May 1, 2009
enroute | Express Services

Calling out the cavalry

calling out the cavalry

Baffled by confusing parcel rates and accessorial charge creep? Parcel consultants are happy to help make sense of things.

By Mark B. Solomon

On Jan. 5, FedEx Express, the air unit of FedEx Corp., implemented a 6.9 percent "average" rate increase for its 2009 services, minus 2 percent for a reduction in applicable fuel surcharges. The same day, UPS Inc., FedEx's chief rival, imposed general rate increases of 4.9 percent and 5.9 percent, depending on the product.

For certain shipments, however, tariffs have risen by far more than these averages. As the carriers were gearing up, an analysis by Air Freight Management Services (AFMS), a parcel consultancy in Portland, Ore., discovered that rates for FedEx Express's next-afternoon delivery product on movements of at least 1,200 miles were actually poised to increase by 9.3 percent, and that prices for the product, known as "Standard Afternoon," were set to rise above the median threshold across all eight ZIP-code–based zones and weight classes. AFMS also found that rates for FedEx Express's nextmorning delivery product, "Priority Overnight," were slated to rise by nearly 7.8 percent from 2008 levels, also higher than the company's announced 2009 average rate increase.

And a closer look at UPS's rate plans revealed a new surcharge to hit more than 19,000 rural U.S. ZIP codes receiving residential deliveries. Residential addresses in those ZIP codes would essentially be classified as "superrural" areas and would be subject to a new "extended" Delivery Area Surcharge from UPS. As a result, those addresses would now face three separate surcharges: one for delivering to a residence, a second for being in areas already exposed to a rural delivery surcharge, and the third for the new geographic classification.

Consultants to the rescue
Unless shippers were willing or able to dig below the surface, those actions—and others just like them— may have gone unnoticed. That may explain why shipper executives in contract talks with one of the major parcel carriers sometimes feel they've walked into a gunfight without their gun.

On one side of the table are the carrier executives, hardnosed bargainers who understand the ins and outs of parcel pricing far better than most shippers ever will. On the other is the customer, who, unless it is a truly highvolume shipper, probably doesn't devote much time to parcel rate analysis. The fact that most of today's parcel contracts run three to five years makes it even harder for shippers to stay on top of their game and resist going into "set-it-and-forget-it" mode with their parcel business.

In addition, most shippers lack the resources to develop and maintain IT systems to monitor annual rate changes affecting air and ground delivery services in 50,000 U.S. lane segments across the eight ZIP-code–based "zones." Nor is it easy for them to stay ahead of the growing array of "accessorial" charges, fees carriers tack on to their base rates to compensate themselves for services separate from the basic pickups and deliveries within easytoreach ZIP codes. Today, there are an estimated 50 accessorial charges, compared to one or two in the mid 1980s. Accessorial charges can add as much as 25 percent to the total cost of a shipment if fuel surcharges at presentday oil prices are factored in, experts say.

Nearly 25 years ago, an industry emerged to help shippers level the playing field. Today, there are 48 companies providing some type of parcel consulting, according to estimates from AFMS, a pioneer in the field. Many are smalltimers who provide services on an ad hoc basis. The larger players offer a broader menu ranging from carrier negotiating and freight auditing and payment, to service analysis and bundling.

Some have branched out into other categories such as lessthantruckload analysis and negotiations, as FedEx and UPS expand their own service offerings. "The successful consultants will build expertise across all modes of transportation," says Douglas Kahl, vice president, strategic initiatives for Tranzact Technologies, a consultancy based in Elmhurst, Ill.

While consulting services vary depending on the consultant, the mission is the same: save money for the customer. The consensus is that a knowledgeable, experienced consultant with powerful IT tools should save a shipper at least 10 percent a year on its annual parcel spending by identifying areas of potential overspend as well as opportunities to strike a better deal for the traffic it tenders.

Sometimes, savings come from seemingly simple requests. Jerry Hempstead, founder and president of Hempstead Consulting, an Orlando, Fla.based parcel consultancy, said he knew of a case involving two shippers in the same industry where the company tendering smaller volumes actually got better rates because it negotiated fuel surcharges out of its contract and its rival did not.

Many parcel consultants still charge a flat rate for their services. However, the marketplace is migrating to a "gainsharing" fee formula, where the shipper pays only if the consultant negotiates cost savings. The two then divvy up the spoils. This form of "contingency" pricing has become popular because it essentially puts shippers in a nolose situation, experts contend.

Most consultancies are staffed with former highranking parcel carrier executives intimately familiar with the strategies and tactics of their former employers. These consultants, which see themselves as extensions of their customers' traffic departments, prefer to build long-lasting relationships with clients rather than perform transactional triage and depart from the scene. The prominent consultants are unlikely to accept customers that spend less than $250,000 a year for parcel services, and some set the bar as high as $500,000 to $1 million.

Be prepared
Consultants say it is vital for their customers to keep abreast of their contracts, especially those that were signed two years ago when times were better. Shippers that seek to renegotiate their contracts may risk the loss of their existing discounts, but they would not be subject to penalties or any legal action, according to consultants. Many shippers don't know they can ask for contract modifications in midstream to secure lower rates or avoid the loss of discounts should volumes fall below previously negotiated levels, consultants say.

"My advice is to not just sit in a contract. Be proactive," says Kahl of Tranzact.

In difficult economic times, carriers may be more flexible in renegotiating contracts to accommodate reduced volumes in order to keep the business they already have, consultants say. With shipping activity down and carriers still needing to fill their planes and trucks, FedEx, UPS, and the U.S. Postal Service will fight tooth and nail to win new accounts and keep existing ones. "The word has come down from on high: 'Don't come back and tell us you lost a bid or customer because of price,'" says Hempstead.

Even DHL Express's Jan. 30 exit from the U.S. market has done little to tilt the balance of power away from the buyer. "FedEx and UPS are very keen to compete as if DHL was still around," says Satish Jindel, president of SJ Consulting, a Pittsburghbased consultant.

Consultants say they and their customers are best served by putting themselves in the carriers' shoes both during negotiations and throughout the contract's life. By better understanding the carrier's mindset and objectives, they say, shippers not only gain bargaining leverage but also build goodwill that can pay off if future market conditions compel the shipper to renegotiate existing terms. "The reason a shipper may get special rates is not because [it is] a better negotiator. It's because [that shipper is] more aware of the characteristics of the carrier," says Jindel.

Rich Corrado, who joined AFMS in 2008 as chief operating officer following a long and highprofile career in the parcel field, says his firm analyzes a customer's shipping and spending activity in much the same way a carrier would. "The way we view the client data is similar to the way the carrier would view it," he says.

Corrado says although a consultant can add considerable value, its presence shouldn't be a signal to the customer that the consultant will do all the lifting. The most successful parcel customers are those that "understand their own shipping profiles. They understand their product distribution by zones, and they understand their mix of highvalue and lowvalue products."

Adds Jindel, "Those that get the best deals have as detailed an understanding of the characteristics of their shipping as their carrier does."

Consultants add that shippers can avoid accessorial charges by being more disciplined in their processes and paperwork. At a recent industry conference, Paul Herron, FedEx Express's vice president, postal transportation and customer engineering, said one out of four domestic air shipments required an address correction for delivery. Hempstead of Hempstead Consulting estimates that carriers levy a $10 fee for making an address correction and directing the courier to the proper location."Shippers can do a better job of verifying addresses, and it's something they can do without a consultant," he says.

For the many tasks parcel shippers are unwilling and unable to tackle, consultants stand at the ready. In a time when austerity and cost cutting are in vogue, consultants feel good about their competitive position. "There's no better business to be in than one that saves people money," says Corrado.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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