When negotiating a parcel carrier agreement there is an endless number of factors that can be potentially considered and negotiated. To start you will always need to review the discounts on your most commonly used service levels as well as a handful of commonly used accessorial and surcharges; this is and will always be an essential aspect when attaining a competitive agreement. However, many times the details are overlooked and one of the most important and least recognized in parcel pricing is minimum package charges.

I am always surprised by the number of shippers who do not understand the role the minimum package charge plays in parcel costs. Still more believe that the minimum package charge is nonnegotiable. Not so. Like any component of a parcel agreement, concessions are possible. Remember, everything is negotiable.

To better explain the importance let's consider a Commercial Ground package destined to zone 4, weighing 3 lbs. Let's say I have a 40% agreement discount on this package. Pretty good, right? But let's also say I have negotiated no adjustment on the standard zone 2, 1 lb. minimum package charge. In that case, the discount will be constrained by the fact that the net transportation charge cannot drop below the zone 2, 1 lb. list rate (currently $5.84). In this case the net realized effective incentive is only 24%. Not bad, but significantly less than the 40% listed on the agreement implies. Now, let's look at that same package with only a 30% discount, but with a 10% reduction on the minimum package charge. This allows more of the discount to apply, thereby reducing the net transportation cost to $5.40 and increasing the realized effective discount to 30%. 

In this example we can see that while discounts are certainly important, they often cannot be fully realized without a minimum package charge reduction. The example above shows how the pricing logic works. However, there is more to be considered because while we have reviewed the implications on one package, what really matters is how the discounts and minimums apply to a shipper’s entire parcel profile; how they are tuned to align with the specific shipping patterns of the individual shipper. To negotiate a truly optimal agreement, shippers must be able to apply discounts and minimums across their entire service level distribution, and then develop a strategy based on the “sweet spot” of both.

Joe Wilkinson is Director of Transportation at enVista, a leading supply chain consulting and IT services firm, delivering innovative solutions that improve profitability, enhance customer service and reduce waste from source to consumption. For more information, visit www.envistacorp.com, or contact Joe directly atjwilkinson@envistacorp.com or 724-315-0024.