Updated: Jul 21, 2018
FedEx and UPS know far more about your shipping than you do. This is a problem when it’s time to negotiate your pricing contract with them but knowing a few pieces of information can level the playing field significantly
I’m sorry to be the bearer of bad news, but when it’s time to negotiate your parcel agreement(s), you are out gunned. This doesn’t make you a bad person or imply that you’re incapable, but really, how many times per year do you negotiate your small package agreement?
If you’re doing it more than once, you’re in the top 1%. It also likely means that you left something on the table last time (assuming you haven’t doubled in volume), and you’re repeating an exercise that should have been accomplished the first time. No, most companies only subject themselves to this torture once every couple of years. Contrast that with how many contracts your rep negotiates. The amount will depend on the number of clients being managed (a factor of account strata), but it’s safe to say that they’ve got you beat. This would be bad enough if your reps had real pricing authority (spoiler alert - they don’t), but now consider the number of contracts being negotiated by their pricing team annually. If you negotiated your agreement daily, you’d still come up short. Frequency is only one factor though; they also have the advantage of knowing your shipping characteristics better than you.
The Googles of Parcel
I’ve said this before - UPS and FedEx are the Googles of small package. Think about everything that you provide to them – from & to where you ship, your customers’ info, package size & weight, account information such as order number and shipment value. If you’re the receiver, they know who your vendors are. They know how much it costs to deliver each of those shipments and how much you’re paying to ship them. Many shippers go into the negotiation knowing only that last part, but aside from knowing the carriers’ cost to deliver, all that information is readily available. If you’re leveraging the abilities of a parcel auditing company, you should be able to obtain all of this information from their reporting portal (with a little bit data massaging). If not, you can download invoice detail from the carriers and manipulate the files manually. The latter is a bit more of a hassle (OK, a lot more), but worth the effort. Ideally you can pull a quarter’s worth of data, but 3 – 4 weeks of representative data can suffice. The ability to manipulate spreadsheets via sorting and pivot tables is extremely useful here.
Building Your Profile
Once you have the data in a spreadsheet, you’ll want to organize the information to understand your shipping profile. A couple of key analytics will paint a decent picture.
1) List your spend by service level (e.g. ground, overnight, 2 Day, etc) high to low by ‘net’. Include a column for ‘published’ and ‘incentive/discount’ as well. You can also include ‘quantity’ as a reference. Do the same for surcharges.
What does this tell you? At its most basic, you’ll quantify your spend and know which buckets are the largest and could have the most impactful room for improvement. You’ll also know where you shouldn’t waste your efforts by identifying the small ones. I’ve worked on several projects where a client was hell bent on addressing an infrequently used service (e.g. Declared Value) because it was a recent headache (“We paid HOW much to insure that $2,500 laptop??”). This distracts from focusing on areas where meaningful savings can be achieved.
2) Include a column (again by service level) for ‘average scale/actual weight’ and another for ‘average billed/rated weight’.
Why is this important? First, it will tell you if dimensional weight is a concern. A disparity between these two figures will indicate if this is the case. Second, a carrier’s cost-to-serve has little to do with the physical weight of the package, but there’s absolutely a connection between weight and the revenue they receive. The result? Heavier (billed / rated weight) packages not only equate to higher revenue, they equate to higher margins.
3) Include a column for ‘average zone’ by service.
Why? Similar to weight there isn’t a linear correlation between distance and cost-to-serve. Long zone shipments are much more profitable and your carrier's cost to move a shipment across town isn’t much different than across the country. If your average zone is greater than 5, you can bet there’s margin.
4) Finally add a column for ‘average/effective discount’. This is where the ‘incentive’ and ‘published’ amounts will come into play. Simply divide ‘incentive’ by ‘published’ to calculate your true discount.
Compare this to the discount specified on your contract(s). Is it lower? If so, it potentially means that you’re not receiving the expected discounts for that service or surcharge (or a portion aren’t being discounted). Missing discounts are a serious problem that need to be immediately addressed, but the more likely cause of a disparity between an effective and contract discount is the impact of a minimum charge for that service. This will mostly impact ground shipments but could affect others as well. Understanding this impact will allow you to gauge whether or not deeper discounts will be meaningfully beneficial without further adjustments beyond a percentage off.
With the relatively simple spreadsheet above, you’ll have a pretty good picture of how the carrier views you as well as a sense of where discount improvements will have a meaningful impact. Your rep will be armed with at least this much information. You should be similarly armed.
Know thyself and be prepared.