Shipping packages is about much, much more than making sure they reach their destination on time. This is particularly true for Procurement professionals working in the small parcel space. Small package, letters, expedited, the category goes by many names. Whatever you call it, this spend area is both essential and challenging for just about every company. eCommerce has given most of us the sense that shipping a package is as simple as clicking 'Confirm.' Anyone with strategic sourcing experience, however, knows it's never so simple.
Optimizing small parcel spend is no small task. Luckily, Source One's team of cost reduction strategists have spent years perfecting each step of the small parcel strategic sourcing process. They devoted an entire chapter to it in their book Managing Indirect Spend! Check out some of their tips for meeting your cost reduction goals in this deceptively complicated spend category.
First, let's take a closer look at where and why so many Procurement professionals run into trouble with their small parcel spend. Predictably, the problems start with the supply base.
It's easy for the inexperienced strategic sourcing team to take one look at the market and assume they've seen all there is to see. On the surface, FedEx and UPS often look like the only suppliers available. Many teams assume that the two competitors are equals when it comes to pricing and service levels. This oversimplification lends itself to a series of oversimplifications. Before long, Procurement teams are overlooking a number of cost reduction opportunities.
In such a small market, suppliers enjoy distinct advantages. The major players know each other's strategies inside and out. They know what it'll take to set themselves apart. With limited competition, it's easy for them to stall cost reduction conversations and delay other portions of the strategic sourcing process.
As with nearly category, small parcel strategic sourcing starts with data and specification collection. Taking a proactive approach to attaining the necessary information will make your cost reduction efforts far smoother. There's nothing wrong with manually going through invoices, or asking suppliers to provide information, but really you should have been collecting monthly and weekly usage reports all along. If you haven't already established a reporting mechanism, you should do so before moving on with your strategic sourcing initiative.
Building an accurate and thorough shipping profile will help immensely during negotiations. To ensure you meet your cost reduction goals, make your sure you collect information related to service types, zone, weight, times, and - of course - a pricing breakdown. With this information in-hand, you're one step closer to cost reduction.
Small parcel agreements are known for their wealth of mysterious charges and fees. Surcharges, ancillary fees, and the like can add up quickly. Some of the most common include dimensional weight surcharges, hazardous material fees, and penalty charges for incorrect zip codes. Each can make it challenging to realize cost reduction. Make sure your entire team knows what these charges actually mean. While some are standard, many are negotiable. Keeping yourself informed about what you're really paying for is an easy way to identify cost reduction opportunities.
Going to Market
Whatever strategies you employ during this stage, it's important to aggressively pursue cost reduction. You might consider incentivizing the supplier by threatening to take your business elsewhere. Even if it's just posturing, the strategy can go a long way in ensuring you reach a better agreement. If you're not comfortable developing your own cost reduction targets, ask the supplier to make an offer of their own. Answer this with an aggressive counteroffer. After some back and forth, you'll likely reach an agreement that serves your cost reduction objectives.
Skillful negotiations are among the most essential components of any strategic sourcing initiative. Ensure your cost reduction efforts have their intended effect by negotiating a maximum yearly price increase. All carriers increase their tariffs annually. Ensure your discounts increase at the same rate. If you're negotiating a tier-based discount to realize cost reduction, things get more complicated. You might consider asking a carrier to include language that will keep them from adjusting discounts in the event of a downturn. Additionally, you can ask to price shipments based on actual weekly volume instead of a rolling weekly average. Whatever road you take throughout the process, ensure your entire team is briefed and prepared to pursue cost reduction.
Want to some help putting these cost reduction tips to work? Reach out to Source One's small parcel strategic sourcing team today.