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By: EmpoweringCPO Insights Team

How to Negotiate with Courier & Small Parcel Vendors

With the increase in adoption of online purchase, courier & small parcel industry has witnessed sudden increase in business. Along with this increase there has been change in size and weight of parcels. Most of the E commerce companies tend to pack very light weight items usually in very big size boxes, this has led to negative impact on the profitability of courier and small parcel service providers. This article talks about the probable increase that these vendors may ask and how and what to negotiate so as to negate the increase in annual cost for this category. Before looking at steps to manage price increase for courier & small parcel contracts, it is important to understand following terms:

  • Dimensional weight pricing:
    1. UPS and FedEx have started following Dimensional Weight Pricing for all packages
    2. Dimensional weight pricing mechanism takes into account the package size, which is the amount of space a package occupies when in the cargo area of a transport vehicle, in relation to its actual weight to determine the appropriate price
    3. It allows carriers to align rates with costs considering the dimensions of packages
    4. For calculating Dimensional Weight*, UPS and FedEx both use 166 as a divisor domestically and 139 for international shipments
  • Dimensional Weight (lbs): = L x W x H / 166 (Domestic shipments) or L x W x H / 139 (International shipments) L = Length in inches, W = Weight in inches, H = Height in inches
  • Divisor value: 166 for domestic shipments and 139 for international shipments
  • Threshold value: Earlier the dimensional weight pricing mechanism was only restricted to packages above 3 cubic feet in size. This means that dimensional weight pricing was not used for packages up to 3 cubic feet. This size limit is known as the threshold value.

Understanding current data and based on insights negotiating on threshold and divisor value:

Now to the main part, considering the above parameters and their impact on the pricing, following steps can be taken to negate the increase, we should start with understanding the current data and contract, and based on insights – threshold value and divisor value can be negotiated for the revised contract. Following steps can be taken:

  • Analyzing available shipment data
    1. Dimensions and weight of orders shipped historically
    2. Threshold value as per the current contract, if applicable (E.g.: 3 cubic feet)
    3. Current divisor value for dimensional weight calculation
    4. Percentage discounts if applicable
  • Negotiating threshold value
    1. Based on the volumes of packages sent by an organization, the threshold value can be negotiated in shipper agreements up to 4 cu. feet (7000 cu. inches)
    2. Maintaining the current threshold or further negotiating a higher threshold can negate impacts of dimensional weight pricing
  • Negotiating divisor value
    1. As dimensional weight is dependent on a divisor value (166 for domestic, 139 for international), negotiating a higher divisor can reduce effects of price increase due to dimensional pricing

To prepare for the negotiation as a standby the organization should also be ready with other alternatives and try and figure out pros and cons of choosing these alternatives. There are two alternatives, as a viable scenario organizations can go for either one of them or if they foresee issues with capabilities they can opt for mix of both these options. These options are as listed below:

Networks of smaller players which are efficient for regional deliveries can be explored as an alternative:

  • Capabilities of Regional Firms
    1. These firms have truck fleets, warehouses, packing facilities and flexible delivery routes. They are much smaller as compared to UPS and FedEx and they do not have fleets of airplanes or national delivery coverage
    2. They can ship packages within specific areas owing to their fleets and shipping systems which are adapted to handling regional traffic. They do not need to move their goods from truck to planes like national players and hence they are efficient for regional deliveries
  • Collaboration with other regional shippers
    1. These shippers are moving forward and collaborating with other regional shippers to ensure efficiency over higher distances
    2. Wide coverage, coupled with flexibility offered by truck-based operations—with flexibility of pick-up times as compared to shippers who deliver via planes and lower costs allows regional alliances to compete with large shippers
  • Increasing coverage and competing with larger firms
    1. Some regional shippers have experience in handling packages for companies leading ecommerce companies.
    2. The market share of regional shippers is around 3% for ground packages and they separately cover 90% of all US zip codes

Option of switching to USPS :

  • Both UPS and FedEx add-on charges for fuel, as well as for delivering to homes or rural areas; while USPS does not do this. As a result, some customers could save 50% on shipping shorter distances by switching to USPS
  • USPS reduced prices for its Priority Mail Commercial Plus and Commercial Base services by 2.3% and 0.9% respectively by end of 2014. This reduction may lead to a 30-50% decline in rates for categories ranging from 6-20 pounds
  • A switch to USPS could likely make sense for 12-inch-cube packages of up to 3-4 pounds for larger shippers

To summarize there are many methods that the organizations can explore so as to negate the hike and in-fact if the usage data is known to the company it is also possible to ensure decent year on year savings. The key ingredient for success is understanding:

  • the pricing mechanism
  • The strength of regional players
  • Capabilities of USPS for the target areas
  • and last but not the least understanding your own data

Leverage Our Procurement Services

EmpoweringCPO, one of the top procurement service provider as well as one of the leading sourcing companies in USA, can help with all the above listed points and much more.

Let us know your views and any additional strategies that can be implemented. Contact us today
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EmpoweringCPO Services Private Limited

EmpoweringCPO is a team of experienced sourcing and procurement professionals with hands on experience of having worked with many fortune 500 companies. The company was founded in 2011 and since then has executed multiple strategic sourcing projects and have achieved average savings of 9% so far. In addition to Strategic Sourcing their other offerings are Spend Analysis, Procurement Intelligence, Procurement Analytics, Best Cost Country Sourcing, Procurement Outsourcing, Built Operate Transfer, Supplier Diversity and Sustainable Procurement.

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