When negotiating with a parcel carrier like United Parcel Service Inc. or FedEx Corp., it’s important to know how carriers think, says Kenneth Moyer, vice president of supply chain strategies at parcel auditing and shipping consulting firm LJM Consultants.
Moyer told attendees this week at the Internet Retailer Conference & Exhibition in Chicago that shipping rates depend on science and what he refers to as “the art” of carrier pricing.
The science, Moyer says, is a data-driven process that involves things like time studies, geography, package characteristics and distribution patterns. All of that is precisely measured and calculated. The art, he says, includes what competitive carriers are offering, how likely a customer is to change carriers, what is and is not perceived as a “good deal,” and other factors.
In each category, many issues are out of a retailer’s control. Those include proximity to a carrier’s central hub, the reputation of a carrier compared with its competitors, whether a carrier is seeking to improve market share or penetrate a new area, or even something as ethereal as how shareholders feel about a carrier’s management at a given time, Moyer says.
However, with preparation, an e-retailer can create a better negotiating position, Moyer says. It starts with understanding a carrier’s competitive position and what pushes costs up. Among the things to consider:
Creating a competitive environment: A retailer that could credibly use a different carrier is more likely to negotiate a discount than one whose operation is built around the needs of its incumbent carrier.
The overall marketplace: A carrier operating at capacity locally is less likely to offer discounts, for example, than a new entrant seeking to build market share.
Package density: Smaller, relatively heavier packages are cheaper to handle than larger, less-dense parcels. Altering box sizes or packing techniques to keep the size of the packages down and increase their density can reduce costs.
Late pickups: Late pickups might be important to some businesses, but it’s worth asking whether the benefits outweigh the added cost to the carrier, which are passed along to its customers.
Other cost drivers: These include requiring a signature for deliveries, shipping hazardous materials, security requirements on a company’s site, oversize packages, or a challenging physical layout that make pickups and deliveries harder to do.
Moyer says every e-retailer needs to go into a negotiation knowing what is most important to the business—now and in the future—and look for operational changes that might improve the costs incurred by a carrier.
Retailers also should look for concessions that the carrier can reasonably make in return, he says. Those can include better terms on contract items like residential-area surcharges, past-due payment fees and address corrections, which are high-margin items for carriers.
The important thing to realize, Moyer says, is that nothing in a carrier contract is fixed. Everything can be negotiated if the client has the leverage, he says. And the amount of leverage a retailer has depends largely on volume, package attributes, location and how well a retailer understands both the science and the art of how carriers establish their rates.