Having met with thousands of parcel shippers over the past 25 years, I’ve compiled a list of recurring mistakes shippers continue to make. And it’s costing shippers big time – into the hundreds of millions annually!
The good news is that most of fixes are relatively easy, do not require significant capital outlay, are not overly time consuming, and can produce significant operational improvements and cost savings.
Sound good? Let’s go! Here are the Top Ten mistakes in order.
10. Over relying on a single carrier
Are you still using a single carrier for the majority of your shipping? Many shippers sole source for convenience or to maximize revenue based incentives with carriers like FedEx and UPS. However, you could realize service improvements and cost reduction by adding additional service providers to your carrier mix.
The United States Postal Service (USPS), postal consolidators (FedEx SmartPost, UPS SurePost, UPS Mail Innovations, DHL Global Mail, OSM Worldwide, Newgistics, etc.), as well as regional carriers (OnTrac, Eastern Connection, Spee Dee Delivery Service, LaserShip, Pitt Ohio, and Lonestar Overnight to name a few) offer multiple shipping solutions and benefits to compliment parcel giants UPS and FedEx.
A 2012 Shipware survey on shippers’ usage of regional carriers reveals that less than 30% of volume shippers are using regional parcel carriers. And the vast majority of those companies that do use regionals do so for less than 15% of their overall shipments.
The top 8 regional parcel carriers cover more than 85% of the U.S. population and specialize in short-haul delivery (typically up to 500 miles). Regional carriers maintain a low cost of operation through their regional focus, direct loading and transportation primarily via truck. With significantly lower operating costs than the “Big Two”, regional carriers are often 10% to 40% less expensive than UPS and FedEx.
Many regional carriers offer discounted pricing through simple contracts that often carry no volume commitments, include better pricing, improved dimensional divisors and far fewer surcharges than FedEx and UPS. Consider the fact that 3 of the top 6 regional carriers don’t tack on surcharges for residential Deliveries!
Since regionals concentrate operations in a well-defined geographic market, service to that market is often better than what the national carriers provide. As an example, if you have high volumes of packages going to the West Coast, you could truck those shipments to OnTrac’s hub in Reno, NV and achieve 1-2 delivery to major ZIP codes within eight states from the Canadian to Mexican borders.
Not only can these companies offer new products, service enhancement and potential cost savings, but also help you gain leverage with the Big Two.
Another mistake is to rely solely on the carrier rep to negotiate pricing agreements. If you’re solely relying on your rep to act as your “advocate” within the carrier pricing departments, you are likely overspending. Shippers need to realize that their need to reduce shipping 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.
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?
Remember – if your goal is to reduce costs – your best friend during carrier negotiations is often the other carrier. UPS and FedEx are fierce rivals. Use the other carrier as leverage.
9. Not making time for your carrier rep
Notwithstanding the lessons learned with Mistake #10 above, of course some shippers make the opposite mistake in not giving their carrier rep the time of day.
I’ve heard many carrier reps complain that some customers do not make time for account reviews which allows the rep demonstrate additional value, new services and cost savings opportunities. Many shippers only contact the rep when there’s a problem, to resolve a billing issue or address the occasional late or lost shipment.
However, shippers can derive tremendous value in scheduling routine meetings with carrier reps. Carrier reps work with many other companies and can help you better manage your spend through best practices, leveraging value-added services and technologies, and integrating additional product offerings like LTL, mail, ocean, warehousing and other carrier services.
Reps have access to powerful management and service performance reports. Routine evaluation of these reports can help reduce address correction and other often preventable fees, identify trends, routing compliance, modal optimization and other opportunities.
Moreover, carriers like FedEx and UPS base their pricing on a sophisticated “cost to serve” model that most shippers don’t understand. Want better pricing? Collaborate with your carrier rep, and ask for ideas to lower the cost profile of your business.
Areas for exploration include increasing the use of automated tender, pickup consolidation, hub bypass options, package tender and materials improvements to lower claims, minimizing high-cost call centers through online self-tracking, changes to pick up schedules and delivery routes, packaging optimization to improve truck and aircraft utilization, and dozens of other options.
As a best practice, I encourage shippers to meet frequently with the carrier reps – both the incumbent (at least quarterly) as well as non-incumbent (at least annually). Challenge your carriers with ongoing rate improvement initiatives and zone skipping opportunities, and addend your pricing agreement as needed.
8. Failure to route packages by least cost/best way
Since carriers provide free shipping systems, why then would anyone consider a third party shipping solution that costs money? While carrier provided automation might be adequate for some shippers, third party automation options should be evaluated periodically to ensure maximum productivity and Efficiency.
Here are several reasons to explore third party solutions:
Integration: Many carrier provided solutions are made up of a collection of PC’s and servers. As shipment volumes and supply chain complexities increase, companies that integrate mission-critical enterprise data and business processes into a centralized platform realize significant performance and efficiency benefits. Integrate carrier networks, brokerage, freight, TMS and 3PL services.
Savings: Reduce Transportation Charges as much as 10% through: Least cost routing across multiple carriers and service classes; Upfront address validation to avoid address correction fees; Validation of accessorial charges; Accurate capture of dimension and weight; Upfront capture of total costs for accurate charge backs, and more.
Leverage: The carriers provide free automation solutions not only so customers can efficiently use their services, but also as a means to lock them into exclusively using its services. The more integrated the carrier is in company operations, the stronger the lock becomes. The ability to ship with any carrier on a minutes’ notice offers significant leverage in negotiations, promotes multi-carrier solutions, and provides a backup plan.
Control: Maintain control of your shipping strategy across a global enterprise, and improve customer service with end-to-end visibility and shipment notification.
Ask yourself the question, what is my “free” system costing me? Then explore alternatives. Most shippers realize rapid return on investment when deploying third party solutions. Leading software providers include ABOL, ADSI, Agile Network, Cloud 9, CMS GlobalSoft, Descartes, Digital Shipper, Enroute Systems Corp, Harvey Software, Kewill, Logicor, Malvern, MEI Distribution, Oz Development, Pitney Bowes, Precision Software, ProShip, ProcessWeaver, RateLink, ShipJunction, ShipStation, ShipWorks, StarShip, and Varsity Logistics.
7. Failure to audit weekly parcel invoices
Each year, more than $3 billion in guaranteed service claims are not refunded because claims are never filed. Shippers that take the time to audit invoices can tap into this often overlooked source of cost savings.
In addition to late shipments entitled to money-back guarantees, shippers should audit for missing discounts, incorrect fuel surcharges, overcharges, shipments manifested but never shipped, and other erroneous charges common with parcel invoices.
Companies unable to audit internally might consider outsourcing to audit firms that specialize in parcel spend management. A qualified freight audit firm can produce weekly savings between 1% and 15% of the total weekly parcel invoice.
6. Lack of benchmarking
Have you been told by your carrier representative that you have the best pricing in the area? That you negotiated discounts and concessions that no one else gets?
Is the sales rep telling the truth, or is it just a negotiation line? Of course, not everyone can have the best rates. How can you be certain your rates are truly best-in-class? By benchmarking your program against other Shippers.
Imagine how your carrier contract negotiations would change if you knew you were getting the worst incentives in the area; or that three quarters of peer companies had negotiated a discount on a surcharge, the same surcharge the carrier rep told you is never discounted.
Through rate benchmarking, you gain an understanding what’s truly possible and how your rate programs compare with others. Most importantly, this information will increase the likelihood of negotiating significant improvements to your carrier agreements.
If you can’t benchmark internally, third-party consulting companies can conduct benchmark studies by industry and carrier, as well as by package volume.
5. Not using the right box size
Have you ever ordered a small item online and were surprised to see it delivered in a large, mostly empty box? Inefficient packaging leads to higher transportation and material costs, and contributes to the mitigation of carrier discounts due to oversize charges and dimensional weight adjustments.
Many shippers are overpaying for packaging and fill materials in several significant ways. I’ve described the carriers “cost to serve” pricing model. Simply put, inefficient packaging raises your cost profile. Moreover, shippers are wise to configure parcels with the smallest box dimensions possible in light of UPS and FedEx’s adoption of dimensional weight pricing for all Ground shipments in 2015 (see #1 below)
The Retail Industry Leaders Association (RILA) recommends an evaluation of current materials and packaging designs, analysis of alternatives, and education and engagement with product suppliers, transportation vendors, retail buyers, customers and other stakeholders.
4. Failure to mine & analyze shipment data
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. Moreover, shippers often don’t understand the impact of terms and structure of their carrier agreements.
Before sitting down at the negotiating table, shippers should analyze parcel invoice data to better understand service usage, expenditures, accessorial charges and other variables. The objective of this analysis is to develop a list of opportunities and priorities to be negotiated to generate the greatest cost savings impact.
Identify “accessorial” charges – like Delivery Area Surcharges, Fuel Surcharges, Weekly Service Fees, Large Package Surcharges, Additional Handling Service charges and the like – now account for as much as 30% of a shipper’s overall costs.
Quantify which surcharges have the greatest cost impact on your business and target those for waivers or reductions. In addition to pursuing lower accessorial charges, of course, try for better overall discounts and contract terms.
3. Mistakes in Contract Negotiations
Ignoring the fine print
Many shippers err in focusing contract negotiations on discounts at the expense of ignoring terms and conditions. Terms are equally as important as discounts in driving cost savings. Moreover, many incentives are mitigated due to 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 30% higher for air services than their “Daily” rates!
Many pricing agreements include language in which you waive your right to file service claims. And that’s not all! Today’s contracts include constraining and even punitive language designed by the carriers to minimize defection to alternative providers. These include diversion and minimum net charges penalties as well as early termination agreements, in which shippers agree to pay financial penalties to divert business to another provider, failing to achieve minimum revenue objectives, or terminating the carrier agreement prior to term expiration.
Remind the carriers that you are the customer, and that you will only sign a fair and equitable contract free of undue burdens and penalties. When pushed, we find both FedEx and UPS to be very reasonable.
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.
Going at contract negotiations alone
If you feel you’ve gotten as far as you can with your carriers, perhaps it’s time to seek outside help. According to Morgan Stanley’s Annual Best Practices Survey, 11% of the top 400 parcel shippers in the US have hired consultants to negotiate their FedEx, UPS, DHL and other transportation contracts.
Most notably, these shippers – commanding a collective $1B in annual parcel shipping expenditures – report that parcel consultants reduced shipping costs as much as 49% lower than the company had been able to negotiate on its own.
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.
Allowing carrier to dictate process
The fact is that most parcel agreements are negotiated with the carrier reps controlling the process, timing and eventual pricing programs offered.
Many shippers have expressed their frustration as they wait for carrier reps to get back to them with a pricing proposal, knowing that they are sacrificing potential savings every day they continue shipping under their current program.
Shippers are wise to establish clear deadlines and expectations upfront. Involve the carrier’s senior management when appropriate, and gain early buy in on the timetables and expectations of your negotiation and/or bid process.
Accepting revenue based incentives and rebates instead of deeper upfront discounts
Most FedEx and UPS agreements include revenue-based incentives. FedEx calls them “Earned Discounts” and UPS refers to them as “Portfolio Tier Incentives” – essentially the greater the threshold of spend, the higher the discount.
Revenue-based incentives are the carrier’s tool for retention. Many shippers have told me they’d like to but are unable to route packages by least-cost mode with multiple carriers for fear of losing discounts with their primary carrier.
Therefore, we advocate getting most or all discounts as base incentives. This allows shippers to realize maximum discounts on the front end without worrying about discount qualification, especially for seasonal shippers.
In addition, UPS often provides additional discounts as a “deferred tier threshold agreement” – or rebates – in which UPS will write your company a quarterly check as a percentage of your overall net transportation expenditures.
Again, shippers are better served getting these discounts upfront, rather than have UPS earn interest as they hold your money for months at a time.
2. Not using USPS
Through careful evaluation, shippers that add the US Postal Service (USPS) to their carrier mix can significantly drive down costs and improve service.
The USPS enjoys many unique advantages over the private carriers. They already go to every door, every day. Other carriers often need to make an additional stop, especially to residences. The USPS simply drops off parcels with the rest of the mail.
The Postal Service is the only carrier that can put items in mailboxes, PO Boxes, or residential mail slots. It’s the only choice to the 20 million APO, FPO, PO Boxes that the private carriers can’t deliver to.They offer free package pickup six days a week. With tens of thousands of Postal Service-managed retail offices in nearly every community in the U.S., the USPS offers the most package drop-off points in the Country.
The USPS has significantly fewer accessorial charges. They deliver to every address for the same price whereas its competitors impose extended area charges, residential delivery fees, fuel and many other Surcharges.
Moreover, it does not charge for Saturday delivery. Free Saturday delivery amounts to 52 additional delivery days a year. Plus, it’s the day residential customers are most likely to be home, eliminating the need for more than one delivery attempt, increasing customer satisfaction and reducing customer service Calls.
Other advantages include the fact that the USPS offers free packaging and package pickup, and is the only carrier that offers First Class pricing for parcels that weigh under a pound with delivery service standards within 1-3 business days. (Note, parcel consolidators like UPS Mail Innovations, UPS SurePost, FedEx SmartPost and others do offer ounce-based pricing with induction back to the USPS for final mile delivery).
Transit comparisons are quite favorable. Priority Mail is a 1-3 day product. Compare that with UPS and FedEx Ground, which are typically 1-5 day deliveries. The Postal Service has made significant improvements to Priority Mail.
They’ve improved Tracking with more frequent scanning events, including a real-time final delivery scan. And tracking is now free. The service now includes 1-3 Day Specific Delivery, comes with $50 ($100 for CPP) in insurance, and is offered at several pricing options: Retail, Commercial Base, Commercial Plus, and custom Negotiated Services Agreements or NSA’s.
There are also many flat, unlimited weight and Regional Rate options. These convenient products feature predetermined rates regardless of weight or destination and are available in multiple sizes and shapes.
Most importantly, many USPS products are competitively priced, especially when compared against fully landed costs – with accessorial charges included – with UPS and FedEx. A pricing analysis reveals that the USPS is particularly competitive for lightweight, residential packages especially to close-in zones. It’s a low cost choice for offshore shipments to AK/HI as well US Territories.
Many of Shipware’s customers are realizing savings of 10-70% through USPS modal optimization. Finally, there’s no complex contract with the USPS. Even custom rates, NSA’s, are less complicated than most FedEx and UPS revenue based contracts.
1. Ignoring the pending 2015 changes to FedEx and UPS Ground dimensional rating
Both FedEx and UPS have announced major pricing changes for Ground products in 2015. Each will apply dimensional weight pricing to all Ground shipments with no dimensional exception. Currently, dimensional weight only applies to packages measuring three cubic feet (5184 cubic inches) or greater.
Shippers, make no mistake about it – this is a huge rate increase. My good friend Jerry Hempstead calls it “the mother of all rate increases”. The majority of Ground packages are less than 3 cubic feet. Some shippers are estimating the change could almost double current charges.
Don’t make the mistake of thinking you are not adversely impacted by this change because you’ve negotiated non-standard dimensional divisor greater than 166. Many volume shippers have contract dimensional divisors (greater than the standard 166), but non-specific cubic thresholds. So unless your contract specifies the 3 cubic foot exception, this change will affect you!
Shippers first need to analyze the financial impact of these changes, and then meet with carrier representatives to amend contracts with a customized cubic inch threshold and/or dimensional factor. Note: Shipware has established a review and action plan for shippers concerned about this rate change. Interested shippers should email corporate@ShipwareLLC.com to get details.
In summary, parcel shippers continue to make mistakes and revert to bad habits. The good news is that it’s never too late to make changes! Hopefully, this Top Ten list provides guidance on low-hanging opportunities to improve your parcel distribution and pricing programs.
I anticipate some debate over other common mistakes that didn’t make this Top Ten list, as there are many. Of course, there are dozens of other strategies, services and technologies that can help you contain or reduce costs.
However, the strategies discussed should point you in the right direction and make you more competitive in your market. Good luck!