I hear it all the time: I have great rates from my parcel carrier. But what I find when I probe a little deeper is that most shippers have focused on only half of the equation. Getting great rates from your carrier is only half the battle. Most shippers pride themselves on having what they consider to be a World Class parcel contract. But what they actually have are World Class rates and a very poor or ineffective contractual agreement with their parcel carrier. Companies pull together large project teams to participate in the process of bidding their parcel business but will then leave it up to someone in Purchasing or Legal to finalize the contractual details. Both sides of the equation must be addressed to ensure your company is receiving top treatment from the parcel carriers.
So what makes a parcel contract World Class? World Class parcel rates are pretty easy to recognize. The best rates are simply that: better rates than other companies of similar size, volume and package characteristics. But defining World Class for contractual elements is a little more subjective. There are however, three main areas that need to be considered to make sure your next contact is working for you not against you.
Carriers Increase Ancillary Charges Too
The first area that is often overlooked in a parcel contract is ancillary charges. Most of the shippers I encounter believe they have negotiated great discounts on their ancillary charges in addition to great rates. But often times what the shipper actually has is little or no protection from the increase in the ancillary charge fees that are issued each year by the parcel carriers. A shipper may think they have negotiated a custom rate for a particular ancillary charge and expect that rate to be fixed for the entire contract. But in reality, what they actually received in their contract was not a custom rate, but discount expressed as a percentage off the list rate for that particular ancillary charge. When ancillary charges are expressed as a percent off list, the shipper will receive the full impact of any annual increase that the carriers announce each January. Ancillary charges can account for up to 35% of the annual budget of a large parcel shipper. Shippers who limit the impact of annual increases to ancillary charges are operating in World Class territory.
Constraints and Conditions
Contracts can be filed with constraints and conditions that work in favor of the parcel carrier and do little or nothing for the shipper at all. Many times a shipper will rush through the contractual process in an effort to get the newly negotiated rates in place and start realizing the savings as quickly as possible. At the encouragement of the carrier, the shipper uses or accepts the carriers boiler plate contract to speed up the process. While this process is understandable (getting a custom contract approved by the legal team at a parcel carrier is not a quick process) often times it is not worth it due to the fact that carriers typically load a contract with requirements that tip the scales in their favor. One significant constraint that can significantly impact a shipper is volume commitments. Parcel carriers frequently add volume commitments to a contract with the reassurance to the shipper that it is no big deal or it has to be done this way. While the carrier may be telling you that the volume commitments should be easy to achieve, the commitments are usually by service and are based on the shippers package volume at the time the contract is signed. Minor changes in a shippers business strategy can give the carrier the option on whether they want to continue to provide services. Volume commitments are often accompanied by cost per package commitments. Sometimes the dollar amounts are expressed in terms of the carriers list rates, making it very difficult for a shipper to determine if they are complying with the commitment or not. Most carriers will tell you that volume commitments are meant to prevent a shipper from moving part of their business to a competitor and the carrier getting stuck holding the bag, having to continue to honor the rates. But there are much better ways to structure a contract that will protect both the carrier and the shipper from unexpected shifts in shipping profile.
This is an area that always baffles me. Shippers continually sign up to short payment terms of 7 to 15 days. Conceptually, I dont have a problem with it. Terms are important for the parcel carriers and sometimes it can be a sticking point to get the deal done. But shippers need to make sure that all the payment terms in a contract are the same. Payment terms for rebates that are due to the shipper for volume incentives or service calculations should match the payment terms for carrier invoicing. Does it make sense that the shipper has to pay the carrier within 15 days, but when the carrier owes the shipper money, the carrier gets to take 45 days to pay? The carrier and shipper should meet on common ground and outline consistent payment terms that work for both parties.
Dissecting a parcel contract can be a complicated process. And as parcel carriers continue to expand their service offerings, contracts will only become more complex. Shippers must understand how the structure and content of a parcel contract are impacting their parcel network. Remember: getting great rates is only half the battle. The shipper who focuses as much effort on the contract process as they do negotiating rates, will separate themselves from the pack and emerge with a true World Class parcel contract.
Mike Williams is Vice President of Consulting Services at