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We’re often asked by shippers, “How often should I negotiate with my carrier?” or “I’m only in the 2nd year of a 3-year term with my carrier, so I need to hold off on negotiating my contract until it expires, right?” As with any situation, there is no one “right” answer, but the following are some rules that often apply and some indicators to consider.
How Often Should I Negotiate?
It’s rare for any shipper that manages its contracts effectively to go more than 2 years between renewing its contracts. Many larger shippers have SOPs that require a small parcel RFP, which typically includes UPS, FedEx, and even DHL, Regional Carriers, and others. Many take it a step further and have specific items addressed every 6 to 12 months based on changes in business, growth, or based on what the Carriers announce during the General Rate Increase “GRI”. Considering that most negotiations can take 1 to 3 months, it’s healthy to review your carrier contracts annually (at minimum) and proactively address any shortcomings when necessary. UPS has applied 13 separate rate increases since the beginning of 2015, while FedEx has applied 11, with most increases being identical or similar. You should be prepared to analyze the impact and make your case to have these increases mitigated.
Can You Negotiate Too Often?
There is a fine balance between negotiating too often and not often enough. 2 years between full RFPs shows the carriers that you are serious about managing your parcel costs, but with a degree of loyalty that they can expect to keep your business for a minimum of 2 years; longer if they continue to be receptive to making changes along the way. Companies that actively keep both carriers engaged typically have more competitive pricing than carriers that remain “married” to a single carrier. If your UPS or FedEx rep does not feel there is a competitive threat, 9 times out of 10, you will not have a highly competitive agreement. You become one of those companies who pay a premium for the carriers to take your staff to sporting events, golfing and nice lunches. Do you ever wonder how the carriers can afford to bring 3 to 4 suits to meet with you to talk about value-added services a handful of times per year?
Is There a Time During the Year That’s Best to Negotiate?
There is no rule of thumb, but you can typically expect negotiations to be a bit more challenging in November and December, due to holiday operational challenges. Historically, the Carriers announce the increase in September or October, with the increase to be applied around January 1st, (UPS seems to be moving the change up earlier and earlier each year), so being prepared to tackle any required adjustments related to the GRI at the end of Q3 or beginning of Q4 will typically provide enough time to have issues resolved prior to year-end. As for managing RFPs or more comprehensive negotiations, the other 10 months are often better suited, in order to get the full attention from both carriers.
But I Have a 3-Year Term with My Carrier!
So why not wait the full 3 years, since that’s the term most shippers historically have signed? FedEx and UPS don’t wait 3 years to make changes, so why would you? The carriers announce a yearly GRI typically suggesting a 4% to 5% increase; however, this increase varies quite substantially by shipper. Based on your individual shipment profile, you can expect your costs will increase 5% to 10% each year. This is because the increases do not apply equally by service, zone, and weight, and are designed to have a more substantial impact in the weights and zones that are most significant for most shippers. Few companies have the ability to increase their prices every year by 5% to 10%, yet UPS and FedEx make strong arguments for why this increase is necessary, while typically understating the fiscal impact. Even if your contract includes protection against the GRI, in the form of a rate cap, this typically only addresses a portion of the increase. The GRI is still applied by weight and zone, so you are likely taking a greater hit than you expect. In addition, the GRI cap does not address accessorial charges, which are typically up to 30% of your total spend and are discounted by a percentage or $ value off the gross charge. As the list rates increase, so do these rates, as well as your minimum charges.
In the end, remember, your spend is extremely important to the carriers! Each one has specific discounts, fees, rebates, and incentives that are negotiable beyond just the initial offer they put on the table. Those rates apply based on revenue and costs based on the current year. Costs certainly don’t increase 5% to 10% each year, so why should your rates. Taking the time to analyze your shipment profile and assess your needs versus your costs will allow you to negotiate discounts and fees beyond just their average, standard template contract, to one that fits your business and operations model. Most importantly, a current contract with any of the carriers does not mean you must continue to overpay, and having another year or two left on your current contract does not limit your ability to negotiate any component of your contract, as a 30 day out clause exists, for you the customer, as well as the carrier. Additionally, the unexpected and unstated increases that accompany the annual rate increases are a great reason for you to introduce your concerns about rising shipping costs when you have the conversation with your carrier.
Ultimately, the bottom line is that the flexibility to negotiate your small parcel typically exists, as long as you understand your business; recognize what flexibility exists with each of the carriers, and know how and when to ask for the right kind of discounts.