Deals On Wheels
When Is The Right Time To Negotiate With Your Shipping Carrier?
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 You Renegotiate?
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 in 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 two carriers engaged typically have more competitive pricing than companies that remain “married” to a single carrier.
Is There A Time Of Year That’s Best For Negotiation?
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 your carriers.
What Should You Know About Multi-Year Agreements?
The big carriers have a yearly increase where they typically suggest a four to five-percent 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 six to 10 percent 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 five to 10 percent. Shippers 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 percent 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 that the flexibility to renegotiate 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 services for industry business services company LJM Consultants (www.myLJM.com). He has more than 15 years of logistics and transportation experience, and core expertise negotiating contracts with FedEx, UPS, DHL, and the regional carriers. To schedule a consultation, email Tamra Earlywine at tearlywine@myLJM.com or call 310-497-7677 or 631-844-9500, ext. 833.
Know Before You Say ‘Go’
Consider these helpful insider tips next time you negotiate your carrier agreements.
- Everything is negotiable, but don’t try to negotiate everything. Put your efforts into areas that have the greatest impact on your bottom line.
- You can renegotiate with carriers at any time. You do not have to wait for your agreement to end to renegotiate.
- Never sign an agreement or addendum that contains an early termination clause.
- Make sure you completely understand your shipping data, your shipping profile and your shipping characteristics. Your carriers know everything about your shipments. You need to as well.
- No matter what the carrier promises, never waive your right to file for a Money Back Service Guarantee/Guaranteed Service refund. It will never be in your favor and you will lose your ability to reclaim thousands of dollars in refund opportunities. Late deliveries lead to unhappy and lost clients.
- Don't put all your eggs in one basket. Split your business with the carriers 80/20 percent or even 90/10 percent. Let the carrier know you always have another option waiting for the opportunity to earn your business.
- Have a solid grasp of your key shipment variables, including but not limited to: pickup and delivery density, single piece versus multi-piece, commodity type, packaging, parcel conveyability, special handling requirements, perishability, hazardous materials, weights, services and zone distributions.
- Use the USPS, regional carriers and consolidators as leverage.
- Don’t let your carrier relationship get in the way of negotiating a fair and competitive agreement. Your carrier representative is compensated by how much they grow their profits from your business. A great relationship doesn’t mean higher prices.
- Use your LTL spend as leverage.
- Understand all of your accessorial charges: residential adjustments, dimensional weight, address corrections, etc., and how they affect your total spend.
- Look at your minimum net charges and how they affect your effective discounts.