SHOULD YOU RENEGOTIATE YOUR CARRIER CONTRACT NOW?
Given the current landscape facing shippers, it has become increasingly important for shippers to recognize the new normal and a future with “perpetual peak” surcharges. This environment has presented significant challenges for CFOs and logistic managers trying to forecast shipping costs and budgets. It has become virtually impossible to know your company’s true shipping costs when the carriers apply arbitrary new charges and make them immediately effective.
There are several important actions shippers need to take in 2021 to combat these issues. Shippers should begin by conducting a thorough review of their current carrier agreements. If your carrier agreement was written and implemented several years ago, does it reflect the current surge of new charges the carriers are imposing in 2021? How do shippers really know if they have a best-in-class agreement?
As we have emphasized for many years, contract terms and conditions can be much more important than rate discounts in controlling your overall transportation costs. And, while most shippers have many concessions in their agreements that are favorable, do these have the same impact in 2021?
This is particularly true for “peak season” surcharges. While shippers may have contractual concessions for historical peak surcharge timelines, these concessions may have little or no impact on new surcharges or the rapid rise of current tariff increases to charges like additional handling, oversize, residential charges, or increased volumes.
Not only are the carriers applying “peak season” surcharges during the entire year, but they are also trying to apply volume constraints on many shippers. The carriers are now trying to tie additional charges to seasonal volume, but they are also trying to impose capacity limits on the number of packages they will service in the Q4.
Given these new circumstances, shippers should look to their agreements to see if they are protected from these new carrier practices. Many shippers are looking for contract language to extend surcharge incentives to any future new surcharges, but they are looking for ways to negotiate contract caps on surcharges as well as general rate increases (GRIs).
The second but equally important area may be contractual language to protect shippers from being penalized by growing and increasing their revenues and accompanying shipment volumes.
Do you know how much these charges are impacting your shipping expenditures? The first thing you need to do is conduct a thorough data analysis to see exactly where your shipping dollars are going and your overall average cost per shipment. Pull down this data by month and pay particularly close attention to all the new invoice line items. This is especially important for your fourth-quarter shipping as the carriers dramatically increase these costs during what was the “traditional peak season.”
Renegotiating your current agreement will not be an easy task. Typically, the carrier reps will tell you that you might jeopardize your current concessions and may not reduce your overall costs. They will also tell you that their companies are emphasizing margins over growth and do not really want to handle your business, particularly if you have shipments that DIM, require additional handling, are oversized or residential, or your volume is heavily seasonal.
It is ironic to think that the carriers had been “losing” money on your account while providing service for years. Most times, your shipping characteristics have not materially changed, but the carriers have benefited from your internal growth and success over the years.
One of the best ways to counter this argument is to show the carriers all of the YOY additional costs you have incurred to move the exact same shipments. And remember, there were no peak season surcharges before 2017.
In 2017, there was a six-week period where UPS applied a peak season surcharge of $0.27 for residential deliveries and $24 for large packages. Today, those fourth quarter peak surcharges are $1.15-$6.15 for residential and $60 for large packages.
One of the best ways to illustrate the financial increases have been the dramatic rise in accessorial costs. Let’s take additional handling as an example:
Other commonly applied surcharges are Delivery Area Surcharge (DAS) and Residential Delivery Add-On. For DAS, the increase has been around 14% over the last five years, and the increase for the residential fee has been a whopping 26%. Remember, these increases are in addition to the tariff GRI, which happens every January.
Once shippers do the data analysis to quantify how much more they are paying the carriers in 2021, it will be clear to both you and the carrier that shippers have taken a huge hit to their bottom line.
Your data analysis should also help you identify your greatest pain points and the areas where you have taken the greatest increases. This data is a solid basis to begin discussions with your carrier on how to improve your current agreement and to lower costs.
Another way to leverage your incumbent carrier is to consider bringing in a regional carrier for some of your volumes. Typically, regional carriers offer better rates and much lower accessorial fees. Additionally, they can provide you with additional capacity during your peak period where your volumes and revenues dramatically increase, i.e., Q4.
Our recommendation is that any current agreement should give shippers appropriate discounts for all accessorial costs and that these should be capped YOY. Incentives should also be able to be applied to any new or increased surcharges, and there should be language that protects you from any volume or capacity limitations during the Q4.
If your current agreement does not meet these standards and the new realities of 2021 pricing, it may be time to renegotiate or consider going out to bid with other carriers. Good luck!
Tim Sailor is the founder of Navigo Consulting Group which specializes in contract optimization, distribution analytics, and strategic sourcing. Since 1995, Navigo has reduced its clients shipping costs by 20-30%. Tim has been recognized as a Distinguished Logistics Professional by the American Society of Transportation and Logistics, Inc. and has contributed to the transportation industry for over 35 years. You can reach Tim at Tim@NavigoInc.com.
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