Whether you are in the early phases of discussions with FedEx, or you already have a working relationship, it is essential for you to take your contract negotiation with them seriously. For those of you utilizing the services of FedEx Freight or any other carrier (such as DHL or UPS), there is a good chance that more than a third of your operational budget is spent on LTL shipping.
Because of this, it is crucial you are prepared when it comes time to negotiate your freight contract. Freight contracts are complicated, filled with dense language and challenging to see what your actual costs will be. To save yourself from overspending, you must painstakingly peruse each document a carrier presents you. By doing your homework, you will enter the bargaining table on even footing and with leverage at your disposal. Below, we will examine several tips and pieces of advice so that you can save your company money on your FedEx shipping in the long run.
Key Shipping Factors
Regardless of what carrier you use, prep work must be done before you sit down with your FedEx sales representative. The first step is to understand how FedEx will look at your business. The following are some main cost drivers that FedEx Freight uses to price your account:
What do you ship?
There are several layers to this question. At the simplest, it’s the average weight, freight class and dimensions of a typical shipment. To be more specific, FedEx will want to know all of the freight classes you ship (more about freight classes below); what handling units you use (pallets, loose, gaylords, crates, etc.); the dimensions of your products; the weights of your products; the frequency of your shipments (any peak shipping periods or lulls); and any special handling requirements (fragile, oversize)
Where do you ship?
The basic data set includes the origin and destination zip codes for your shipments. It is also important to know if you ship frequently to grocery store warehouses or other places with limited access for deliveries. Another important metric is your percentage of shipments to residences or other locations that don’t have a loading dock (and therefore require a lift gate). It will be factored into the analysis of your account.
Who is FedEx Freight’s competition (either current carriers or other bidders)?
FedEx views only a small subset of LTL carriers as direct competitors. The rest are viewed as less of a threat based on the quality of the carrier, their service area and other factors. FedEx positions themselves as a premium service carrier and not necessarily the least expensive option.
How many locations do you ship from?
If you ship from multiple locations, FedEx typically analyzes them separately to determine their pricing strategy. Depending on your location, you might be in an area that has a surplus of freight (headhaul) or a deficit of freight (backhaul). Typically, shippers in a backhaul area (South Florida is one example) can get very aggressive pricing from carriers because collecting some revenue is better than having empty trucks going back north. Headhaul pricing can be less aggressive depending on the metrics of the freight.
When do you need your pickups and deliveries to occur?
Any unique operational needs must be communicated from the outset to reduce confusion. FedEx will review accounts periodically and come back to those whose margins are not meeting expectations with increases. Flexibility in this is a positive when it comes to FedEx’s view of the account.
FedEx Freight class obeys the standardized method to classify any product and help facilitate consistent pricing across all LTL carriers. It is governed by the National Motor Freight Traffic Association (NMFTA). Products are assigned a National Motor Freight Classification (NMFC) number which corresponds to a freight class.
Classes are determined by four characteristics: density (pounds per cubic foot), stowability (anything that makes it harder for an item to go on a truck), ease of handling (can it be loaded with mechanical equipment?) and liability (likelihood of theft/damage). The 18 classes range from 50 (most dense and best for carriers) to 500 (least dense and most expensive for shippers to transport).
One thing to be aware of is that the freight class used to rate your product is negotiable. Just because you have an actual class of 100 doesn’t mean you have to pay the class 100 rate. Since the rates are cheaper as your class gets lower, any adjustment to your rated class is savings right off the bat. These adjusted rated classes are called Freight All Kinds (FAKs). Typically, they are for a range of classes – FAK 60 (Classes 60-100) means that any shipments with actual class between 60 and 100 will be rated at Class 60. In rare occasions, shippers will offer a single class for all shipments.
If you negotiate an FAK, FedEx will add language that reduces their liability in the case of loss or damage. Basically, they will say the liability will be based off the rated class instead of the actual class. This can change the liability by a significant amount. If you experience frequent loss or damage, you would want to negotiate this language as part of your FAK.
Rating a shipment:
The base rate of a shipment is determined by 4 factors:
- Origin zip code
- Destination zip code
- Freight Class
- Shipment Weight
That base rate is reduced by the negotiated discount to get a net transportation cost. Every shipment then has a fuel surcharge assessed. The fuel surcharge is a percentage that is tied to the price of diesel fuel. As diesel goes up, the fuel surcharge goes up.
Similar to parcel, shipments can also be assessed accessorial charges based on a variety of factors.
Some of the most frequent accessorial charges are:
- Inside pickup/delivery ($12.55/100 lbs, $132 minimum charge, $1,326 maximum charge) – carrier will go inside the storefront for the shipment
- Lift gate ($8.74/100 lbs, $129 minimum charge, $426 maximum charge) – locations that don’t have a traditional loading dock require a truck with a lift gate. This adds costs and routing complexities to the carrier.
- Residential Pickup/Delivery ($136 per shipment) – for deliveries to homes. Lift gates are typically part of a residential delivery.
- Over Length ($85 per shipment with any handling unit with length of 8 feet to 12 feet)
- Extreme Length ($157 per shipment with any handling unit with length greater than 12 feet)
- Limited Access Pickup/Delivery ($136 per shipment) – examples of limited access include schools, churches, construction sites, mine sites, etc.
- Notification Prior to Delivery ($58 per shipment)
Just like freight classes, these accessorial charges are negotiable. Make sure to know which are meaningful for your shipments so that you are targeting items that have a material impact to your costs.
By answering these questions, you will have a solid idea of what your shipping needs are before you ever set foot in a room with a FedEx rep.
Potential Leverage Points to Consider
To find ways to save money in freight contract optimization and negotiations, you have to know your business and its goals inside and out. You have to know the whos, whys, whats, whens, and wheres of your business. This type of preparation will give you opportunities within your contract negotiations to work with FedEx by offering concessions or accommodations in exchange for better rates or lower surcharges.
Re-negotiating Your FedEx Freight Contract
If you already have a working freight contract with FedEx, you might wonder about when it is appropriate to re-negotiate a contract. The following are some guidelines to consider:
How often can I renegotiate?
Very rarely does a company go more than two years without renewing their FedEx agreement. Some take the next step and set guidelines where certain items will be re-addressed annually or biannually based on changes in growth, business, or GRIs.
Some carrier contract negotiations can take months, so it is wise to review your FedEx contract at least once a year so that you can address any inadequacies. Carriers often announce changes, some of which may seem minor, but can be significant. You should monitor such updates to see the impact they might have on your freight contract.
Is there a good time of the year to get it done?
Obviously, peak shipping times during November and December can pose a challenge since FedEx is at its busiest and reps are focused on their parcel retail customers.
In the past, FedEx announced rate increases for the following year in September. Customers should review the rate increases and see if they are adversely impacted. If so, that is a good reason and a good time to reengage FedEx.
Things to Consider When Re-negotiating
You should keep in mind the following expectations for future shipments before you meet for re-negotiations:
- Shipment Volume – Has it increased, decreased, remained static?
- Fuel Prices – Is fuel more or less expensive?
- Average Shipments – Increased or decreased?
- What was FedEx’s performance? – Were they on time with their collections and deliveries. Did your goods arrive at their location undamaged? What was their record of lost/damaged shipments?
- Customer Service – Were you happy with the customer service FedEx provided? Was there anything missing, anything that requires amending?
- Rate increase – Are there new surcharges or rates that will affect you much more than the announced increase?
Freight Contract Negotiating Areas to Avoid
All too often, shippers end up not fully optimized when it comes to their LTL contract negotiations.
Entering the meeting unprepared
Commonly shippers come to the negotiating table without detailed answers on their leverage points or comprehensive knowledge of their distribution. Like any meeting, you have to do your prep work. Otherwise, you are wasting time and money as well as setting up your company for future problems if the FedEx contract does not fully or ideally satisfy your shipping needs.
Without proper preparation, you will lose credibility and leave yourself at an immediate disadvantage. Reach out to contacts and experts within your network for benchmarks. If they have contracts with FedEx, you should try to find out what rate they are getting. Ask them what they would have done differently. This will help you enter your negotiations confident since you have comparison points.
Not reading the contract
Many shippers focus entirely on the contract negotiations and incentives and neglect the fine print, the terms, and conditions. Terms are a great place to look for cost savings that all too often go ignored. Further, incentives are often diminished or canceled out due to terms such as general rate increases, accessorial charges, minimum shipment charges, late payment fees and other hidden surprises.
Entering the meeting overly aggressive
Some view contract negotiations as if it were some sort of duel, but this mindset will likely lead to very little good. Proper negotiation requires a give and a take; it is two mutually interested parties gathering together. If you go in overly aggressive or are unwilling to be flexible, your FedEx rep will likely be the same. Remember, his job is to get his company the best rate possible for your goods, so you must work with him to establish an agreement that both of you are satisfied with.
Avoiding carrier meetings
Along the lines of that last thought, once a relationship has been forged, you have to work on it. That requires an open line of communication and reaching out to your rep besides that times you need something from them. Have periodic business reviews and keep your rep advised of any changes to your shipping patterns.
Optimizing your FedEx LTL pricing is not as simple as calling your rep and asking for a price reduction. You need to know your data and be aware of the structure of your LTL agreement. The time you spend preparing will be more than repaid by the savings you will earn in your negotiations.