reduces shipping costs.
A detailed RFQ includes the following:
- Submission Details – Includes deadlines, contact info, mailing address.
Intro and Executive Summary– The overview of the company and the requirements for services to be provided by the shipper.
- Business Overview and Background– Brief account of your business, its goals, the products you provide and your market sector of operation.
- Specifications– Detailed qualitative measurements and requirements, includes deliverables and timelines.
- Assumptions and Constraints– Any and all assumptions or constraints that vendors will need will be listed here.
- Terms and Conditions– Includes contract length, warranties, delivery penalties, service levels and options of renewal.
Review all aspects of the contract – not just the rates
There are more components to a contract negotiation process than just price. Remember that density and special circumstances will impact the price of your shipments, so keep this in mind when you are negotiating or optimizing carrier freight contracts for an affordable rate. Review all the information, including the terms and conditions, rates and surcharges. Be aware of the shipping lanes, minimum charges, and freight class.
You might find that the least expensive carrier is not always the one that you’ve chosen. Potentially, superior performance capabilities of one carrier may make it worth the extra overall cost. They may be more efficient communicators, more tech savvy, or have higher customer service performance ratings.
All of the points above should be considered when negotiating or renegotiating carrier contracts with DHL, UPS, FedEx or regional carriers. Understanding the agreement and how you will be charged per shipment is key to a successful negotiation and effective contract management. Thorough carrier contract management will ensure that you reduce costs and ship more expediently.