Look Beyond LTL Rate Increases

As the 1st quarter is coming to an end, many less-than-truckload (LTL) carriers have announced their General Rate Increases (GRI’s) for 2008.  As usual, these GRI’s are not that far off from the last year’s carrier announcements and they are closely aligned with one another due to the competitive nature of the industry. 

The following are examples of the 2008 LTL rate increases:

Carrier                        GRI              Effective Date

FedEx Freight               5.48%           January 14th

UPS Freight                 5.4%            February 4th

Old Dominion              5.4%            February 11th

While the LTL carriers and rate bureaus are making these announcements, you are probably paying close attention to the moves these carriers make given the current state of the economy and recent changes in the industry. 

It is no secret that the freight industry is suffering the wrath of the economic slow-down.  Adding to the Surface Transportation Board ruling last year to eliminate the anti-trust immunity across the major rate bureaus, the LTL Market is becoming more competitive and is rapidly moving in favor of the shipper.

Given these factors, you must look past these GRI’s and into your actual contract to substantially reduce these costs.  The challenge, however, is understanding what negotiating parameters you can take advantage of to achieve the competitive pricing that you deserve.

First, consider the frequency at which most carriers raise their rates. Since 2000, a majority of LTL carriers have announced their GRI’s every 10 months instead of 12.  This means that as of today, these LTL carriers have raised 9 years worth of rate increases in only 8 years.  It is also important to understand the way in which these rate increases are considered because there are a variety of factors that come into play. 

Many carriers base a GRI on their current operating expense, apply a suggested percentage and analyze it against the previous year’s shipments to determine if the increase will be profitable.  The fatal flaw with this analysis is that it’s based on historical data.  Shipping characteristics can change, causing unfavorable profit margins for the carriers.  As a result, supplemental GRI’s will follow. 

According to Geoff Comrie, CEO of Transite Technology, a transportation technology service provider, this is a common situation.

“There have been several occasions where a carrier has issued a supplemental rate increase to make up for the original miscalculation,” Comrie explains.  “But because of the complexity of the industry as a whole, the majority of the shippers do not even notice.”

This complexity and the shippers’ lack of understanding of the ins and outs of the industry is what the carriers depend on to stay profitable, Comrie says. 

“What many shippers do not understand is that LTL carriers – especially these days - are willing to negotiate almost any portion of their contract, provided that your shipping characteristics are in line with their profitability goals,” he says.  

For example, by negotiating fuel surcharges alone you can save up to 10% off of your overall shipping expenditure.  Many shippers are unaware that they can even negotiate pricing in this area. Accessorial charges should also be examined.  Not only will this make a big difference to your bottom line, the carriers are unlikely to push back if you are incurring these charges on a regular basis. 

Another way that can help you avoid incurring additional shipping charges is by reading the rules tariff.  If you thoroughly go through this document, you are likely to find the “gotchas” that the carriers put in place and are often overlooked.  Some of these “gotchas” include:

• Capacity limitations
• Pricing guidelines for lost and damaged claims

Of course, these are just a few examples of things to look out for in the rules tariff. If these are overlooked, however, you are apt to incur additional surcharges that could’ve easily been avoided.

There is no time like the present to renegotiate pricing with your LTL carriers. The most important things to understand however, is the leverage that you have with your carriers as well as your current shipping characteristics so you fully understand what negotiating parameters will be most profitable for your business.

Whether it is from internal employees or an outsourced service, it is vital that you utilize resources that possess the industry knowledge necessary to make this happen. 

To learn more, contact ontrack@birddog.com.

The carriers usually announce these rates as an average increase, which means that the actual impact will vary widely depending on your individual shipping characteristics. As a shipper, you should carefully look at each individual increase and compare it to your own demographics to fully understand the affect it has on your budget. Knowing that this can be a very time-consuming process, BirdDog has compiled the following information to give you a better understanding of the new rates.

First of all, express rates were announced by the carriers as an increase with a net impact of 4.9%. However, it’s actually a rate increase of 6.9%, combined with a 2% fuel surcharge reduction. Paying 2% less for fuel is a nice break for shippers facing volatile prices. But because fuel is, in fact, volatile, these costs will fluctuate at the same rate they always have. This means that if fuel costs go up, regardless of the 2% fuel surcharge reduction, your shipping costs will go up as well.

To better understand what the rates look like across all services, we’ve broken out the average rate increase by each service level across zones 2–8. Although these rates are based on the pricing announced by UPS, rates from both FedEx and DHL will most likely be similar.

As you can see, the actual rate increase across each service varies significantly and—depending on your individual shipping characteristics—the overall impact could be much higher than the 4.9% increase announced by the carriers.

But as you dig deeper into each individual service, you will see that the rates continue to vary based on other factors as well. For example, ground shippers need to pay close attention to package weight, as this plays an important role in the overall increase. Although pricing does vary on both weight and distance, the rates for packages that fall below 10 pounds is higher than for packages that fall within most other weight ranges.

The following chart is the average rate increase for ground services at each weight break across zones 2–8.

Based on this information, you can see that the rates are above the published 4.9% increase if your shipment weight is 10 pounds or less.

Also, because it is more expensive to send a package by air, especially with the rising costs in fuel, the prices increase at a greater rate for express shipments sent to farther zones, which is when these services are most commonly used. For example, in the following chart, we took the average increase for packages in the 1-10 pounds range sent 2nd-day air across each delivery zone.

Based on our analysis, the rates rise significantly at zones 6–8, and are 3-4 percentage points higher than the average increase.

With the exception of size, the way the parcel rate increases were announced for 2008 is nothing out of the ordinary. What’s more important are the steps that you take to minimize the impact these rates will have on your shipping expenditure. This requires a thorough review of each individual rate increase, along with a complete understanding of your own individual shipping characteristics, to determine what can be changed to lessen the cost.

Inbound freight expenditures are often controlled by vendors. Shippers, therefore, tend to lose sight of these costs. When you purchase a product, your vendor can determine how that product is shipped and then bill you for both the cost of the product and the cost for shipping that product. Where you can regain control of your inbound freight costs is in determining how you are invoiced.

There are typically three billing options to choose from:

Prepaid. The vendor will bundle the cost of the product and the cost of freight onto one line item on the invoice. These charges are not separated.
Prepaid and Add. The vendor will list the cost of the product and the cost of freight separately on one invoice.
Collect. The vendor will bill the client for the cost of the product, but the client chooses how the product is shipped.

The Prepaid billing method is quick and simple, and most shippers select this option. But because costs are not separated on the invoice, little information is provided with respect to what you are being charged for product and freight. In some cases, customers have even been given the impression that they are not being charged for freight at all. “When you bundle things together, you don’t have the information you need to fully understand if—and where—improvements can be made,” says Bill Wolski, senior partner of BirdDog’s professional services team. The ultimate impact on your bottom line? Prepaid billing reduces, if not completely eliminates, your ability to manage your inbound shipping costs.

But the larger issue is this: Prepaid billing options put the vendor in charge of determining how your product is shipped. Vendors can choose the carrier and the service level, and they can even include additional handling costs of their own. This can be an enormous waste of money, particularly if your own shipping program is more competitive than that of your vendor. Wolski explains that even if vendors do have better rates, they might not pass their discounts on to the customer. “I have seen instances where vendors will invoice the customer for the gross shipping charges rather than the net, making transportation a profit center for the vendor.” Many of BirdDog’s current clients are converting to the Collect billing option for this very reason.

Collect is the only option that provides real details about both freight expenses and merchandise costs, which truly allows the customer to control its inbound shipping costs. That being said, customers should still understand every charge they will incur before they agree to a payment method. If you are purchasing from a large vendor with significant buying power, then choosing Prepaid and Add billing might be the best option. If your shipping program is less costly, then Collect is the obvious choice.

BirdDog’s professional services team specializes in determining which payment methods are best, given a shipper’s current environment. To learn more, contact Bill Wolski at bwolski@birddog.com.

Many industry professionals believed that the lower GRIs could be attributed to a decrease in shipping volume and an increase in available capacity. While these changes in volume and capacity could lower the rate increases dramatically, a number of factors will continue to drive the rates upward nonetheless.

Indeed, the new rates were announced last quarter across all regional rate bureaus and individual carriers. SMC3, the largest rate bureau in the country, announced that its General Rate Committee has approved an overall increase of 3.5%, which went into effect on April 2. According to SMC3’s news release, this increase was due to higher operating costs, which were “driven by insurance premiums, driver recruitment, and security requirements.”

Other regional bureaus have followed the same guidelines. Middlewest Motor Freight Bureau’s rate increase reached 3.56% and Rocky Mountain Motor Tariff Bureau approved a 3.52% increase. Pacific Inland Tariff Bureau however, which was the first to announce its 2007 rates, announced a much higher increase of 6.5% across its PIN500 Tariff.

Individual LTL Carriers have also announced new rates for 2007. The following are a few examples of the increases that have gone into effect:

Carrier | Rate Increase
FedEx Freight | 5.59%
Old Dominion Freight Line | 5.1%
Yellow Transportation | 4.95%

Regardless of the size of the increase, it is still no help to shippers that are already spending too much on LTL shipping expenses. Todd Benge, senior partner of BirdDog’s Professional Services team, says many LTL Shippers do not fully understand how much they are overspending. “The clients that we are currently working with were paying between 10%-20% more than they should on their LTL shipping expenditure,” says Benge. “It will make no difference how small the GRI is, as it still forces the shipper to spend more for the same service.”

This is a good time to renegotiate carrier rates. It is also a good time to identify changes to your shipping operations that can provide even more savings. Many shippers will switch from small package services to LTL at weight breaks that are assumed to be the most cost effective for their businesses. But with the right tools in place, you could compare the rates that you are paying for small package vs. LTL, and then determine if you would be better off switching to LTL at a higher breaking point.

For example, you could be switching over at 150 lbs. But when you take into consideration the rates, weight of the pallet, and minimum charges vs. the small package rates, you might find that switching at 500 lbs will be more cost effective. That’s why it is important to redefine your small package and LTL weight breaks and structure contracts accordingly. Small package carriers offer very competitive pricing for shipments in the 150 lb - 500 lb range.

To have a fully optimized LTL contract, companies must look past the GRIs and closely examine the individual contracts. Because of the various data points to consider, it is easy to overlook the areas that are causing shippers to spend too much on LTL. For example, fuel costs, which remain volatile, are not included in the GRI increase as they are applied separately through one of the many surcharges.

Benge adds that it is not uncommon for shippers to be contracted with 20 or more LTL carriers. This can become difficult to manage, as each new carrier brings more complexity to pricing. Bottom line: the savings and service improvements you can realize from renegotiating your LTL contracts will certainly soften the blow of your carriers’ rate increases.

The carriers will publicize these higher charges as if they are flat increases applied to all services. Therefore, many shippers will remain unaware of the real impact of these higher charges, unless they consider their own shipping characteristics and dig deeper into the new rate hikes.

If you are like many logistics professionals, your budgeting strategy will be based on advertised average price increases along with the impact of last year’s rate increase on your annual transportation expenditure. While this approach can be an effective way to estimate the impact of the carriers’ rate increase, it can often lead to unforeseen cash flow deficits that result from under-budgeting.

In November 2005, UPS announced an average price increase of 3.9% on commercial ground shipments and an average increase of 5.5% on its express and international shipments. These "average" increases are just that-averages. So the question that must be asked is "Are you an average customer?"

A $1 million net UPS shipper in the Northeast saw a 6% increase to its small parcel expenditure between 2005 and 2006. The increase to its commercial ground shipping charges was in line with what UPS advertised, coming in at just under a 3.9% increase. But this shipper used the Next Day Saver service to move 35% of its packages. The cost of this service level for this particular customer increased by just over 6% and accounted for nearly two-thirds of its overall parcel expenditure increase.

This same rate increase resulted in a different outcome for another shipper within the same parcel spending range. Because it ships 96% commercial ground, this company saw an overall increase of just 4.28%. While the shipper did see a dramatic increase in commercial next day air (at a 6.2% rise) and residential ground (at 7.3%), very few packages were shipped using this service level. Because this shipper primarily used one service level that experienced the smallest increase, the impact of the carriers’ transportation charge increase was mitigated.

It’s well known that carriers increase their rates at least once per year. The real story here is the difference between the carrier announcement and the impact rate hikes will have on your parcel expenditure. As a shipper, you should thoroughly consider each individual rate increase in order to fully understand the overall impact it will have on your transportation spend. This not only better prepares you for the next year, it also allows you to make changes to your shipping characteristics that will help soften the blow. Changes such as rerouting packages to service levels that are more economical but deliver on the same day can put significant dollars back into your budget.

Dave Roy is product manager for Andover, MA-based BirdDog Solutions, a parcel shipping optimization services provider.

Are you a good candidate for UPS Hundredweight or FedEx Multiweight?

Many businesses are unaware of how much they could save by choosing UPS Hundredweight or FedEx Multiweight when sending merchandise on partial pallets, or less-than-pallet loads (LPLs). High costs and the increasing risk of goods becoming lost or damaged are common issues that businesses face when sending LPL shipments. But using UPS’s or FedEx’s services for non-palletized shipments can save you both time and aggravation.

Operating via a hub system, LTL carriers pick up packages from a variety of customers in a given geographic area and transport these items to a local terminal. From there, the packages are consolidated according to the delivery route for each truck. Because LPL shipments are uneven, carriers break these pallets down and rebuild them with other uneven pallets to maximize truck space and increase load efficiency. Once the packages arrive at the delivery terminal, the mixed pallets are then reassembled.

The problem is that there is a greater risk that these packages will be lost at the time of reassembly. Some packages will not have a label when they are sent on a pallet, because they are part of a series of packages that are to be sent together. Without a label on every package, reassembly can be extremely difficult and packages can easily be lost. But Multiweight and Hundredweight services track shipments at the package level, rather than using a pro number that indicates shipment level detail only.

Packages sent through LTL carriers are also subject to interlining. That is, when shipments are sent to a location outside the delivery area of the original LTL carrier, the trucking company will transfer that shipment from the border of its service area to another LTL carrier for final delivery. Interlining means that packages are subject to additional handling; therefore, you will be subject to extra charges. There is an increased risk of loss and damage to these packages as well. UPS’s and FedEx’s delivery areas, however, are located across the continental US. So, with Multiweight and Hundredweight services, typically no interlining is involved.

The savings that businesses realize when switching to FedEx Multiweight or UPS Hundredweight can be substantial. Because these services are equipped to accept LPL shipments, shrink wrapping, palletizing, and so forth are not required. Pallets not only cost money, but they can also add a substantial amount of billable weight per shipment. What’s more, additional surcharges that LTL carriers typically bill do not apply with these alternative services. Minimum surcharges are much lower and accessorials, such as inside delivery, congested area deliveries, and single shipment pickups, all contribute to savings when sending LPL shipments.

Todd Benge and Bill Wolski are senior partners for Andover, MA-based parcel shipping optimization service provider Birddog Solutions.

Companies commonly assume that they are getting competitive rates when renegotiating carrier agreements. But in reality, businesses waste hundreds of millions of dollars each year because key factors go unnoticed.

Enter BirdDog’s Contract Optimization experts. Our experts have helped hundreds of clients identify savings that would have typically been overlooked. Consider one pleased client: a wine distributor that has been a BirdDog customer since 2005.

Before being introduced to BirdDog, the wine distributor renegotiated its contract itself and was under the impression that it was seeing substantial savings. Its rates were improved, and it appeared that the company was getting the most out of its carrier for a shipper of its size. When the wine distributor was introduced to BirdDog, however, it realized that there were many details in the contract that had been missed. "Certain terms and conditions, as well as the contract structure itself, can prevent the client from seeing true incentives," says Todd Benge, senior partner of BirdDog’s Professional Services.

BirdDog’s Contract Optimization consultants analyzed the company’s shipping data and carrier contracts using a customized modeling tool. With this information, we were then able to benchmark the usage and rate data against BirdDog’s extensive knowledge base, considering over 130 factors in our analysis. What was uncovered? For starters, some incentives were not being fully utilized because specific clauses in the contract prevented the company from seeing the discounts it deserved. In addition, the consultants provided the wine distributor with extensive knowledge and insight on the contract that the company would have otherwise not received.

"We recognized the areas that affected our client’s pricing structure and adjusted them accordingly," says Chad Herbert, partner of BirdDog’s Professional Services. This resulted in a better contract, providing the wine distributor with even greater cost savings.

"We now have the ammunition to work with our carrier more effectively," says the CFO at the company. "BirdDog has even armed us with information that enables us to make technical changes, which will prevent specific charges from happening in the future."

BirdDog’s Contract Optimization specialists enable organizations to successfully negotiate their contracts to match their business needs, challenges, and future goals. To contact the Contract Optimization team at BirdDog, you can email Todd Benge at tbenge@birddog.com.

In an effort to minimize the impact this will have on its customers, the company adjusted its air and international fuel surcharge index down by 2 percentage points.

This new air fuel surcharge, an index-based rate that is adjusted monthly, applies to all UPS small package air and international services. Although the cap was removed because UPS is reporting a significant increase in fuel spending from last year, the original cap was put in place to differentiate UPS from FedEx, its top competitor (which has never capped its fuel surcharge).

With the frequent increases in these rates, however, the cap was not an effective selling point. "Customers did not see this as a secure savings opportunity because the charges were increasing too frequently," says Todd Benge, partner of Professional Services for BirdDog Solutions. Before coming to BirdDog, Benge held many positions at UPS in Sales, Marketing, and Operations. "Because of the rapid change, UPS just couldn’t sell the cap differential, so this puts them back on the same scale as FedEx."

Before UPS revised its index table, the price per gallon of jet fuel had a higher surcharge percentage at UPS than at FedEx, despite the 12.5% cap. This means that if there was ever an unexpected price drop on jet fuel, it would need to drop much lower at UPS than at FedEx, in order for UPS customers to get a better surcharge rate.

The index-based surcharge for air and international shipments at UPS is comparable to FedEx’s Express Fuel Surcharge table. Both indexes are based on the National US average on Highway Diesel Fuel Prices reported by the US Department of Energy. Changes to these rates are posted on the respective carriers’ websites.

jleblanc@lakotasolutions.com

BirdDog Recognized as One of Omaha's Top 25 Private Companies

The Omaha 25 program, co-sponsored by the Greater Omaha Chamber of Commerce, First Westroads Bank and KETV, honors 25 privately owned businesses and their contributions to the growth and success of the entire community. Like the INC. 500 list of the nation’s fastest-growing private companies, the Omaha 25 list showcases the positive growth of our community. During the Omaha 25 Excellence in Business Awards Luncheon the Greater Omaha Chamber of Commerce expands the program to include the following awards; Emerging Business of the Year, Not-For-Profit Organization of the Year, Small Business Advisor of the Year, and Small Business of the Year Award.

About BirdDog Solutions Inc.
BirdDog Solutions (www.birddog.com) is the leading provider of contingency-based, small parcel cost recovery services. Through superior technology and service, BirdDog delivers unique value to its customers by reducing shipping expenses and returning profits. As a private equity, venture-financed company, BirdDog provides fully outsourced services to reduce express parcel shipping costs, eliminate unnecessary internal costs, and provide information to help better manage transportation departments. Founded in 1998, BirdDog is headquartered in Omaha, Nebraska, with a management team composed of successful entrepreneurs, business leaders, and technologists.