Big Costs in Small Parcels: A Webinar on Navigating Shipping Spend, Improving Contracts and Saving Money

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For many companies, shipping small parcels to customers is a hefty, unavoidable cost. And those costs — many of which are never shared with buyers until an invoice is sent — keep rising, sometimes multiple times a year.

So what are buyers to do?

Imagine the difference if you could uncover the specifics of your small parcel freight needs, then negotiate with small parcel freight suppliers to ensure better, more consistent pricing.

Spend Matters recently participated in a webinar  with experts from NPI and Spend Management Experts that provided detailed information about what’s happening in the shipping industry, how the large carriers impact every aspect of shipping and what companies can do to realize savings.

According to Pierre Mitchell, chief research officer at Spend Matters, this issue isn’t new. He pointed to a Harvard Business Review study that looked at supply complexity, noting that for buyers, the complexities revolve around the overall business impact, not just the spend with any given supplier.

Freight is a great example, he said, because a company might have significant spend that’s not apparent to end customers even though they are directly impacted by it. He talks more about this in a recent Spend Matters article: Is Telecom and Freight ‘Commodity’ Spend? Look How Uber/Lyft and Amazon Manage Them!

“Over this last 25 years in this world of strategic sourcing,” he said, “we’ve done some of this supplier aggregation and the markets have really consolidated. … What happens is that you get very powerful suppliers and those suppliers are much better at managing you and are much better at managing contracts and complexity.”

'Small parcel is way more complicated than you think'

To shift the narrative, Mitchell stated that buyers need the ability to manage their data, manage the suppliers and have a consistent process to do that. This ensures a clearer understanding of and visibility into contracts and spend.

“Small parcel is way more complicated than you think,” he said. “Organizations do have a sense that they’re not very good at being able to manage at this level of complexity.”

Small parcel shipping in the U.S. is dominated by UPS and FedEx, with little competition. According to Jon Winsett, the chief executive of NPI, the two companies tend to move in lockstep when it comes to pricing, resulting in complex rules and fee structures that change rapidly. Over the past few years, there has been an escalation of costs with both carriers, amounting to about 5% each year. Increases can also vary by delivery zone and weight. Over the past 12 months alone, there have been about 10 rate and surcharge increases.

Right now, there are more than 200 fees that UPS and FedEx can add to shipments, making it difficult for buyers to understand what they’re paying. And in most contracts, shippers can change rates at any time without notification to the customer, sometimes resulting in substantial cost overruns.

One especially troubling category is accessorial fees, or fees for services beyond regular pick-up. These fees can include address corrections, surcharges based on delivery areas, large package surcharges, and something called “overmax,” a fee charged for weights of 150 pounds or more.

Overmax fees have skyrocketed in the past couple of years almost 675% — to an average of $850 for an individual package.

“Accessorials are rising rapidly, and they are accounting for a greater percentage of the overall freight cost in small parcel, with most shippers having accessorials account for 30% to 50% of their total small parcel cost,” said John Haber, CEO at Spend Management Experts.

Transparency into shipping spend

For buyers trying to manage costs, these quiet changes impacting policies, fees and rates make it next to impossible to have transparency into shipping spend. Companies absorb double-digit increases without even realizing it.

So how do companies improve their contracts and save money? According to Kim McQuilken, president at Spend Management Experts, the question shouldn’t be how much shippers charge, but rather what should it cost a carrier to deliver the service levels your company requires to meet your needs? If companies have transparency, real-time analysis, accurate forecasting and long-range planning, they can better-control these costs. And they need to look at key cost drivers, not bottom-line pricing.

Spend Management Experts has created a three-phase solution approach: analysis, strategy and execution.

Haber offered details for each phase:

  • Analysis needs to allow companies to understand what they have, what they need, what barriers exist and how their supplier relationships actually work.
  • Strategy is created once there is a clear understanding of where a company is overpaying. Every shipping company has a unique services profile, so buyers can choose shippers based on their specific needs. And creating cost-based justifications about where to adjust a shipper’s large margins can be effectively used during contract negotiations.
  • Execution allows companies to make sure their deals are optimized. It should include ways to monitor and measure the savings realized by an organization, which allows for quick remedies if underperformance or other problems crop up.

Spend Management Experts and NPI noted in the webinar that about 90% of the companies they work with have non-optimized contracts.

A leading tractor and heavy equipment manufacturer faced overmax charges that were becoming prohibitive to their overall business operations. The overmax charge, about $850 for an individual shipment, was being charged in addition to the base cost, fuel surcharge and any other additional costs, making one package cost over $1,000.

At one point, the company’s annual shipping costs were projected at $1.35 million.

After working with Spend Management Experts, the company started using less-than-truckload (LTL) shipping, which came in at as much as 1/10th the cost of an individual parcel. Ultimately, all shipping was done via LTL, and Spend Management Experts developed a rate tracker that generated a weekly report showing any pricing abnormalities. The result was a dramatic cost reduction, to annual shipping costs of $200,000.

Another client from a merger that created of the world’s largest medical technology and healthcare companies resulted in two shipping contracts to manage. Their biggest problem was the residential delivery surcharges levied by UPS and FedEx. Even though the company received some discounts on air and ground surcharges, the costs were still high. For both contracts, one existing discount at 40% was increased to 60%, and where no discount existed, a 60% discount was secured. The annual saving totaled $450,000.

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