Jerry M. Hempstead is a 32 year air express industry veteran and consultant. He is President of Hempstead Consulting based in Orlando, FL. Jerry is a contributing author to freightdawg.com and may be contacted by email at gmhempstead@aol.com
Now we have to be Rocket Scientists?!
Parcel carriers have really done a great job of confusing things with this years tariff rates and surcharges. It is becoming increasingly difficult for a shipper to compare competing carrier offers to determine the real value. Check out the following (simple) example and prepare to scratch your head!
Just a Little "Slice of Reality"
Lets say you ship a next morning 5-pound package from the local Mailcom store in Atlantic City, New Jersey to me in Florida. It is a zone 5 shipment. (at least all the carriers have the same zip-to-zone conversion) Lets also suppose that DHL offers you a 50% tariff discount, FedEx offers you a 47% discount and UPS offers you a 45% discount. Those seem to be typical of the discounts I'm seeing in competitive bids these days. (The percentages and spread will vary by shipper profile)
Some quick calculator work shows the following result based on the discounts above.
DHL $21.95
FedEx $23.80
UPS $22.22
Here, DHL looks the cheapest, but note that UPS offered a smaller discount than FedEx. However, FedEx comes out with a higher charge because FedEx and UPS don't have the same base rate!
But wait, the carriers don't all have the same fuel surcharge either! As of this writing, UPS and FedEx are charging a 10.5% FSC while DHL is at 12.5%. So lets add that into our calculations and see what happens!
The result is:
DHL $24.69
FedEx $26.30
UPS $24.55
Now UPS beats out DHL by 14 cents and UPS looks cheapest. They have the smallest discount but still have the lowest net price for your shipment! Now lets make it really interesting. I work out of my house. Therefore it's a residential shipment.
UPS, FedEx and DHL charge an additional $2.20 for residential delivery. My recollection is that the formula for calculating a total rate is that you add the residential surcharge to the tariff rate then you add the fuel surcharge. (still with me?)
So the result is:
DHL $27.78
FedEx $29.06
UPS $27.13
Now UPS is 65 cents less on this package than DHL and $1.93 less than FedEx. That's a 7% savings on this shipment over a carrier that was offing a 2% better discount to start with.
If I lived in Oak Hill where my mother-in-law lives it gets even nastier with a Residential Delivery Area Surcharge of another $2.20 added before the fuel surcharge is applied.
Hang on! The result is:
DHL $29.64
FedEx $31.16
UPS $29.42
What the heck happened here?
Almost 25% of the bill for this shipment is accessorial fees and charges! This isn't even a hard shipment to understand. The carriers chalk it up to the "cost to serve". I chalk it up to free enterprise. UPS in the most recently announced quarter had a profit of $975 million dollars, FedEx a net income of $511 million and Deutsche Post the owner of DHL made about $705 million despite losing money in its US operation.
UPS and FedEx guarantee delivery of that package to me by 10:30 in the morning to my house in Orlando. If you want the same guarantee with DHL you have to add up to another $3 to that package. The reason I say "up to" is because like all things in life "everything's negotiable" and someone who has enough volume to get the above 50% discount (and I hope you all are getting at least that these days) should be able to negotiate the 10:30 fee pretty easily.
Free Enterprise System in Action
The end result is that the carriers have decided, "In confusion there is profit." They can get away with complicating things, well... because they can. Nobody says they have to have the same base rate. Nobody says they have to have the same fuel surcharge, or says that they have to have the same accessorial fees. Nobody dictates in what order fees and surcharges are applied to compound the resulting rate. (Interestingly in the ocean freight business, carriers usually do agree on this kind of formatting.)
Now free enterprise works the other way as well. Carriers right now know more about your book of business than you do, and how to maximize their profits when they handle your shipments.
A Possible Solution
I recently gave a seminar and I asked "how many in the audience get a reduced residential fee from their carrier?" Several people raised their hand. I asked, "Anyone get that fee waived?". Two people raised their hands. I asked "How many people get a reduced delivery area surcharge?" Several people raised their hands. I asked "How many get the delivery area surcharge waived?" Two people raised their hands. I asked "Does anyone get a reduced fuel surcharge?" A few raised their hands. I asked "Does anyone get the fuel surcharge waived?" Two people raised their hands.
In todays pricing environment it's very hard to understand competing carrier offers. It's almost impossible for you to know what carriers are offering other shippers of similar or even lesser stature than you. It's difficult for you to figure out the net rate the carrier is offering because of the lengths the carriers go to confuse shippers. And it's often impossible for you to take the offers and apply them to your book of business.
The last thing I would say is that Morgan Stanley, the investment-banking firm, late last year did a survey of shipper best practices. They found out that 11% of the survey respondents used a consultant to negotiate their parcel rates. It was reported by these respondents that those who used consultants drove discounts 49% lower then if the shipper had negotiated directly with the carrier.
That's pretty incredible when you think about it. The truth is that the consultants see carrier offers to other shippers every day of the year. They have the computer tools to break down your book of business into its component parts and they have the tools to break down carrier offers into meaningful net rates and they have the tools to do the analysis of those offers against your book of business. They then know what offer is the best, but they also know how it can be better.
Most consultants get paid out of the savings they generate, so if they don't get you a great deal they don't make any money. Some consultants offer the first X percentage of savings for free back to the client because the client would have generated some reductions on its own anyway and the consultant only gets paid out of the incremental savings he obtains. Some consultants do the work for a flat fee. Usually this results in a much lower cost to the shipper but the consultant gets paid up front for the hours he will put in on your behalf. Some have a combination of up front and then a bonus for achieving a level of savings. Like carrier pricing, consultant rates, fees and charges are also negotiable.
If you need help just e mail me at gmhempstead@aol.com . Maybe my next article should be "What you need to know when negotiating with parcel consulting companies".
Jerry
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