The Calm Before the Storm - Change in the Parcel Industry

Springtime marks the transformation from the predictable cold of winter to a time that can bring unpredictable variations in weather. The small parcel industry is experiencing the same kind of unpredictable change. Three forces have converged, putting additional pressure on shippers.

Downward movement in tier levels
Impact of moving DHL business to a new carrier
Fuel surcharges

Current U.S. economic conditions have been compared to the Great Depression and are impacting all businesses in many ways. Wide swings in shipping volumes, ranging from 20-30 percent, are having a significant impact on shippers’ contracts. However, most have not yet begun to feel the impact because of the dramatic drop in fuel costs, thus creating the “calm before the storm.”

Tier Levels

We have seen a trend by many shippers wanting to change tier levels, which could lead to double digit increases in their rates. Tier levels are designed to motivate shippers to maintain their volume with a carrier within a specified range, typically +/- 15 percent. Carriers design their price structure around a specific volume, but will significantly penalize shippers if they drop below a certain level. Tiers have been designed to be carrier friendly. The upside rewards for shippers who increase their volumes is not nearly as significant as the downward penalties that result from lower volumes. If this is happening to you, now is a great time to strongly consider renegotiating your contract. At a minimum, you should renegotiate your tier levels. If your carrier is not willing to cooperate, then this might be a good time to consider putting your parcel business out for bid.

DHL Volume

When DHL Express made the decision to exit the U.S. market on January 31, 2009, it forced many shippers to shift their domestic parcel volumes to Fed Ex, UPS and the USPS. At the time, many shippers were more concerned with obtaining shipping capacity and agreed to short-term deals (6-12 months) with other carriers. Many of these deals were at their current DHL rates or slightly modified with understanding that the agreement would be changed at a later date. Given the short timeframe they had to make the change, many shippers found this convenient and very easy to agree to these terms. However, as these agreements come to term, many shippers will realize a significant increase over their DHL volume costs, typically 10-50 percent. During the mad scrabble to secure capacity, carriers also deployed a strategy that enticed shippers to move their domestic parcel business without a solid pricing platform in place for the future. If your agreement is about to expire, this is also a great time to renegotiate your contract.

Fuel Surcharge

Shippers have benefited from the rapid decline in fuel costs. Many also had budgeted for a higher FSC in 2009 and are benefiting from its downward move. However, we are already seeing this starting to reverse course. Traditionally, the summer month have been a time that the oil companies raise fuel costs because of reformulated gas requirements and increased consumption. There are indicators that fuel costs will go up in the second half of 2009 and 2010. When this happens, shippers will lose the one advantage they had and will begin to see a negative impact on their transportation budgets, creating another opportunity to renegotiate contracts.

Moving Forward Plan

The economic recovery will move at a much slower pace than the U.S. has experienced in the past. Leading economic indicators are suggesting that the economy will remain weak in 2009 and begin to rebound sometime in 2010. This will have a significant impact on shippers’ rates over the next 18 months. The duopoly (FedEx/UPS) is still in a dog fight for volume. UPS just reported their first quarter 2009 results, which stated that their domestic revenue was down 10.2 percent and daily domestic volume was down 4.3 percent. The duopoly is working very diligently to drive cost out of their networks while continually looking for new business. This creates a great opportunity for shippers to place their parcel business out for competitive bids. As part of a forward-looking strategy, it is best to secure a 2-3 year contract during times like this, because as the big two get closer to optimizing their networks they will be less willing to offer concessions. The USPS also is an alternative to create additional competition. There seems to be a place for the USPS in all accounts.

Most parcel contracts are very complex and require the assistance of a third-party provider. There are companies that offer this service to assist shippers in negotiating or renegotiating their contracts. As the horizon darkens, the calm is about to end. Shippers need to take the necessary steps now to weather a “perfect storm” that’s rapidly approaching.

Michael J. Ryan is vice president of Sales/Marketing at GENCO Supply Chain Solutions-Transportation Logistics. He has over 25 years experience in the small parcel industry. GENCO has negotiated over $2.5 billion in small parcel contracts. GENCO offers a full portfolio of services that are designed to create best- in-class contracts and pricing. Mike can be reached at 708-224-1498 or ryanmj@genco.com.