We’re often asked, “How often should I negotiate with my carrier”? Or “I’m only in the second year of a three-year term with my carrier, so I need to hold off on negotiating my contract until it expires, right?” The following are some rules that often apply and some indicators to consider.
HOW OFTEN SHOULD I RE-NEGOTIATE?
It is rare for any company that manages its parcel shipping effectively to go more than two years without renewing their carrier agreement(s). Many take it a step further and have specific items addressed every six to 12 months based on changes in their business, growth, or what the carriers announce during the General Rate Increase (GRI). Considering that most negotiations can take one to three months, it’s healthy to review your carrier contracts annually (at a minimum) and proactively address any shortcomings when necessary. When the carriers announce a significant change, such as the new dimensional weight rules for 2015, you should be prepared to analyze the impact and make your case to have the increase mitigated.
CAN YOU NEGOTIATE TOO OFTEN?
There is a fine balance between negotiating too often and not often enough. Two years between full RFPs shows the carriers that you are serious about managing your parcel costs, and it also shows a degree of loyalty where the carriers can expect to keep your business for a minimum of two 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 companies that remain “married” to a single carrier. If your UPS or FedEx representative doesn’t feel there is a competitive threat, you will likely not have a very competitive agreement.
IS THERE A TIME DURING THE YEAR THAT’S BEST?
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, with the increase to be applied around January 1, 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 WHAT IF I HAVE A 3-YEAR TERM WITH MY CARRIER?
So why not wait the full 3 years (156 weeks), since that’s the term that most shippers sign? FedEx and UPS don’t wait three years to make changes… why would you? The carriers have a yearly increase where they typically suggest a 4% to 5% rate hike. However, the impact varies quite significantly by shipper, based on shipment profiles and characteristics. Most shippers end up taking an increase ranging from 6% to 10% each year. This is because the increase does not apply equally by service, zone, and weight, and it’s 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 cap does not address accessorial charges, which are typically discounted by a percentage or dollar value off the gross charge. As the list rates increase, so do these rates, as well as minimum charges. Accessorial fees and surcharges can amount to 30% of your shipping costs. Just look at the impact of the new Dimensional Weight rules…
In the end, remember that your spend is extremely important to the carriers! Each carrier has specific discounts, fees, rebates, and incentives that are negotiable beyond just the initial offer they put on the table. Ultimately, the bottom line is the flexibility to re-negotiate your small parcel agreements exists prior to the end of the initial term. The companies who receive “best-in-class” carrier agreements are those that understand their shipping profile and know how and when to renegotiate their carrier agreements.
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.