Parcel shipping spend: The untamed holdout in today’s supply chains

For those who oversee parcel shipping operations, the supply chains of their organizations can seem like a study in contrasts. On one hand, innovation reigns for much of the supply chain operations. Connected sensors monitor the performance of machinery and the whereabouts of supplies; autonomous mobile robots accelerate materials handling; and automated storage and retrieval systems achieve levels of throughput and order accuracy in e-commerce operations unheard of just a few years ago.

Such technologies, and many others, have made today’s factories, ports and distribution centers some of the most technically advanced environments in the world. And even in supply chains where organizations are just beginning to embrace automation, strategic sourcing techniques institutionalized by e-procurement software years ago are often mature and refined. That is why so many parcel shippers see their own operations as an anomaly, the last untamed business function in many supply chains and e-commerce fulfillment operations.

Most shipping departments today have very little visibility over their parcel shipping data and even less ability to control parcel shipping costs. This is despite significant and continued parcel shipping cost increases since the pandemic and a growing appreciation of their direct impact on bottom and top-line results—whether it’s making it possible to more quickly and economically get parts for a machine on the factory floor or enabling e-commerce organizations to fine-tune their pricing strategies to offer “free” or reduced shipping, a key differentiator in online sales.

The reasons for this lack of visibility and control are many. Parcel shipping has always been a complex endeavor. Each shipment is essentially an ad hoc event, with each package being sent to a different destination and typically a different weight and dimension.

But the complexities don’t end there. Parcel shipping data is not standardized and every shipment is governed by a complex web of terms and conditions, among them a constantly changing array of fees and rules governing everything from specific zones to a litany of surcharges.

As a result, parcel carrier contracts are multi-page documents with many pages of fine-print details, each of which can dramatically impact what it costs to send any one parcel from one point to another—a reality that causes e-commerce operations to sell and deliver items at a loss far too frequently. Lacking real visibility over their shipping data and with practically no ability to manage it strategically in real time to save money and gain efficiencies, most shippers have simply lived with the status quo.

The gain share model

In the absence of any real ability to proactively manage parcel shipping spend, shippers for decades have relied on parcel consultants who specialize in parcel carrier contract analysis and negotiation. Typically, such firms operate under a gain share model in which they receive a percentage of the savings they generate by securing better terms and conditions from the carrier or through audits that uncover opportunities to rein in costs. These payouts often extend over a three-year period.

It’s a lucrative arrangement for consultants, particularly when one considers that even a basic audit typically uncovers savings of one to two percent of total parcel shipping spend. Considering that a manufacturer may send hundreds of parcels each week and an e-commerce company may send millions from its distribution center, just one audit can result in a highly lucrative recurring payment—again often over three years.

Unfortunately, a vicious cycle of gain share fatigue often results. As payments to consultants increase, many shippers end their consulting engagements in an effort to decrease costs, only to come back when their shipping outlays begin increasing again.

Notably, although they are adept at best practices, most parcel shipping consultants also have very limited visibility over their clients’ shipping data and are unable to parse it in a granular fashion for decision-making. One basic task—budgeting for the annual General Rate Increase (GRI)—reveals in stark terms just how difficult even basic efforts to manage parcel shipping spend are as a result.

Budgeting blind

For years, shippers have struggled to create adequate budgets, with carriers’ GRIs introduced at the end of the calendar year, being a prime example. Last year, for 2024, FedEx and UPS increased their general rate by 5.9%.

One would think that shippers could simply increase their shipping budgets by 5.9% and call it good; however, the many rules, fees and surcharges that can dramatically impact what it costs to send a parcel are not included on either carriers’ announced average increase, and even if they were, they would impact each organization differently depending on its unique shipping profile and activity. As a result, even creating an annual parcel shipping budget has, and for most, remains a best-guess endeavor—a far cry from the exacting procedures used to manage other supply chain costs.

Our own analysis at Reveel, conducted in December of 2023, of the 5.9% GRI announced by both FedEx and UPS, demonstrates this point. By creating a model that makes it possible to apply the 2024 rates and the many new surcharges and fees not included in the GRI to real shipments that occurred the year before, we are able to provide an apples-to-apples comparison of year-over-year costs.

While the difference between the 5.9% GRIs and the real-world cost increases incurred by shippers were not as great as in previous years, they remained significantly higher than published rates. Specifically, we found that if the average organization were to make the same shipments in 2024 as it did in 2023 the average FedEx customer would pay 8.17% more in 2024 than they did last year; while the average UPS customer would pay 7.72% more in 2024 than they did in 2023.

That’s actually a slight decrease in cost increases over previous years. For example, our analysis of the GRIs introduced by both carriers for 2022, again in December shortly after they were announced, found that the 5.9% increase introduced by both carriers for that year actually amounted to a 10.25% increase for UPS customers and a 12.86% increase for most FedEx customers with one exception: Customers who at the time used FedEx’s Ground Economy services stood to see their annual parcel shipping costs increase by 26%.

More broadly, our analyses have found that parcel shipping of FedEx and UPS have increased by 30% cumulatively over the past three years—a full 10% higher than the compounded, three-year published general rate increases from both carriers. Most importantly, with no real-time availability over their shipping data and the control that comes with it, most shippers are very limited in their efforts to respond by optimizing even the most general aspects of their operation. But all of this is changing.

A new era of parcel shipping and vital factors to track

As in many endeavors, advanced data science and artificial intelligence are changing parcel shipping. Technology has empowered shippers for the first time to gain very detailed visibility over their shipping data, automate decision-making, pose what-if questions to determine how costs will be impacted by various decisions, and do for themselves many of the very things they previously paid consultants for.

This does not mean that consultants are not needed—their expertise is still important in complex shipping operations—but technology now enables shippers to address many common shipping mistakes by focusing on the most important determinants of success.

In interviews with more than 400 leading shippers, we identified the vital factors that have the greatest impact on parcel shipping effectiveness. These are the things that every shipper should be tracking—something data science and AI now makes possible—to be certain that they have the information needed to keep their costs in check and take a strategic approach to parcel shipping. They include:

• Total parcel shipping spend: Today parcel shipping spend, and its ratio as a percentage of sales for companies that sell online, and as a percentage of operational costs for other operations within the supply chain, should be measured.
• Surcharge spend: Carrier surcharges, from fuel surcharges to delivery area surcharges typically assigned to more difficult-to-reach remote areas, but expanded in 2024 by FedEx and UPS to include popular metropolitan areas, are some of the most powerful ways for shippers to increase their RPP, or revenue-per-package or parcel. Not only are new surcharges added all of the time, but they can radically impact shipping costs.
• Average weight: Over the past few years most carriers have taken steps to increase the costs associated with heavier or bulkier items, so the average weight should be closely monitored. In addition, dimensional weight should also be tracked. Dimensional weight divisors are the complex formulas carriers use to calculate the pricing of packages based on their weight and size—something that’s understandable when you consider that a large but light package still takes up space.
• Average zone: Monitoring where packages are being sent or alternatively being shipped from, is crucial when looking at whether it makes sense to decrease the distances involved—such as by using a different warehouse or a supplier’s different facility. It should also be determined if less expensive delivery options are viable.
• Minimum charges: Minimums are the absolute lowest price a carrier will charge for the delivery of a parcel and are independent of discount agreements. For that reason, minimums, and more specifically the percentage of total shipments that reach them, should be tracked at all times.
• Average cost per shipment: The average cost of shipments is something that also should be considered at all times, and is particularly powerful in demonstrating how parcel shipping spend impacts revenue and operational budgets. It is also helpful to measure the average cost of specific carrier service levels. For example, an increase in costs for expensive express air delivery should prompt an exploration of why costs are going up.
• Carrier performance: A measurement of on-time vs. late delivery as measured against carrier service levels. This metric allows shippers to confidently make decisions that balance cost against customer delivery expectation.
• Time in transit: Time in transit is a crucial metric in parcel shipping that measures the duration a package takes from origin to destination. Businesses rely on this data to optimize routes, predict delivery dates, and manage inventory efficiently. Additionally, time in transit plays a key role in contract negotiations, SLA compliance, and overall supply chain optimization, making it essential for improving shipping operations and maintaining a competitive edge.

With data on these vital factors in hand, parcel shippers have the operational intelligence they need to negotiate better shipping rates, terms and conditions with their carriers. It is commonly known that carriers expect their customers to negotiate aggressively when the new GRIs are unveiled, but notably this information should be used on an almost continual basis to keep costs in check, create new opportunities to save, and avoid the most common parcel shipping mistakes.

The most common parcel shipping mistakes in today’s supply chains

The ability that data science and AI gives shippers to proactively address and control their parcel shipping spend also makes it possible to address many of the common mistakes organizations have historically made when managing their parcel shipping spend. Some of these include:

• Not negotiating enough: Carriers expect their customers to negotiate new contract terms and conditions—not just when the new GRIs are introduced. Shippers should look for opportunities to negotiate more favorable terms and conditions on a quarterly basis at a minimum, or when aspects of their business change even if they have multi-year contract in place, as addendums can be added and removed.
• Not addressing surcharges: Shippers should always take the time to determine how any new surcharges will impact their costs. It is also imperative to track surcharges not only for their impact on costs, but also their effective dates. One of the most common sources of significant losses is when shippers fail to realize that surcharge discounts they received or negotiated expire before the contract does. Vigilance, and automated alerts, are crucial.
• Embracing a multi-carrier approach without the proper safeguards: A multi-carrier approach that aligns each shipment with the carrier that is best qualified to deliver it at the lowest cost or at the highest service level offers many benefits, but organizations all too often embrace it without putting the proper systems in place. For example, a multi-carrier approach that is not implemented correctly can create a situation where the shipper fails to meet negotiated volume levels—a reality which often results in significant penalties.
• Failing to optimize service levels: Many shipping departments too frequently use express air express service when much more affordable ground delivery services suffice. Advanced data science easily remedies this in situations where the time difference is immaterial for customers.
• Not monitoring the basics: Our research of shipping organizations finds that more than 75% of shippers do not request the rebates they are entitled to when carriers fail to meet their own service level guarantees, typically when packages are delivered late. A thorough audit, again something new technology enables with ease, should be a routine process.
• Failing to follow the money: One of the most common strategies of carriers is to offer a number of discounts and concessions on services that do not significantly impact the shippers’ costs. Making sure that negotiations focus on where money is spent is key.

Shippers have always played an important, mission-critical role in the organizations they serve. Today, when consumers in every sector, and the businesses that serve them expect fast access to the items and supplies they need, the importance of parcel spend management has never been greater, or able to be more effectively addressed

About the author

Josh Dunham is the co-founder and CEO of Reveel. Founded to help shippers level the playing field for carriers, Reveel’s Shipping Intelligence Platform uses Parcel Spend Management 2.0 technology to provide parcel shippers with the actionable insights they need to lower their shipping costs right now, on their own.

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