Every year, when FedEx and UPS release their GRIs (general rate increase) announcing contractual shipping rate increases, it’s not always clear what numbers are changing. Rather than simply accepting the increases, no matter how big or small, it’s important to revisit your contracts to address any changes and gain clarity on the overall impacts these changes may have on your supply chain network.
If the pandemic has taught us anything, it’s that supply chain flexibility is paramount. In times of disruption, having a healthy, working relationship with the carriers can be a key component in maintaining a healthy, working business.
If you’re a small parcel shipper, this means it’s probably time to revisit your carrier agreements and see if they are still valid for your needs. If not (as is likely), you’ll want to renegotiate. Thorough preparation is crucial for success in any negotiation. So here are six steps to help you ensure you enter your parcel carrier agreement negotiation well prepared.
1. Understand your own shipping profile
Before kicking off a parcel contract negotiation, you need to understand your own shipping profile. Data trends like volume, service mode, zone, package weight/dimensions, commercial vs. residential, and accessorial exposure are good starting points.
Without a proper understanding of your shipping profile (including any seasonality), you will enter into a negotiation handcuffed and will limit your success in bringing substantial savings.
2. Understand your parcel carrier agreement(s)
Equally important in the preparation phase is getting familiar with your current carrier agreement(s). Hidden in the agreement could be pockets of leverage. Some examples are how long it has been since you last negotiated, expiration of surcharges/rate caps/dimensional divisors, tier band growth, etc.
To help focus your attention on useful areas, you can raise questions like:
- Is my agreement out of date?
- What has changed in my supply chain since I last negotiated (package characteristics, volume, modal, accessorial exposure)?
- Have I outgrown my target tier?
- Is Freight/LTL bundled with my Parcel tier thresholds?
Some parcel carrier agreements also have language that makes it harder for a shipper to negotiate. For instance, your agreement may have a component like Early Termination or Minimum Commitment penalties. Some agreements also have technology subsidies or implementation bonuses/rebates that would have to be reimbursed if terminated early.
3. Understand the overall shipping environment
To kick off a parcel contract negotiation, savvy shippers will be aware of the overall shipping environment and the current year’s GRIs. In the past, understanding the overall shipping environment has not been as critical. But in a post-COVID world where the carriers are pushing capacity, they will be pickier in the volume they want to keep or gain.
For example, the domestic carriers’ networks in 2021 were inflated with lightweight residential packages. A shipper that had more of an expedited, commercial, or heavier package profile found an easier path to negotiation.
In tandem with this, we understood from the 2021 GRI announcements that lightweight, e-commerce shippers will feel the largest increases. Shippers had new Additional Handling rules and aggressive increases for accessories like Declared Value and 3rd Party Surcharge.
Sample questions to raise at this point include:
- How will the current year’s landscape drive my parcel costs?
- Do I have exposure in the areas where the carriers are increasing the most?
- Do my packages often hit the service level minimums?
4. Identify the carrier’s pain points
Your carrier will have pain points related to servicing your business. A truly savvy shipper will identify these pain points and target areas that will bring relief. You can then use this information and understanding to set goals and build a narrative to focus your parcel contract negotiation strategy.
While many cost drivers will be uncovered in the shipping data, some pain points can be identified from operational behavior or customer feedback. Sample questions include:
- What percentage of my packages are subject to dimensional pricing?
- Am I paying my invoices on time?
- Do I have any operational issues like missed pickups or late/damaged packages?
- Are my packages being adjusted for incorrect manifesting habits (weight/dimensional or comm/resi adjustments)?
5. Leverage the competition
More shippers are exploring shipping alternatives, particularly now that FedEx and UPS are reaching capacity limits and have suspended their service guarantees.
The following questions can guide you in exploring ways to leverage the competition, either to get a better deal with the incumbent, or a better deal with one or more other carriers.
- Have you considered the competition?
- What does the non-incumbent carrier(s) offer that you don’t have currently?
- If you have a relevant shipping footprint, are you willing to entertain a regional carrier?
If you do engage with the non-incumbent carrier(s) for an RFP, the carrier will most likely ask for a package-level detail (PLD) sample. These PLD samples can typically be extracted from the carrier billing sites (electronic invoicing). A word of advice: Be sure to cleanse the data of pricing before sharing it with the non-incumbent(s).
6. Negotiate firmly and collaboratively
Contrary to popular belief, negotiation is not a war. As former FBI lead international kidnapping negotiator Chris Voss writes in Never Split the Difference, “Negotiation is the heart of collaboration. It is what makes conflict potentially meaningful and productive for all parties.”
Bearing that in mind, negotiate firmly, but without spoiling the partnership. Driving savings may be your end goal, but burning bridges with the carriers could come back to bite.
If 2020 taught us anything, it’s that supply chain flexibility is paramount. In times of disruption, having a healthy, working relationship with the carriers can be a key component in maintaining a healthy, working business.
Parcel carrier negotiations, like all negotiations, require preparation. Go into your discussion with an understanding of your shipping profile, your carrier agreements and pain points, and the shipping environment. Be sure to leverage the competition and negotiate firmly and collaboratively. With these tips, you’re guaranteed to gain clarity on any changes and shortcomings in your parcel carrier agreements.