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By Thomas Andersen, Partner / Vice President of Supply Chain Service – LJM Group, Inc.
You’re likely just getting back into the swing of things after attending Parcel Forum 2015, trying to determine what great idea(s) to implement first… or perhaps you’re still evaluating the options. After working with thousands of clients for more than two decades, the following five (5) actionable initiatives stand out as being some of the most realistic to implement effectively with the highest return on investment.
– Utilizing Carriers & Services based on Cost & Service
– Negotiating with your Carrier(s)
– Implementing technology solutions
– Optimizing shipping materials
– Streamlining operating efficiencies
Utilizing Carriers & Services Based On Cost & Service:
We find that many, if not most, Shippers are married to their incumbent Carrier. Some don’t want to consider the other national Carrier, nor wade into treacherous waters by considering regional Carriers, other couriers, the USPS, or even different services, which may include UPS SurePost or FedEx SmartPost. Many UPS Shippers won’t even consider FedEx, and vice versa. Often, the concern stems from a negative situation from many years go or the perception that there will be a negative customer experience. The mentality is often that if it’s not broken, don’t fix it. That will hold up for so long, until enough rate increases and changes in Carrier policies create an environment where an organization can no longer be competitive. One has to adjust to the competitive landscape, which includes evaluating all shipping options, on an ongoing basis.
Some of the key regional Carriers include the following:
– Utilizing Carriers & Services based on Cost & Service
– Eastern Connection: services the Northeast and Mid-Atlantic
– GSO: services California and parts of NV, AZ, and NM
– Lasership: services parts of the East Coast
– LSO: services Texas and parts of Oklahoma
– OnTrac: services the West Coast and parts of AZ, NV, UT, CO, & ID
– Pitt Ohio: services parts of the Northeast and Midwest
– Spee-Dee Delivery: Services parts of the Midwest
– US Cargo: Services parts of the Midwest and East Coast
Although these Carriers cover nearly 90% of the U.S. population, it’s challenging for a Shipper to depend on one or more Regional Carriers for the majority of the volume. There is a volume play that needs to be considered and the DCs or origin points would need to be geographically in line with the Carriers.
When negotiated properly, with cost savings often being 25% to 40% versus the National Carriers, it’s worthwhile to examine if there is an opportunity to shift a portion of the volume in key markets.
In addition to Regional Carriers, more cost-effective services may be available. Many large Shippers continue to use UPS Ground and FedEx Home Delivery, rather than the respective Carriers’ SurePost and SmartPost solutions. There are various other similar solutions through the USPS or USPS partners that can generate substantial savings without impacting service levels significantly.
By single sourcing, you ultimately lose leverage with either of the 2 National Carriers, which is likely leading to overspending. You should therefore examine these options on an ongoing basis and ensure that Portfolio Tier and Earned Discount Tiers are being met.
Negotiate With Your Carrier(s)
Once you make the necessary improvements to packaging and operational efficiencies, and determine which Carriers may be a fit, the focus should turn towards negotiating with each of the Carriers. It is absolutely essential that you have specific goals based on your requirements.
Don’t assume that you have an agreement in place that protects your best interest. Parcel agreements never look the same, and most leave significant gaps, which are likely to lead to unexpected expenditures over the term of the agreement. Since the Carrier “leads” the Shipper to focus on the primary services and weights, many of the other components, areas, and services that account for substantial costs are ignored. Review your discounts on transportation charges and fees against your historical shipping patterns. Odds are that there are services that aren’t receiving the discounts that they qualify for, and some are likely to receive no discounts. In addition, it helps you identify areas where more appropriate services can be utilized. Pricing Tiers are established based on the Carrier receiving specific volume. If there is a slight decrease in volume, you may fall into a lower tier, which can result in extremely undesirable results. Make sure that you are meeting the appropriate revenue qualifiers. As this may be challenging to measure on your own, ask your Account Manager to provide you with your revenue qualifier on a consistent basis. If you identify a significant gap between the current revenue qualifier and discounts that are available at higher thresholds, ask your account manager to help minimize the gap or lower the qualifier at the higher tiers, so that you qualify for more aggressive pricing. Don’t feel that the terms of an agreement are set in stone. There may be X months or years remaining on a 3-year agreement with the Carrier. Some feel that they are required to wait until the end of the term to renegotiate. Rather than feeling locked into a 3-year term, recognize that most agreements include a 30-day out clause and no penalties when making changes. Some may include an early termination fee, but it’s rarely applied and is more of a deterrent than anything else. You should put the business out to bid on a regular basis (we suggest every two years for most Shippers) and have quarterly reviews with the Carriers, to ensure that your needs are being met.
Allow for enough time for the Carrier to make the necessary changes to your agreement. A full-blown RFP is likely to require several rounds and weeks (sometimes months) to negotiate, to achieve the best results. Allow sufficient time for the process to develop, as escalation of a pricing request is required to occur within the corporate pricing or finance group. This is a time-consuming process with all Carriers and requires patience. A thorough analysis requires substantial time and effort, on your part, to determine the savings. One must be able to apply the current versus proposed net transportation charges, based on the discounts, minimums, and fees. Building an accurate shipment profile, based on historical spend, is therefore critical when determining the net impact. Set aside ample time to review this thoroughly as you progress through the negotiation process. If comparing pricing proposals for two or more Carriers, be aware that base rates and zones differ for most services, as do select fees. Don’t be married to your Carrier. FedEx and UPS are typically both good options, yet most organizations are reluctant to make a switch. With services being similar, the cost savings may be substantial enough to justify the short-term potential headaches. Although a change in Carriers is typically unnecessary to achieve savings, be willing to negotiate with them, but be sure that you are comparing apples to apples, which can be a cumbersome and complex process.
We often hear how the UPS and FedEx make the rules, establish the terms, and limit your visibility. Although there is some truth to that, increased knowledge and visibility can help you level the playing field. The basis of any negotiation is to have a goal and an understanding of what you are setting out to accomplish.
Although it may be a challenge to have either of the 2 national Carriers offer pricing based on less volume, if you can provide a case around the shift to a regional Carrier, the USPS, or another solution, the Carriers may prove to be flexible… rather than losing the volume, they may even decide to offer pricing beyond pricing guidelines, in order to retain the business.
Developing relationships with the Carriers and driving towards ongoing discussions is critical as costs continue to increase and the Supply Chain continues to become more complex.
Implementing Technology Solutions:
There are a variety of technology solutions that are available to help optimize Carriers and services based on cost and time in transit. To open the door to multiple Carriers, it’s beneficial and sometimes necessary to implement multi-Carrier shipping software. It enables the Shipper to choose the low-cost Carrier based on acceptable transit times and service levels. In addition, having options protects one against any changes and interruptions in service. It can also help provide cost-effective inventory management if it’s properly integrated with an organization’s warehouse management system (another recommendation).
A relatively modest upfront investment and small ongoing fee can also help provide an ongoing environment for cost management by implementing systems that focus on effectively cubing, weighing, and dimensioning shipments. This helps ensure that proper costs are passed onto the recipient and more effective use of packaging is utilized.
Gaining access to ones shipping data is another critical step that every organization needs to take. In order to have complete visibility to transportation costs based on service levels, zones, weights, residential versus commercial status, urban versus rural, and any other factors, data must be compiled and analyzed consistently. Most Shippers are shocked by the amount of money that’s not only spent on transportation costs, but also random accessorial charges and unexpected charges such as late payments and shipments that may not be receiving any discounts.
For any of the services, one must determine what discounts are being applied to Undeliverable Packages, Third Party, Undeliverable Third Party, Freight Collect, and others. In reviewing the data, one will quickly identify areas that have not been addressed, and it may require little more than a phone call to your Carrier Account Manager, to have those areas addressed.
By having visibility to your data, you will be equipped to review your shipment volume, service utilization, zone distribution, actual vs. billable weights, dimensions, pickup requirements, etc. This will help you identify areas where more cost-effective shipping methods and packaging can be used.
Optimize Shipping Material:
Right-sizing packaging became a much higher priority at the beginning of this year. With both national Carriers applying dimensional weight to shipments that measure less than 3 cubic feet, companies can no longer expect to carry a handful of standard box sizes. Shippers should evaluate shipping boxes. This may include analyzing the impact of cut-down boxes vs. standard box sizes, opportunities to utilize Jiffy Mailers or other packs and packaging options. Options for dunnage should also be analyzed so that shipping “air” is minimized.
Finally, you should evaluate hardware to optimize density. Although there will often be an upfront investment, most of the cost can be absorbed in a relatively small amount of time.
Streamline Operating Efficiencies:
Optimizing the efficiency of one’s operation can include a variety of options. Not only does it require a comprehensive review of processes and procedures that influence outbound shipments, but also the inbound volume, as well as the returns process. Are products brought in and distributed most effectively? Is it beneficial to drop-ship certain products? Is a centralized warehouse, multiple DCs, or “Store-to-Door” the most effective methods to ship… or perhaps a combination? Is partnering with a 3PL in some cases the right fit? It may include increasing operating costs and carrying inventory, but lead to reduced shipping costs and improved time-in-transit.
As for your operation, you should examine the pick and pack process and evaluate all the processes that influence the customer experience. There are many more options that can be beneficial for cost reduction and to optimize your operations. Identify the low-hanging fruit and work your way through the larger initiatives.
Thomas Andersen is Partner / Vice President of Supply Chain Service for LJM Consultants (www.myLJM.com). Thomas has more than 15 years of logistics and transportation experience. His core expertise is negotiating contracts with UPS, FedEx, DHL, and the Regional Carriers. Thomas began his career in the transportation industry with DHL Express, where he served as a Senior Pricing Manager. He attended University of Florida and Florida Atlantic University, where he received his Bachelor of Science in International Business and an MBA. To speak with him, please call (631) 844-9500 or email tandersen@myLJM.com.