March 13, 2015
thought leaders | The DC Velocity Q & A

"Parceling" out the future: interview with Rob Martinez

"Parceling" out the future: interview with Rob Martinez

The founder of parcel consultancy Shipware sees higher costs in shippers' futures—but also sensible approaches to mitigating them.

By Mark B. Solomon

Those looking for a "steady as she goes" transport climate should steer clear of parcel. E-commerce's explosive growth has translated into enormous traffic gains. There are all sorts of new ways to get packages into people's hands. Meanwhile, shippers in the business-to-business (B2B) segment continue to face escalating rates and ancillary charges as giants UPS Inc. and FedEx Corp., which dominate the B2B parcel shipping world, push for ever-higher revenue.

Parcel consultants like Rob Martinez, all of whom held executive positions with various carriers before hanging out their shingles, frame themselves as the shippers' wingmen. Martinez has logged 25 years in the business, the last 15 running his own shop. Like other consultants, Martinez said his firm can help shippers with a myriad of functions, including assisting—to some degree—in contract negotiations. In an interview with DC Velocity Executive Editor Mark B. Solomon, Martinez said the deck is stacked against B2B shippers and it will take creativity and extra effort (and a little outside help) to win at the table.

Q: Several years ago, UPS and FedEx said they would no longer work directly with parcel consultants. How have consultants worked around that edict, and have the carriers backed off from that hard line?

A: UPS and FedEx will work with third-party consultants for matters unrelated to pricing, provided the consultant, shipper, and carrier sign a three-way nondisclosure agreement. However, the restriction remains in place for rate negotiations and third party-led bids. We've heard that some firms have closed their doors, and others have pivoted to other services. Even if consultants aren't allowed to negotiate pricing directly with the carriers, the good ones can still offer tremendous value in areas like distribution analysis, dimensional pricing and accessorial impact studies, RFP (request for proposal) templates, negotiation strategies, DC site studies, modal/carrier optimization, automation recommendations, and invoice auditing.

Q: UPS has struggled to master its peak season operations in the wake of rapid growth in online shipping. It's been suggested the company choose between driving market share through aggressive pricing and focusing on improving its return on invested capital at the expense of market share. Given the current landscape, what would be your recommendation to the company?

A: In 2013, UPS and FedEx dealt with a deluge of packages tendered during Christmas week, severe weather conditions in several U.S. states, and an abbreviated peak shipping season. An estimated 2 million packages were delivered late. UPS delivered exceptional service last peak, but it came at a cost of $200 million over 2013. UPS is well down the road in planning for Christmas 2015. While it will continue to assume the burden of higher costs associated with holiday deliveries, it will also strive to recover costs from its customers. For example, high-volume e-commerce shippers will be assessed a "peak season" residential surcharge this year.

Q: As we speak, UPS and FedEx are a couple of months into their programs to impose dimensional weight pricing on packages measuring less than three cubic feet, which is a large chunk of their mix. Are parcel shippers changing their packaging strategies, or will they grin, bear it, and pay up?

A: At this time, many shippers have been slow to analyze cost increases attributed to dimensional pricing. Shippers will find that package optimization carries benefits such as reduced fuel consumption and vehicle emissions. Some will enjoy lower transportation costs. For many, however, there will be significant rate increases. We estimate, on average, a 17-percent rate increase on packages affected by the new policies.

Q: Much has been made of UPS and FedEx's dominance of the B2B parcel market. But B2C (business-to-consumer) shipping has become a larger share of the overall mix. In B2C, there is strong competition from the U.S. Postal Service (USPS) and possibly from the likes of Amazon.com, which may establish a dedicated shipping network. Given the different dynamics of B2C, are competitive concerns about the FedEx-UPS duopoly overstated?

A: First off, Amazon is decades away from being a significant competitor to the national private carriers. In fact, it may never reach that level. USPS is a formidable competitor in B2C. However, though USPS plays in B2B, that segment will continue to be ruled by FedEx and UPS because their networks and systems do the best job of serving that market. Unfortunately for shippers, FedEx and UPS are focused on revenue and yield management, which means finding more ways to extract money from their customers.

Q: Do you see regional parcel carriers moving the needle in a significant way? Is there a marketplace need—or is it viable from a business standpoint—for a national network knitted together by the various regionals?

A: The regionals are growing because they offer alternatives to FedEx and UPS. Regionals have simple contracts with more flexible terms and volume commitments, 10 to 40 percent rate savings over FedEx and UPS, more favorable dimensional divisors, and fewer surcharges. That said, regionals haven't moved the needle in a significant way. Shipware estimates they account for less than 4 percent of U.S. parcel volume. Our recent survey on shippers' use of regional carriers reveals that less than 30 percent of high-volume shippers use them. Most of those allocate less than 10 percent of their shipments to the regionals.

A "national regional network" is not going to happen anytime soon. There are too many problems to work out. Who owns package custody? How are systems to be unified for tracking, reporting, and invoicing? What if a carrier cannot handle heavy freight? Most importantly, how is revenue allocated so it makes sense to all parties?

Instead, what is evolving are strategic partnerships between a handful of regional carriers in the areas of business development, lead sharing, and shared operations. An example of the latter is a warehouse-sharing agreement in Pennsylvania between Pitt-Ohio and [regional parcel carrier] Eastern Connection.

Q: If you were speaking to a roomful of parcel shippers on ways to mitigate the price increases that are in place or are looming, what advice would you give?

A: Shippers must utilize multiple concurrent strategies. These include improving pricing through rate negotiations, optimizing package routes by mode/carrier, implementing least-cost/best-way automation, reducing packaging costs, minimizing returns, zone skipping, and exploring postal and regional options.

Shippers should work with carriers to reduce the carrier's operational costs. Carriers link their pricing to the costs of supporting a customer. Shippers should identify components of their business that are raising their cost profile and work with the carrier to reduce its investment in handling the business.

Another approach is to think regionally. It's no secret that many businesses are migrating from globally centralized distribution to multiregional DCs in an effort to put product closer to the customer and reduce transportation costs and transit times. Companies that do both effectively enjoy an enormous competitive advantage in the marketplace.

Also explore the many shipping alternatives out there. Many shippers sole source to FedEx or UPS for convenience or to maximize revenue-based incentives with the carriers. They may forget that cost reductions and service improvements can be achieved by adding more service providers to the carrier mix.

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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