Across the world, two strategies remain top of mind for parcel shippers as peak season and the year’s end draw nearer: 1) carrier diversity; and 2) carrier negotiation. COVID-19 continues to impact the parcel industry with unprecedented numbers leading to consistent carrier delays and capacity constraints. So, it’s no secret that shippers in particular are interested in utilizing the latter strategy to impact the former in an effort to overcome carrier capacity concerns and issues; however, shippers are finding that negotiating your parcel carrier contract in 2020 is unlike negotiating during any year prior.
To begin, traditional carrier contract negotiation tactics are simply ineffective as carriers have the bargaining leverage. Take for example, the tried and true tactic of offering carriers additional volume for better rates and reduced surcharges. In a year where both of the Big 2 saw their pre-peak-season package volumes surpass the entirety of 2019’s package volumes and consumers spent an astounding $82.5 billion online in May, carriers have more volume than they can effectively handle. UPS has also made it abundantly clear that their business will focus on healthy revenue and profits over pure shipment volume, and it’s likely that FedEx and regional carriers will follow suit. The carriers have more volume than they can handle, and there is no incentive to ask for more.
Additionally, it’s important to recognize the general market uncertainty surrounding the parcel industry as a whole. In the past, carrier contract negotiation as a cost mitigation tool has largely depended on the ability to assess the market and thoroughly identify opportunities to align carrier and shipper interests; however, a fast and frequently changing environment challenges this ability and more. Consider:
- As carriers close their networks to new customers and set volume limits on existing ones, shippers everywhere face a rising capacity challenge that will not be solved with a sole carrier.
- Carrier rules, rates, and surcharges changed often in the initial months of COVID-19 response, affecting even contractually negotiated terms, and industry analysts expect much of the same during this year’s peak season. Such a reality significantly impacts shipper budgets, while also limiting their resources to grow and optimize their own parcel network.
- The Big 2 continue to experiment with new ways to sustainably respond to a tremendous growth in demand (i.e. robotic sort arm and autonomous delivery vehicles); however, these solutions appear largely future-focused. Alternative and regional carriers present an opportunity, but without larger resources like that of the Big 2, it’s expected that they also will limit opportunities and capacity as their own networks become strained. Shippers who shifted volumes to USPS in response to COVID surcharges and volume constraints with other carriers are seeing degraded transit times which impact the customer experience.
- Amazon is still very much a wild card in the parcel market, leaving many to wonder what role – if any – they may play in helping shippers with unmet capacity needs.
Such uncertainties are indicative of not just the changing parcel industry, but of the changing contract negotiation landscape as well. Not only will these challenges impact a shipper’s ability to effectively navigate negotiation waters as a means to meet cost savings objectives, but they should also be utilized to reassess expectations and reevaluate the negotiation strategy.
How? Start with the consumer. In the past, shippers primarily focused their cost savings objectives during contract negotiation toward obvious or immediate parcel network savings; however, as shippers contend with their own operational adjustments at DCs, as well as volume limitations and transit delays with carriers, the customer experience is sure to be impacted. And that’s nothing to ignore. In fact, shippers able to pinpoint their largest customer pain points and mitigate them during parcel carrier contract negotiation will likely fare well in the upcoming peak season and beyond. For example, it may be prudent to seek out costly or opportunity zip codes that would benefit from carrier diversification, consider consumer attitudes toward carriers/carrier reputations during the evaluation process, or even identify network optimization opportunities to better convert last mile delivery traffic to in-store pickup instead.
At GMT, we have continued to partner with and assist our customers throughout their contract management events during this pandemic, and we’ve observed the following trends:
- Carriers are offering longer-term contracts (7-10 years), rather than more traditional 3-year agreements, in an effort to gain certainty as they plan to adapt to COVID-19 and meet rising demand.
- Alternatively, shippers are pursuing short-term (1-2-years) contract extensions rather than full blown contract negotiations or RFPs, also in an effort to gain certainty as they plan to adapt to COVID-19 and meet rising demand.
- Shippers are also pursuing increased carrier diversification and flexibility as they reassess their parcel carrier contracts. This seems an obvious and practical step, though we’ve already mentioned regional carriers are not immune to the impact of COVID-19 on their networks.
- These observations remain true for both B2B and B2C shippers.
At the end of the day, COVID-19 has impacted the parcel industry entirely. Shippers considering contract negotiation as a component to parcel success vs. the success will undoubtedly fare better than those that do not. For shippers entering contract negotiation to mitigate network congestion and costly shipping errors, it will be important to let go of traditional tactics and seek out new creative solutions, likely customer centric. Shippers of all types will need a diverse carrier partner network to succeed, with a brand strategy that can survive adaptation and flexibility when the rules and rates change again.