It's a scene repeated countless times each day in offices and shipping rooms across America. There's a tap at the door and in walks a UPS or FedEx delivery person. As he (or she) drops off the package, the driver either runs a scanner over the label or requests a signature on that handheld device he or she carries before heading out the door.Whichever the case, it's clear that package delivery these days isn't just a matter of moving a parcel between two points; it's about creating a full electronic record of a parcel's whereabouts every step of the way.
The benefits of collecting all this information are undeniable. Access to tracking and tracing data can prove invaluable to a manager frantically awaiting an urgent shipment. And the signatures collected as proof of delivery have settled many a dispute. But there's unquestionably a downside as well. Shippers may not realize it, but the information being captured in those innocuous-looking devices is also affecting the prices they pay for small-package service.
With several years' worth of detailed data on their expenses, carriers from Airborne to FedEx now know exactly what it costs to deliver each package. They know who's likely to give them shipments that are relatively cheap to handle on a per-package basis, like half a truckload of parcels delivered to a single city block near one of the carrier's major hubs. They also know which shippers are more expensive to serve, the ones that routinely send parcels to impossibly remote locations or request a lot of extras. They know what it costs to collect a signature. They know what it costs to provide a photocopy of the airbill. And they know what it costs to make a detour for an unscheduled pickup.
Armed with specific cost-toserve information, carriers are no longer shy about recouping those costs, generally in the form of service charges or accessorial fees. Just a few years ago, no tariff contained more than a handful of accessorial charges.
Today there are fees for everything—around 80 at last count. Need a shipment picked up on a Saturday? That will be $2.50 (on top of the regular charges). Want to change the terms of a COD collection? That will be $7. Need a written proof of delivery? That will be $5.How about a residential delivery? Figure on paying an extra $1 to $1.75. Want a verbal confirmation of delivery? $2. Address correction? $5 for ground and $10 for air shipments. Whatever the service, it's no longer safe to assume it's included in the price of the delivery.
No more package deals?
It's easy to understand why carriers like those fees. First, collecting surcharges allows them to recoup the added costs they incur for hard-to-deliver shipments. And more to the point, in a competitive marketplace, collecting fees and surcharges allows carriers to raise revenues without announcing huge rate increases. But there's more to the small-package pricing shift than a few fees. Though many shippers aren't aware of it, carriers are also using their enhanced costto- serve data when drawing up contracts with customers.
In the past, small-package rate setting was a pretty straightforward matter. Pricing was based on a fairly simple formula that factored in zones, volume, weight and seasonality. Discounting was a straightforward process as well. When a carrier offered a shipper a discount, it was for all the shipments in that service field from zone 2 - one pound to zone 8 - 199 pounds.
Not any more. Look at a contract today and you'll likely be in for a shock. Carriers have taken all the data collected by their drivers over the years, wrestled it through their computer systems, and developed sophisticated cost-toserve models that bear little resemblance to pricing schemes used in the past. Gone are simple rates based on zones and volumes. Instead, carriers are using complex algorithms based on at least 10 often obscure factors, such as rolling averages, cell-by-cell pricing and revenue tiers.
Granted, it's complex, but it's not necessarily cause for dismay. Nor is it a sign that you should enroll in law school or dust off your old calculus textbooks.What you do need to understand is what the carriers consider profitable and unprofitable in terms of package characteristics and where your freight fits in. In the end, that's what will determine the rates and discounts carriers are willing to offer you.
You also need to be able to decipher the new terms that are cropping up in contracts with increasing frequency. Here's a little quiz: Can you identify the following 10 terms?
- Net minimums
- Matrix pricing
- Cell-by-cell pricing
- Revenue tier
- Rolling averages
- Product group (portfolio) pricing
- Ramp-up period
- Delivery codes
- Accessorial charges
- Delivery density
These are important to know. Though not every term will appear in every contract, it's a good bet you'll encounter some or even most of them the next time you read through a contract. Here's a brief explanation:
- Net minimums – Minimum rates set by the carrier, typically a set figure or the gross cost of a one-pound, zone 2 package, which ensures the carrier a minimum revenue for delivering that package.
- Matrix pricing – Pricing based on discounts that may change by weight or zone for each service. There may also be a bonus offered as an incentive for meeting a certain revenue threshold.
- Cell-by-cell pricing – A pricing formula under which specific rates apply to specific weight and zone combinations.
- Revenue tier Carriers will assign you to a specific revenue tier or band, depending on the weekly average revenue you provide them. These tiers are then used to determine discounts.
- Rolling average – Carriers use rolling averages to determine the average weekly revenue levels you provide them. Rolling averages are recalculated each week—the oldest week's worth of data are dropped and the most recent week's are added on—so that they reflect the most recent 13- week period.
- Product group (portfolio) pricing – In an effort to capture all of your business— air, ground, home deliveries, and so on— a carrier may offer a "product pricing" package with discounts that max out only if you give it all of your business.
- Ramp-up period – The grace period for target discounts before the contract goes into effect.
- Delivery codes – Carriers use these to classify delivery destinations as rural, super rural or urban. Extra charges will apply for deliveries to rural and super rural areas.
- Accessorial charges – Ancillary charges being applied to the cost of a shipment for various reasons, such as oversize and dimensional weights, address changes or residential deliveries.
- Delivery density – The number of pieces being delivered at one time to one place. Obviously, the higher the delivery density, the lower the carrier's per-package costs.
Knowledge is power
If you didn't know half of these terms and you ship packages under contract with a carrier like UPS or FedEx, you need to reeducate yourself. Ignorance could end up costing you thousands of dollars weekly. You might want to consider getting expert advice to help you evaluate how these charges and costing methods affect your business.
In the meantime, find out as much as you can on your own. Attend some industry trade shows, talk to some experts and get some help figuring out these new contracts and what's behind them.
Too many companies negotiate in the dark. Don't be one of them. Do your research, pay attention to the details, and focus your efforts on steps you can take to make your freight more attractive to carriers. They've gone to the trouble of collecting all the data and using it for their own benefit; now it's time to see if you can't turn it to your advantage as well.
