Optimizing Your UPS Agreement

by LJM Group

A lifetime ago, UPS seemed happy and willing to provide transparent and easy-to-understand agreements to their many customers, encompassing a single discount for Ground, Air, and Hundredweight services, along with fees that were relatively “easy” to predict.  Things sure have changed, to the point where very few parcel shippers truly understand their own agreements, much less their actual pricing and discounting practices, and measuring the true impact of a new UPS agreement or proposal can be challenging for even the most seasoned consultant.

This article will help you better understand how to read the discounts and savings that are offered in the UPS agreement and position you to ensure that all the applicable areas in your shipping profile are being addressed.

The UPS Agreement

General Structure

Whether it’s a small or mid-sized business, or a national or global account, more than 90% of UPS’s agreements are structured in a similar manner.  The document itself may range from 6 to 36 pages but, structurally, most agreements are crafted in the same vein.

Assuming that you have one of these “standard” agreements, the first page typically includes the term of the contract (the standard is three years with a 30-day out clause that either side may choose to execute), the date of expiration of the offer and general information that pertains to most UPS clients.

Addendum A: Accounts & Commodity Tiers

The next page of the agreement (or the next few few pages, depending on the number of accounts a client has) is typically titled Addendum A.  This includes the client’s shipper accounts and applicable Commodity Tiers (not to be confused with the Portfolio Tier).  Commodity Tiers, the number that’s stated next to the account number and address (if there is a number) reflects the Hundredweight Tier that would apply for that account (typically a specific location).

Discounts and adjustments to minimums being excluded, Tier 1 reflects the best pricing, while Tier 7 is the least aggressive (from UPS’s perspective).  In theory, the Commodity Tier is ‘commodity’ driven; lamp shades and light bulbs would theoretically fit the Tier 7 label, while denser shipments such as bricks would fit the Tier 1 criteria.

In reality, it’s not that black and white, as UPS may seek to apply higher tiers when they can, and may be willing to cede tiers if pushed.

Addendum B: Getting to “The Meat”

Following that, we get into the meat of the agreement (typically labeled Addendum B).  This takes us firmly “into the weeds,” so let’s approach it in sections.

Fee Adjustments

Although Fee Adjustments—discounts to standard accessorials such as residential or additional handling surcharges—can be addressed in any section of the agreement, most common domestic fee adjustments are typically included near the top of this section as well as at the end of Addendum B. (However, as UPS increasingly subjects their fees to volume commitments, you may start finding them in the middle of your portfolio tier discounts.)

With more than 100 fees that can be applied by the carrier, it’s unrealistic to delve here into each possibility. The important thing to note here is the term of the fee adjustment. It’s common practice for UPS to limit the terms of these discounts to 12 months. Keep an eye on your fees’ expiration dates and, if a discount is nearing its end date, proactively engage your account rep to address the expiration.

Guaranteed Discounts

The next section contains Guaranteed Discounts that are applied to Ground discounts, broken down by weight ranges and international services (Export and Import, sometimes broken out by zone or individual country). These are discounts that apply regardless of where the shipper falls in its volume commitments to UPS.  That’s not saying that UPS won’t exercise its 30-day out clause and revise the pricing if volume changes dramatically—especially in the case of a volume drop—but the Portfolio Tier incentives, to be described below, are in place to manage such scenarios.

Standard Dim Weight Factors

Any adjustments to the Standard Dim Weight Factors would also be included in this section, usually after the international guaranteed discounts.  The dim divisor (139 standard for all shipments) simply determines the dimensional weight, which is the size of the package in relation to its actual weight (rounded up to the next whole pound).  As one would expect, the billable weight will be the greater of the dimensional and actual weights.  For example, a 30-pound package measuring 24’’ x 20’’ x 16’’ would be billed at 56 pounds, based on the standard dim divisor of 139 being applied (7,680/139 = 55.3).

Other specialized concessions may be included in this section as well; these will typically be size-related fees such as Additional Handling or Large Surcharge, separate from discounts to the actual fee itself, such as an inch or weight allowance on the surcharge’s requirements, as well as any UPS shipment audit variances.

Portfolio Tier Incentive

In the next section we arrive at the Portfolio Tier Incentive.  Additional incentives for Ground and International, as well as discounts for all applicable Domestic Air services, form the bulk of this section.  Simply add the discounts presented here to the guaranteed discounts above for each applicable service. Buyer beware: if a specific service level or even billing type (Freight Collect, Third Party, etc.) is not explicitly stated here, don’t expect it to receive a discount discount.  The default structure here is a six-tiered structure, with the third tier traditionally representing the targeted discounts based on the volume UPS expects to be committed, but the individual agreements may vary.

What’s important is to understand where your current history would place you, and to know that any changes to your shipping volume—especially any downturns in business—may affect your pricing dramatically.  Ask your account manager about your historical volume or find your current and prior historical rolling averages on your UPS invoices.  The Gross Weekly Revenue can also be estimated by calculating your pre-discounted transportation charges from the past 52 weeks, excluding any fees, and then dividing the number by 52.  If your pricing has been implemented recently, you may find that the UPS average calculation has been ‘reset’, so use the number of applicable weeks since the reset to calculate your average.  Note that with fewer weeks included in your averages, the first months of a ‘reset’ in volume history could see more volatile swings week to week until you’ve accumulated enough weeks in the average history.

The way UPS sets up your tiers is specifically meant to penalize any shipper that doesn’t continue to commit close to 100% of its forecasted or historical volume, barely rewarding growth with the smallest increases in incentives in the higher tiers.

Adjustments to Minimum Charges

Adjustments to Minimum Charges, typically stated as a reduction off the Zone 2 (or applicable zone for international shipments) Letter or one-pound tariff rate, are provided toward the end of Addendum B.

Minimum charges, which often apply to most of all of your transportation services, can have a substantial impact, so always consider this when comparing a new proposal to your existing agreement.  Once applied, these minimum thresholds can result in significant offsets to negotiated discounts, especially if you send primarily lightweight shipments, or ship more regionally (zones 2-4) than nationally (zones 5-8)—either scenario resulting in lower savings that the discounts would suggest by themselves.

Calculating True Savings

While calculating shipping costs was relatively easy in the distant past, shippers must now decipher the many cost-driving factors—such as:

  • billable weight
  • dimensions
  • mileage (zone) between the origin and destination locations
  • service level
  • the many fees UPS now chooses to impose depending on the size, dimensions, or  whether or not a shipment falls into what the carriers now define as their ‘peak’ seasons.

The applicable service levels are no longer determined just by commercial vs residential shipments, but also by whether the shipment is a regular pickup, freight-collect regular pickup, third-party regular pickup, undeliverable, freight-collect undeliverable, or third-party undeliverable.

For air services, the AM option must also be considered, as well as the Hundredweight option that can be applied when multiple shipments combine to weigh more than 100 or 150 pounds (the latter of which also features its own pricing quirks such as minimum total weight and minimum average weights).

And again: if the service is not explicitly stated in your agreement, it’s highly likely that you’re paying the tariff rate for that shipment.

Also, note that discounts are applied only to applicable services, whether it’s a transportation or accessorial (fee) surcharge.  Don’t combine your base transportation charge with its associated fees prior to discounting them, but make sure to calculate each component separately (while accounting for minimum charges) before adding it all up.  (Note that the fuel surcharge, which applies not only to the transportation charge but also to select accessorials, needs to be factored in as well).

Making Sense of it All

Once you’ve signed your new agreement, make sure you dig in to your subsequent invoices to verify that your new discounts have been properly put into place, including all of your negotiated services (guaranteed/base and tier incentives), any reductions to minimum fees, surcharges, and any concessions on your dim divisor.  While the carriers are accurate for the most part, mistakes do happen; just make sure they don’t happen to you.

UPS is very good at its job, providing customers with an excellent product and service.  They are also very good at structuring their agreements and implementing pricing that returns their shareholders the greatest margin.  As a result, the documents you receive from your UPS reps are designed not for simplicity and readability on the shipper’s behalf, but to maximize UPS’s profits.

Know that, at the end of the day, it’s your job as the customer to understand what you are signing!

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