UPS Freight Contract Negotiation: What You Need to Know

By June 8, 2018 Contract Negotiation, News
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For anyone looking to negotiate a freight contract with UPS for the first time or any who desire to re-negotiate their current UPS freight contract, it is wise to diligently prepare for that meeting or RFP (Request for Proposal) release.  Shipping and distribution can account for nearly half of a retailer’s operational budget, so it is no doubt a savvy move to initiate discussions on ways to save your company money and improve its bottom line. Below we will discuss things to keep in mind when approaching UPS for a discussion.

UPS Freight Trends

On top of UPS freight rate increases, shippers have had to deal with an increasing number of new accessorial charges over the past decade, such as home delivery, delivery area surcharges, fuel surcharges, lift gate service, handling, palletizing and substantial shipment surcharges. In many cases, accessorial charges now add an additional 30%-40% to a shipper’s total cost.

One blunder that many shippers make when approaching contract negotiations with UPS is to do so unpreparedly where they mainly wing it. As a result, carriers are more knowledgeable about a shipper’s distribution than the shippers themselves and to make matters worse, shippers often do not take the time to comprehend the structure and terms within the UPS contract. Often times, they will enter the meeting without benchmarks and comparisons of what other companies are being charged and provided. Having this type of information can help you check false or grandiose claims by UPS on the screaming deal they’re giving you.

Do Your Due Diligence

Prior to approaching the bargaining table with UPS, shippers must analyze all of their figures to have a better grasp of costs, accessorial charges, usage, routes, service usage, weight ranges, cost per shipment, and a variety of other factors. This way, shippers have focus points and priorities when it comes to concessions that will have the most substantial cost-saving impact on their bottom line.

Figure out which surcharges you can either find ways to avoid in future practice or can be another target for waivers or reductions. Whatever UPS says, keep in mind that all accessorial fees are negotiable. Reach out to other shippers who use UPS’ service and collect benchmarks from them. Having these numbers will give you leverage and encourage them to make concessions if they are giving others a better deal.

Ask Yourself The Following Questions

If you are planning to sit down with UPS face to face for the initial meeting, be sure to do your homework and prepare thoroughly for the negotiations ahead of time. There a variety of questions that you have to ask yourself regarding your company’s shipping goals and needs:

What type of freight are you shipping with UPS?

This is one of the most significant factors during the negotiation. Know your goods: Are they prone to damage? Likely to be stolen? Are they heavy or light? Difficult to handle or transport?  Will it need specialized equipment? Are they fungible? Could they do damage or contaminate other goods? Do they have to be refrigerated or kept at a specific temperature? All of these can play a major factor in pricing in the long run.

What type of UPS shipping service do you want?

Less than truckload – Less than truckload services allow you to only pay for the space in the truck’s cargo hold that your goods use. If you are regularly shipping less than ten pallets full of goods, or your freight ranges from 100 lbs to 4,000 lbs, LTL is likely the service you would be using. With LTL you make a tradeoff of speed for flexibility. Your goods can be shipped to multiple locations, routes, and lanes, at various times, with repeated shipments. It is more cost effective since you are getting every dollar out of the space you are renting. If you primarily ship LTL, try to get a FAK (freight of all kinds) rating where all goods are palletized together and sent using the same rate base. If you cover an array of freight classifications, this could save you a ton in the long run and also make invoice audits easier.

Full truckload – With full truckload you rent out the truck’s entire cargo bay. You have the option to fill it up entirely or not at all. If you generally ship more than ten pallets or have shipments weighing more than two tons, then FTL is your likely choice. Even if you do not fill up the cargo, FTL may be your route if you have something that is very valuable, fragile, or heavy. With FTL your shipment is at lower risk since the goods never leave the truck and the only delivery locations are those you dictate.

Where do you ship?

Distance matters, unused or low-density routes/lanes cost more. Sometimes carriers do not service specific areas and have to transfer your shipment to a third party, which costs you more. If a carrier does not operate in an area where you do the majority of your shipping, why on earth would you partner with them?

Do you regularly pay your bills and on time?

Provide them with at least a half-year’s copies of invoices and payments to show that you are a reliable paying customer which gives you leverage. Will it be pre-paid, or paid upon completion of shipment?

If you have a current carrier, what are you paying them?

Freight negotiation often involves a non-incumbent carrier reaching out to pursue the shipper’s business. Provide them with some guidelines as to what you’re currently paying as an enticement for the carrier to offer better service or a better deal.

Are you growing?

Does your company have new goals, acquisitions or product releases in the near future that you expect to boost your company’s total revenue? If that answer is yes, you should request better rates that correspond with the improvement in the overall shipment volume that will be produced by an increase in revenue. It is challenging to grow in such a way that you see marginal gains based on that growth.  If you hit those tiers, be sure that your carrier sufficiently compensates you via discounts.

Are you shrinking?

Continued growth is often times unsustainable. If shifts in the economy, within your company, or in the industry, lead to a decline in profits or capital, this could have severe consequences to your budget. If you miss target tiers, you can lose a host of discounts that further ding your bottom line. Be open and honest with your carrier and be sure to form a new settlement that reflects the uncertainty ahead.

Are you a seasonal shipper?

If you are a seasonal shipper and you come to an agreement with your carrier that is executed outside of the peak season, you might fail to achieve revenue thresholds required to hit discounts in your target tier. To avoid this, your carrier should include an appropriate “ramp up” period so that your company has the time to establish a weekly rolling average that will let you reach your goals.

Other Questions Include:

  • How frequently do you ship your product?
  • What is your shipping schedule? – Which days of the week do you usually ship? If you can be flexible and pick non-peak days, you can likely get a better rate.
  • What is the tonnage of your average shipment – Does it require the carrier to come to your dock and load it up, or can you handle that?
  • What is the freight classification of your shipment? – Are their hazardous or breakable goods? Do special actions have to be taken to ensure their safety?

Early Termination Fees with UPS

If your contract has early termination fees, do everything in your power to remove them. If a customer agrees to a deal and then terminates it before the deal expires, UPS can charge you 2.5% of the total charges billed to the customer by UPS during the fifty-two weeks previous to the customer’s notice of termination. Do everything in your power to avoid getting locked into contracts with constraining terms, early terminations, deferral penalties or any other constraints. Aim for increasing base discounts instead of creating incentives with rebates and revenue thresholds.

Consider Enlisting Help

Morgan Stanley’s Annual Best Practices Survey stated, “11% of the top 400 parcel shippers in the US have hired supply chain 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 from what the company had been able to negotiate on its own.”

Before you ever enter discussions with UPS, you should contemplate bringing in outside market experts to serve you in freight contract optimization, benchmarking, negotiations, and distribution analysis. Enlisting the services of consultants can help volume shippers negotiate better terms with carriers, especially since they have a wealth of experience and industry knowledge, including benchmarks, so they know whether or not UPS is giving you the best deal possible. Many consultants will give you a free accounting of your current rates and give you an idea of ways you can save.

Always remember that your business is very important to the carrier, even one as big as UPS. You have leverage, use it! Whether or not they will admit it upfront, often times, UPS has discounts, fees, rebates and incentives that are up for negotiation. Ideally, you want the flexibility to re-negotiate when the time comes and the companies who land the best freight contracts with UPS negotiate with a clear understanding of their shipping profile and with confidence about which areas or fees need amending. Be bold and brave, but also be respectful and flexible in your discussions. Remember, this should be a long-lasting, mutually beneficial relationship, treat it as such.

Shipware

Author Shipware Admin

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