Shipping Contracts: ‘Cost Modeling’ Your Way to a Better Deal
This article was first published in the Jan-Feb edition of Parcel Magazine (2016). To view the full magazine click below. This article is located on page 7 immediately following the “Editor’s Note.”
Shipping Contracts: ‘Cost Modeling’ Your Way to a Better Deal
By Shaun Rothwell, Founder and CEO of iDrive Logistics
Shippers use one of two approaches when developing a pricing and negotiation strategy. (1) benchmarking (the most common), or (2) based on the understanding of carrier cost models.
Both approaches are effective in achieving favorable shipping rates and both require high levels of industry knowledge and understanding of carrier pricing. Where the two approaches diverge is at the level of understanding of carrier costs.
Understanding carrier pricing vs. carrier costs is an important distinction.
Unlike an understanding for carrier costs, carrier pricing can be well-understood by anyone with enough industry experience. A deeper frame of reference lends itself to the principle of ‘the more you see, the more you understand,’ which is why 3PLs and other contract consultants market their industry experience so heavily when trying to sell contract negotiation services. They know and understand the market shipping rates, and therefore, know what shipping discounts are obtainable for your company.
This focus on existing carrier pricing, market rates and average discounts is the crux of the benchmark approach.
Benchmarking is a weighted average.
In reality, benchmarking is a simplistic analysis that compares a company’s shipping spend, shipping volume, its size and industry against what has been “seen” for companies with similar shipping profiles. While it focuses on dollar amounts, volume shipped and discount percentages, it ignores—in large part—language and structure of agreements, which can vary greatly from company-to-company based on shipping characteristics and corresponding carrier costs. Although benchmarking provides a comparatively quick-and-easy negotiation cycle, this usually means shippers are not getting as detailed as they should with their agreements.
Myth: The more you ship, the better your discounts.
Because benchmarking focuses on volume and discount percentages rather than package-by-package details, benchmarkers will miss out on numerous concessions that are relevant to their shipping profiles. One of the biggest misconceptions in the world of shipping—which is fed by the benchmark philosophy—is that the more you ship, the better your discounts. The truth is, once shippers reach spends of about $100,000, ‘volume’ becomes a much smaller factor in determining rates. At this point, the best deals result from taking a deeper look at shipping characteristics and determining how they line up against carrier cost drivers.
‘Cost modeling’ analyzes variable shipping characteristics and carrier cost drivers.
At the highest level, cost modeling means knowing where the carriers have the highest margins and the amount they are able to concede in order to maintain desired profitability. But to get there, cost modeling requires an in-depth understanding of what drives cost for carriers and how they line up against shippers’ package-by-package shipping traits. Package-level detail is key! Companies will discover dozens of additional concessions throughout negotiations by examining their shipping characteristics and weighing their “uniqueness” against their knowledge of carrier cost drivers. These can include service mix, package densities, carrier ground feed costs, sorting costs, delivery densities, special handling and a host of other factors, all of which will vary greatly based on the shipper.
At the end of the day, maximizing concessions from both sides is a key objective because it provides for more collaboration and a stronger business partnership between the two parties. This collaborative approach maximizes savings for the shipper while the carrier concedes in areas they can afford and avoids getting beat up over an area they cannot.
If cost modeling is so great, why doesn’t everyone do it?
A true cost model approach is scarcely implemented in carrier contract negotiations from the shipper’s side because top-down knowledge of the carriers’ actual costs relative to package-by-package shipping traits is not simply “picked up” with time spent in the industry. This safe-guarded information is not handed down from the carriers’ top-level corporate pricing executives. Thus, there are very few individuals—even inside the carriers’ elite pricing teams—who have this knowledge. Because of this, it is virtually impossible to find someone in the consulting space with true carrier cost model knowledge. The only exception is iDrive Logistics, which is led by two individuals from UPS’s elite, special pricing unit who built and managed the carrier cost models for the world’s largest enterprise shippers. When you are ready to negotiate your next agreement, you’ll owe it to yourself (and your company) to explore the benefits of iDrive’s ‘carrier cost model’ negotiations.
Shaun Rothwell is Founder and CEO of iDrive Logistics—an industry-leading supply chain consulting and contract optimization firm. With 22 years of experience in the small parcel and logistics industry—including 8 with the US Army as a Supply Chain Specialist—Shaun was a partner in building (and selling) the largest and fastest growing small parcel audit and contract optimization firm in the industry. Shaun was the Gold Eagle Chairman award winner while at UPS and holds the degrees of Bachelor of Science in Business Administration and Master of Business Administration (MBA).
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