Having negotiated thousands of parcel agreements over the past 22 years – on both sides of the negotiating table – I have seen countless shippers make many negotiating mistakes resulting in overcharges into the hundreds of millions!
My objective in writing this article is to share several common mistakes so that YOU benefit in your next parcel contract negotiation.
One of the biggest mistakes I see repeatedly is a shipper coming to the negotiation table unprepared. Very often, carriers know more about a shipper’s distribution than the shipper. Not too surprising since the carriers “own” your shipping data.
However, there are many useful sources of information you can use to prepare for a negotiation. At a minimum, analyze invoice or manifesting data to better understand your transportation and accessorial costs, services used, weights, dimensions, zones, international destinations and other package Characteristics.
Unless you do your homework, you might as well not show up to the negotiating table. Apart from losing credibility in the negotiation, you give the other side an unfair advantage.
An important component of preparation is the effective use of benchmarks. Benchmarks provide data points from other companies for comparative purposes. For example, imagine going into a negotiation knowing that you were being charged 20% more than 3 out of 4 shippers with similar spend and package characteristics. How much better prepared would you be when your carrier rep says, “You’re getting the best deal in our district”?
No Formal Tool for Procurement
Many parcel contracts are negotiated outside any formal process, and often, leave money on the table as a result.
Formalizing requirements and pricing requests in a Request-for-Proposal (RFP) or other bid process can lead to significant savings.
By its very nature, RFP’s enhance leverage by creating a competitive bid environment in which both the incumbent and non-incumbent carriers see the same set of facts. The RFP process allows shippers to control the negotiation, request target pricing of both transportation incentives as well as accessorial concessions, and establish requirements including terms and conditions.
Over Reliance on Current Carrier
Shippers need to realize that their need to reduce costs and a rep’s desire to earn higher commissions are conflicting motivations. Carrier reps are compensated, evaluated and promoted in part on their ability to sell your business at the highest margins possible. If you’re solely relying on your rep to act as your “advocate” within the carrier pricing departments, you are likely overspending.
One of the worst negotiating mistakes a shipper can make is to exclude the non-incumbent carrier from contract discussions. The single best way to reduce costs is to leverage competition. With no threat of losing your business, what is a carrier’s motivation to lower costs?
In fact, businesses that routinely shift between and/or split their business with both carriers get the best pricing.
The carriers commonly classify pricing requests into one of three sets of customer types: 1) Retention, whereby the carrier gets the majority of the available business; 2) Penetration, carrier already gets business but there’s some opportunity to gain additional volume; and 3) Conversion, the carrier has no or little presence.
Guess which set of customers get offered the deepest discounts? Conversion: The shipper that gives a carrier the least business. If you primarily use only one carrier, and it’s been years since negotiating your agreement, there’s a good chance your loyalty is being unrewarded. Remember – if your goal is to reduce costs – your best friend during carrier negotiations is often the other carrier.
Ignoring the Fine Print
Many shippers spend too much time focusing contract negotiations on driving deeper incentives and ignore terms and conditions. Terms are equally as important as discounts in driving cost savings. Moreover, many incentives are mitigated due to terms like minimum shipment charges, general rate increases, accessorial charges, late payment fees and other such contract “gotchas”.
A single word within a carrier agreement can result in significant rate hikes. As an example, UPS recently created a new set of list rates called “Standard” rates. However, these new “standard” rates are anything but standard. The new tariff is as much as 35% higher for air services than their “Daily” rates!
Go It Alone
9 out of 10 shippers are overpaying for UPS and FedEx services by a minimum of 10%. If you feel you’ve gotten as far as you can with your carriers, perhaps it’s time to seek outside help.
Morgan Stanley/Parcel’s “Annual Best Practices Survey” reported that volume shippers obtain significantly better discounts through consultants, as much as 49% lower.
Most third party market experts are willing to conduct a no obligation, complimentary assessment of your current rates and terms to assess potential savings. Several firms will also benchmark and score each component of your pricing agreement.
Don’t Make Time for Carrier Meetings
The relationship you forge with your carrier isn’t made during contract negotiations, but rather throughout the year.
Carrier reps often lament that some of their customers do not make time for them to demonstrate additional value. Many shippers only contact the rep when there’s a billing issue or to address the occasional late or lost shipment.
However, shippers can derive tremendous value in scheduling routine meetings with your carrier reps. Carrier reps work with many other companies and can help you better manage your spend through best practices and leveraging value-added services and technologies, and integrating additional product offerings like LTL, mail, ocean, warehousing and other carrier services.
Review powerful management and service performance reports. Determine ways to reduce address correction and other often preventable fees. Review electronic invoicing options best suited for A/P needs. Challenge your carriers with ongoing rate improvement initiatives and zone skipping opportunities, and addend your pricing agreement as needed.
As a best practice, however, I encourage shippers to meet frequently with the carrier reps – both the incumbent (at least quarterly) as well as non-incumbent (at least annually).
In summary, there are many negotiating pitfalls to avoid when negotiating your carrier agreements. Take the time to develop a valuable relationship with your current carrier, but be sure to invite the non-incumbent carrier to participate in annual bids (and give them a real shot!).
To maximize savings, do your homework – including meaningful benchmarking – and direct carrier negotiations through a formal bid. And take the time to understand and negotiate terms in addition to discounts.
Finally, explore using market experts if you think you might need help with contract negotiations. At a minimum, take advantage of their complementary benchmarking and market assessment.