Recent Articles
Updated: February, 2007

Are My Parcel Rates Too High?
Written by Mitch Felts and Gina Myatt of DMG, Inc.

The key to a successful small parcel rate negotiation depends on three things:

• Knowing your shipping and packaging characteristics
• Knowing how your characteristics rank in your carriers' profit scale
• Knowing your carriers' operating ratios and profit margins

Sounds simple doesn't it? Well, it's not. Small parcel carriers' pricing algorithms, operating environments, and technology have become extremely dynamic. Literally hundreds of factors determine how your shipping and packaging characteristics mesh with the carriers' operating ratios and ultimately what type of profit margin the carrier can expect on your accounts.

The carrier organizations are fundamentally no different than your own. They have to minimize operating expenses while maximizing profits just as you do. As within your organization, certain aspects of your operating activities are much more costly while others are easily controlled. In addition, your margins likely differ substantially from service to service or product to product. Carriers are faced with the same dilemma of minimizing expenses and promoting higher margin products/services; therefore, carriers will determine specifically how your shipping and packaging characteristics will affect their operating ratios and profit margins before they ever consider negotiating the terms of a small parcel agreement. Unless you have the ability to do the same due diligence prior to a contract negotiation, it is virtually impossible to ensure that you have negotiated a true 'best-in-class' contract.

While it may appear that carrier reps. arbitrarily throw out specific incentives in some areas and dig their heels in on others; don't be fooled! The reps. know exactly how these inclusions and exclusions will affect their revenues and profits before they ever walk through your door. Prior to bidding on your business, or renegotiating an agreement, carriers will do an intensive analysis of your shipping and package characteristics. This analysis has very strict, quantitative parameters. I can assure you there is no "freewheeling" when it comes to contract negotiations. These negotiations are quite calculated, and your reps. have been instructed what to accept and reject.

It may surprise you to find out that operating ratios differ greatly from carrier to carrier. While each carrier is ultimately delivering your packages from Point A to Point B, their costs of doing business is very different. Due to differences in labor costs, equipment, marketing, sales force compensation, etc., all carriers will weight your shipping and package characteristics differently. It is critical to understand which characteristics receive the highest and lowest weighting and how those factors drive the operating ratios of the carrier(s) you are negotiating with. Even more importantly, you must know where your characteristics rank in the carrier(s) "profit scale".

We have provided an actual client sample containing some of the prominent shipping and packaging characteristics that drive the level of incentives a carrier can and will provide if negotiated adeptly. Without this knowledge, your carriers will always have the upper hand.

	Actual Sample	Carrier	Carrier
Shipper Characteristic	Total/Note	Weighting	Profit Scale (1-5)
Weekly Gross Revenue	$          226,405.00
Weekly Net Revenue	$          143,321.00
Avg. Net Revenue/Pcs.	$                    5.78
Avg. Weight & Distribution	11.52
Zonal Average & Distribution	4.03
Air to Ground Ratio	28.19%
% Commercial	26.60%
% Residential	73.40%
% Rural (Super Rural, Rural, etc.)	16.71%
# of Pickup Locations	3
Pickup Density	5,198
Delivery Density	2.82
Average Cube	2.64
% OSI, OS2, OS3	9%/3%1%
Billing Method Elect/Paper	EDI
Avg. Product Value	$188.71
Accessorial Impact	27.18% of Net
% Undeliverable	2.03%
Avg. # of Delivery Attempts	1.41
% GSR	1.09%
% of Damage / Loss Claims	0.31%
% Non - PLD Pkgs	0.12%
Payment Characteristics	13 Days
Seasonality	Flat
Automation Type	Worldships/TMS
Pickup Type/Issues	Drop, 24/7PU
On-Site carrier employees	1
HWT/CWT Tiers	3/03
Special Handling	.06% > 130'
Annual Growth Potential	18%
Future opportunities	26% Alt. Carriers
Additional Information	9 mi. from Hub
Carrier/Customer Relationship: Retention Penetration Conversion	X X X

DMG, Inc. has enabled hundreds of organizations like yours to understand their carriers' ratios and margins, rank and improve their shipping and packaging characteristics, negotiate 'best in class' small parcel agreements, and save millions of dollars. We are offering a complementary shipping and characteristic analysis to the first 50 respondents to this article. Whatever your size and annual small parcel spend, we guarantee we will drive sizable savings directly to your bottom line. Go to the "Contact Us" page of our web site, type "Contact Me" and click "Submit Request". We also encourage you to visit our site for additional insightful articles.

To request our complete 2007 GRI Analysis by service, weight and zone as well as our highly useful 2007 Carrier Accessorial Comparison (everything you need to know about new and increased accessorials by carrier) please go to the "Contact Us" page of this web site, fill in the required information about yourself, type "2007 GRI Analysis" in the "Comments" field and click "Submit Request".

*Your contact information will be kept highly confidential!

Archived Articles

• 2007 General Rate Increase - What's a Shipper to Do?; November, 2006
• Tackle the 2006 General Rate Increase; February, 2006
• Avoid the Nickel and Dime Treatment; March, 2005

Contact The Distribution Management Group today!