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UNDERSTANDING THE NEW MATH OF PARCEL RATE INCREASES

Monday, January 23rd, 2012

By now all parcel shippers have received their new rates from both UPS and FedEx that went into effect on January 2, 2012.  The overall message from both of these parcel carriers was that their General Rate Increases would be 5.9% for Ground shipments and 5.9% to 6.9% for Express shipments.  These increases should not come as a surprise to any parcel shipper as both UPS and FedEx increase their base rates every year regardless of overall economic conditions, or their own financial condition.  By the way, the domestic motor carriers do as well.  These annual General Rate Increases are but one reason both parcel carriers are so very profitable and they will obviously continue to be profitable in the future.  For the record, there is absolutely nothing wrong with operating a profitable business enterprise, in spite of what some folks think.

Click here to see, FedEx List Rates – 2011 vs 2012

Click here to see, UPS List Rates – 2011 vs 2012

While the overall increase is reported to be between 5.9% and 6.9%, you will see from the attached charts we have produced, (which compare rates by service type and by zone for both carriers), that the actual increases many shippers will pay are much higher than what has been reported.  Another important fact to remember is that these increases are compounded each year, so over a period of several years the increases are much greater than the sum of the individual annual increases.  To put this into perspective, since 1998, UPS’ Ground rates have increased 83% and FedEx’ Ground rates have increased 76%.  For Express shipments the compounded increases are much higher, 103% for UPS and 94% for FedEx.

The challenge for parcel shippers regarding these annual increases is how to absorb them since business conditions over the past several years has precluded many shippers from increasing shipping fees to their customers.  Recently a business executive told us they continually have to reduce the price of their products because their customers have established a ceiling on the total charge they will pay for goods; that is product cost, plus the cost of shipping and handling.  So the only way this shipper can gain any ground would be for them to re-negotiate their pricing agreement with their parcel carriers and retain some of those savings or they will never be able to gain a competitive edge.

While we are on the subject of contract negotiations, both UPS and FedEx have made it clear to their shipper customers that they will not negotiate directly with Third Party Negotiators.  Currently at least one lawsuit has been filed against both parcel carriers and the Federal Government is also sticking their nose into the fray to determine if Antitrust violations exist.

One thing is for sure however, and that is shippers should not be intimidated by either of these carriers regarding the use of Third Party Negotiators or consultants.  A shipper is certainly free to work with any company or individual it wishes to help them improve their bottom line.  And, Third Party Negotiators have certainly proven their value to the shipping public, and many have preserved the business for the incumbent parcel carriers, so both sides benefit.  Why else would these parcel giants take such a bold step to keep these specialists out of the negotiating process?

Parcel shippers should not let another day go by without having a Third Party Parcel Negotiator or consultant assist them with benchmarking their rates and services to ensure the rates they are paying are the best available rates for the services offered.  Parcel shippers can rest assured that neither FedEx nor UPS will reduce their rates to levels where they will not continue to make a reasonable profit.  The real question is how much profit does a parcel shipper actually contribute to UPS’ or FedEx’s bottom line.  If parcel shippers never measure it, they will never really know will they!

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WHAT YOU DON’T KNOW CAN HURT YOU!

Monday, December 19th, 2011

Shippers today more than ever need to become “Educated Consumers” when it comes to doing business with any transportation service provider.  The main reason is that all freight carriers, regardless of mode of transportation are free to publish rates and charges they deem necessary and appropriate to meet their internal revenue requirements.  This is done to assure the carrier covers its cost of doing business plus ensure they make a profit.  Making a profit is not only a good thing for the carrier, but it is also good for the shippers’ utilizing these carriers to ensure the carrier’s viability, profitability and future growth.  The question is how much profit is “reasonable.”

To ensure these profit margins are met, carriers will resort to a variety of pricing provisions that often come as a surprise to the shippers.  Many of these ever-changing pricing provisions fall outside of what has been the “acceptable norm”, (whatever that is.)  Here is an example of what we are talking about.

In performing an audit for a client, we recently came across a new pricing provision for a major motor carrier that adds a significant “up-charge” to the carrier’s base rate when certain invoicing provisions apply.  In this case, when a shipper tenders a shipment to this motor carrier on a “freight collect” basis, or has the shipment billed to a “Third Party” payer of freight charges and neither party has any established pricing with the motor carrier, the following provisions apply.

The carrier will apply the discount that the shipper has in place, however, this carrier now states that it will apply the shipper’s discount ONLY after it increases the carrier’s base rate by a whopping 25%.  To put this into perspective, a shipment that would normally cost $500.00 will now cost $625.00 under the aforementioned invoicing provisions.

So with this carrier’s new pricing provision a shipper’s customer will now see their freight costs increased by 25% without any knowledge that this provision has been published by the freight carrier.  The only true way to know these provisions exist is to request a complete copy of a carrier’s pricing publication for every freight carrier utilized and to read through it section by section to make sure a shipper understands all of the pricing provisions the freight carrier can and will charge.

If a company does not have anyone on staff that has the technical expertise to read through, digest and make prudent business decisions based on the carrier’s published rates, charges and pricing provisions, it should seek outside consultative services to assist in negotiating its rates and contract pricing provisions.  A shipper needs to allow their carriers to make a reasonable profit, but one which will not be financially detrimental to the shipper or its customers.

In fact, all shippers would be well served to have all of their freight rates benchmarked by an outside consultant to make sure the rates they are paying are in fact competitive in today’s marketplace.  It’s not a matter of how good a negotiator someone is, but more importantly, if a shipper does not negotiate from a position of strength, (that is knowing every carriers’ cost structure), a shipper will almost always pay more than they should.  This will certainly have a negative impact on their bottom line results.

How can a third party consultant greatly enhance a shipper’s profitability?

  • They analyze and benchmark transportation cost structures from an “insider’s” point of view
  • They understand carrier profit models and internal rate approval processes
  • They understand transportation contracts, terms and conditions and what can and cannot be negotiated
  • They have the ability to consider all sourcing alternatives to ensure “Best in Class” results

Unfortunately, many companies are content with the status quo; they are afraid to even look at opportunities that may improve their bottom line results.  They remain in a “Decision Paralysis Mode”, as they have been for several years now.  However, what they fail to realize is that aggressive competitors will soon be “eating their lunch” because they HAVE made a decision to engage Third Party Consultants to improve their bottom lines.

To add insult to injury, shippers are being told by their freight carriers, and specifically the major parcel carriers, that they cannot use Third Party Consultants to negotiate their pricing agreements.  What better way for the parcel carriers to ensure they make huge profits.

We would ask however, would you enter into a house purchase and mortgage agreement without having an attorney review the documents before signing?  Obviously not, so why would a company sign freight carrier pricing agreements without having a Third Party Consultant who thoroughly understands all the pricing aspects of such agreements?  Your guess is as good as ours.

All shippers must be sure their company is not being penalized by any “extreme” pricing provisions that will obviously wreak havoc on their freight budgets.  The real question however is, how many really will?

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IT’S OFFICIAL; YOUR UPS RATES ARE GOING UP (AGAIN)!

Monday, November 21st, 2011

UPS has announced their 2012 General Rate Increase which will become effective on January 2, 2012.  This is certainly not a surprise as these General Rate Increases almost always become effective on the first business day of the New Year, Happy New Year everyone!

This year’s increase UPS says will “enable UPS to continually expand and improve our portfolio of solutions, helping us serve you and making the service you offer your own customers even better.”

According to UPS, the Ground Service increase will equate to a “net” increase of 4.9% through a combination of an across the board 5.9% increase in base rates, coupled with a 1% percentage point reduction in their Ground Fuel Surcharge.  UPS’ Air and International rates will also increase a net of 4.9% with a 6.9% across the board increase coupled with a 2 percentage point reduction in their air and international Fuel Surcharge.  UPS Next Day Air Freight and UPS 2ND Day Air Freight rates for shipments within and between the US, Canada and Puerto Rico will increase 5.9% and their UPS 3 Day Freight rates will not be increased at all.

UPS is also publishing a number of increases in their service fees, some of which are highlighted below.

  • COD (Collect on Delivery) charges will increase $0.50
  • Delivery Area Surcharges to Commercial Addresses will increase $0.15, no increase is scheduled for Ground Residential Surcharges
  • Delivery Area Surcharges for Air services to residences will increase by $0.25
  • Delivery Area Surcharges for UPS Hundredweight Shipments will increase $0.75
  • The Large Package Surcharge will increase $5.00
  • US Import shipments which are delivered to certain US Postal Codes will be subject to additional surcharges ranging from $2.00 to $15.00 for shipments delivered to certain Alaska Zip Codes

UPS will be sending notices to their customers in the coming days and will also have the entire freight rate change information published on their website.  For those shippers that utilize FedEx, as tradition tells us, be prepared for similar if not identical increases from the Number Two Parcel Carrier and their General Rate Increase announcement will follow shortly.

Of great importance to all shippers is that fact that the overall impact of these increases will far exceed 4.9%.  It behooves shippers of all sizes to review the services they utilize when shipping with their parcel carriers and determine the overall impact these increases will have on their business in the short and long term.  In the past many companies were able to pass these General Rate Increases onto their customers however in this economic climate we do not believe that will be the case any more.

Shipper’s need to be “EDUCATED CONSUMERS’ when it comes to the freight rates they pay to their transportation and logistics service providers.  In the true sense of partnerships it may be time for shipper’s to have a “heart to heart” conversation with their parcel carrier(s) to see what can be done to reduce the impact of this latest round of increases. Shippers do have a say you know, they just have to take the time to say it.

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SURPRISE / SURPRISE!

Tuesday, October 18th, 2011

Actually it should come as no surprise that many experts predict continued weak growth in the economy for the rest of 2011 and certainly into 2012.  According to a recent survey commissioned by the Council of Supply Chain Management Professionals, business logistics costs – the cost to transport and warehouse goods- rose to 8.3% of the US Gross Domestic Product in 2010 compared to 7.7% the previous year.

This years report revealed that the cost of US business logistics jumped to $1.2 Trillion in 2010 an increase of $114 Billion from 2009.  Inventory carrying costs also increased 10.3% last year due to higher costs of taxes, obsolescence, depreciation and insurance.  Transportation costs were up 10.3% from the 2009 levels, with trucking lagging behind the performance of other modes.

As shippers know all too well freight carriers typically implement General Rate Increases once a year and many times shippers are unaware of such increases.  Over several years transportation managers will really find their freight costs out of control and will have to answer to management as to why.  So what can a shipper do to minimize the impact of increased costs.

  • Understand what you are paying for; not just the base rates, but fuel surcharges and all accessorial fees and charges as well
  • Consolidate shipments wherever and whenever possible; including consolidating small parcel shipments into LTL quantities and LTL quantities into truckloads
  • Understand the services your company is paying for; do not use expedited services unless they are absolutely required.
  • Continually benchmark the competition’s rates and charges; if your carrier feels they have a “lock” on your business, they probably do
  • Understand your carriers’ costs; what if anything can you do to reduce their costs so they can pass those savings back to you
  • Perform a comprehensive audit of your entire transportation spend; use an outside audit firm, the results always outweigh the costs

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GOING GREEN WITH INTERMODAL

Tuesday, October 18th, 2011

Many shippers are realizing the benefits of increased use of intermodal transportation for those lanes where intermodal competes with trucking.  The increased use of intermodal also has a green effect, as in dollars, as well as enhancing sustainability to a company’s supply chain.  Here are some facts to prove the point:

  • Railroads consume 1 gallon of fuel to move one ton of freight an average of 405 miles.  That equates to approximately 250 miles per gallon.
  • More than 1 billion gallons of fuel would be saved each year if 10% of highway freight were moved by rail
  • A single intermodal train could save 5.2 million gallons of fuel per year
  • A freight train emits two-thirds less greenhouse gas emissions for every ton mile compared to typical truck shipments
  • Railroads are three times more fuel efficient than trucks

Unfortunately many shippers still believe railroad transportation is slow and unreliable; nothing could be further from the truth.   It behooves shippers to check with their railroad and/or intermodal service providers to benchmark the rates and service levels for major shipping lanes.

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ORGANIZED RETAIL CRIME INCREASING IN NUMBERS AND VIOLENCE

Tuesday, October 18th, 2011

In every recession we hear statistics of rising crime; well this recession is no different.  In a recent survey conducted by the National Retail Federation called Organized Retail Crime Survey, 94.5% of the 129 retail respondents indicated they were the victims of organized retail crimes within the last 12 months, an increase over last year and the highest level in the survey’s seven year history.  Many retailers indicated that thieves are even becoming more brazen and that one in ten retail crimes results in physical assault or battery.  So where do retailers claim these crimes occur?

  • At the store level – 17.6%
  • At the Distribution Center – 22.1%
  • En route between stores – 10.3%
  • En route from DC to store – 57.4%
  • En route from the manufacturer to the DC – 39.7%

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USPS URGES UNIONS TO ALLOW LAYOFFS OF 220,000 EMPLOYEES

Tuesday, October 18th, 2011

We know this is hard to believe, but it’s true.  The USPS, facing a loss of $8 Billion for this fiscal year alone, has begun contract negotiations with the National Association of Letter Carriers and The National Postal Mail Handlers Union which combined represent 247,000 of the Postal Services 560,000 employees.  The main thrust of the negotiations seeks the union’s “buy in” to these massive projected layoffs.

USPS says the current economic environment, along with the shift to digital communications resulted in mail volume plummeting 20% to 171 billion pieces last year.  Over the last four years the postal service has actually reduced its size by 110,000 career positions and saved $12 billion in costs.  But those measures are not enough to save the Postal Service now; they are a “band-aid” solution where major surgery is required.

According to the USPS’s Chief Human Resources Officer and Executive Vice President, Anthony Vegliante, “if the Postal Service was a private sector business it would have filed for bankruptcy and utilized the reorganization process to restructure its labor agreements to reflect the new financial reality.”  Wow, what a thought!  Should the Federal Government have allowed General Motors, Chrysler Corporation and many of the financial institutions they gave billions of taxpayer dollars to to take the same road that Mr. Vegliante suggests for private sector businesses?   We wonder what the outcome would have been.

The Postal Service will have a very rough road ahead if it thinks the unions will just roll over and play dead; that has never been part of their playbook.  Perhaps you’ll see your local postal carrier at the “Occupy Wall Street” rallies in the very near future.  One other thought that perhaps the beauracrats have not thought about.  How about hiring some folks from the private sector to inject some new blood into the Postal Service and create additional services that just might compete with UPS and FedEx; last we heard those company’s were making a profit- just a thought!

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FREIGHT BILL POST AUDITS – AN OFFER YOU SHOULDN’T REFUSE!

Tuesday, August 30th, 2011

In today’s deregulated transportation environment every freight company has the ability to set its own rates, discounts, fuel surcharges and fees for various ancillary services.  This includes parcel giants UPS and FedEx, as well as all motor carriers.  Many companies are under the misguided impression that as long as they receive the proper discount percentage, the invoice is correct and should be paid as submitted.  But is that a true invoice validation and audit?  No it’s not, far from it!

In addition to a company performing a freight invoice audit before they pay a freight invoice, they should also consider having a post-audit firm audit their invoices after they have been paid.  Freight bill post-audit firms have been around for years and usually provide their services for a contingency fee of 50% of the actual overcharges they collect.  If a company shops around, they may even find a post-audit firm that would provide the service for 30% of the actual audit recoveries they collect.  But we believe in the old adage that “you usually get what you pay for” as many of these companies will only go after the low hanging fruit.  So what value do you really gain by negotiating a lower savings percentage?  Sometimes, none!

While these services are critical to businesses today and widely used, we believe companies are short changing themselves by not performing a more comprehensive post audit analysis that takes into account the following elements:

  • Reporting of and recommendations for controlling excessive freight costs
  • Benchmarking the shipper’s current rate levels against other shipper’s with similar shipping characteristics
  • Performing a comprehensive analysis of shipper’s pricing agreements and transportation contracts to achieve lower rates and charges, as well as incorporating contract elements that may further protect the shipper

It has been proven over and over again that a company can save up to ten times the amount of money it receives from a traditional post audit when they contract to perform a comprehensive post-audit analysis that takes into account the elements listed above.  And, they can usually obtain all of these benefits for a lower cost of a traditional contingency post-audit.  Under a comprehensive post-audit analysis, the auditor will usually perform the service for a flat fee based on the audit elements selected rather than a contingency fee.  Not only that but the benefits the shipper derives from this comprehensive audit analysis, almost always will exceed the net dollars the shipper would derive from a contingency post audit.  Here is how the process works and the resultant benefits:

Freight Bill Audit Process:

  • The post audit firm receives all of the paid freight invoices either in paper or electronic format, along with complete copies of all freight carrier pricing agreements or contracts for the period to be audited, typically the most current 180 day period, stipulated by government statute.
  • The post-audit firm audits each and every invoice seeking out all overcharges assessed by the freight carriers.  Upon uncovering the overcharges, the post audit firm files overcharge claims against the respective freight carriers seeking full refunds of any overcharges and billing errors which are directly payable to the client.

Benefit:  The shipper retains 100% of the overcharges recovered!

Excessive Freight Cost Reporting:

  • As part of the post-audit process, the audit firm reports back to the shipper advising them of any excessive freight costs incurred by the shipper that did not result in an overcharge, but did increase the shipper’s cost for any number of reasons.

Benefit:  The shipper receives a thorough analysis of additional cost cutting recommendations provided by experts in the transportation field without having to hire a consulting firm.

Benchmark Analysis:

  • During the comprehensive post audit analysis, the audit firm will benchmark the shipper’s current negotiated rates against the auditor’s vast data base of freight rates, fees and charges for shippers with similar shipping characteristics.

Benefit:  The shipper now has the benchmarking information it needs to negotiate even lower freight costs with its carriers based on real shipping lane analysis.

Pricing Agreement and Contract Analysis:

  • The audit firm would undertake a comprehensive review of all pricing agreements and freight carrier contracts and will provide the shipper with a detailed report containing recommendations for additional cost reduction opportunities and/or improvements necessary to protect the shipper’s interest which may have been overlooked in the initial agreement.

Benefit:  The shipper will now have an “experts” review and analysis of its contracts and pricing agreements that will  assist in reducing its costs, but perhaps more importantly, how to protect its company’s interests in the future.

All of this sounds logical, so why wouldn’t a company take this comprehensive approach to auditing and analyzing its overall freight costs, pricing structures and agreements?  Well the real answer is that many post-audit firms don’t offer these comprehensive audit and analysis services; secondly, shippers don’t always take a pro-active approach to their transportation programs, they assume they are getting the lowest rates consistent with their required service levels when they receive huge discounts.  That’s just not enough of a benchmark to rely on.  And one other important fact, if a shipper does not want to pay for all of the services mentioned here, it can select and only pay for those services it deems necessary.

So, how does your company’s freight audit program stack up?  Are you sure you are being invoiced properly? Do you have the lowest available rates and charges from your freight carriers based on the services they provide?  Are you sure your company’s interests are protected by the pricing agreement or transportation contract you signed?  That’s what we thought….it’s time to take a more comprehensive approach!

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FREIGHT CLAIMS MAY BE HARDER TO COLLECT

Thursday, April 28th, 2011

Many large companies are requiring their suppliers to ship their goods on shrink wrapped pallets and also require that the freight carriers sign the bill of lading as “Shippers Load and Count”.  The reason for this is to reduce the freight expense because the shipper may be receiving lower rates when these shipping conditions exist.  There is another aspect to this and that is some freight carriers use the ”S L & C” notation as a way of limiting their liability.  Some carriers contend that if they picked up X number of pallets and deliver X number of pallets, they can not be held liable if there is an ultimate shortage, because they never signed for the actual number of pieces on each pallet.

While this may sound like a logical response, the fact remains that all freight carriers must thoroughly investigate each claim it receives.  By merely declining these claims without a thorough investigation, the carrier may be violating the freight claims processing rules.

A recent declination letter we reviewed from a freight carrier clearly indicates that the carrier did not perform a thorough investigation as the following comments they made indicate.  The facts of the claim are as follows:  The shipper shipped three pallets of product and the customer clearly signed the delivery receipt as ”44 cartons short at time of delivery”.

  1. “We did not physically handle the shipment in our system”.  Our response, then who did?  The shipment moved from Indiana to New York, how did it get there if it was not ”physically handled” by the carrier?
  2. “We placed no other shipments on the trailer from the time of pick up to delivery”.  The shipment contained 3 pallets.  There is no way the carrier moved this shipment from Indiana to New York with only three pallets on the trailer.
  3. “Our records do not reflect any unusual incidents during our transportation of this shipment”.  Great statement, but the carrier did not supply any documentation such as internal trailer manifests to support their contention.

While the statements made by the carrier are certainly questionable, the carrier should be challenged to provide details to support their contentions.  It is not enough defense for the carrier to just make blanket statements, they must be properly supported and shippers have every right to ask for such supporting documentation.

On the other side of the coin, no freight carrier should be required to pay any freight claim unless it is a valid claim.  It always goes back to ”Caveat Emptor”- The buyer beware!   Both carriers and shippers have an obligation to make sure they have all the claim facts and share them with the other party.

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SUPPLY CHAIN INSURANCE

Thursday, April 28th, 2011

The tragic events related to the Earthquake and Tsunami in Japan last month are a clear indication that global supply chains may be at great risk for any number of reasons.  Add to this the social unrest in the Middle East and you can see even greater risk potential.  A good piece of business advice is for firms to have secondary suppliers in place who can make up the shortfalls should these extenuating circumstances occur.

Traditional Supply Chain Insurance previously required physical damage to trigger coverage.  Now, however, in response to consumer demand, policies are available to insure against non-physical damage, such as strikes, political unrest, a pandemic, or acts of nature such as what happened in Japan.

Generally the Supply Chain Insurance allows the company to name the supplies and even the suppliers most crucial to the company.  The insurance protects the business income in those instances when the reduction in the supply of materials leads to a reduction in a business’ output.  The insurance covers lost profits and extra costs associated with the break in the chain.

The first step to acquiring the insurance is to perform an assessment of the company’s major suppliers, their risk of disruption, and the effects that disruption would have on the company’s business. This is certainly sound advice for any business in today’s fast moving and global supply world.

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