Benchmarking is an excellent management tool but, unfortunately, not when it comes to assessing carrier incentive rates. Many professionals cannot resist the notion that “if my discount is better than someone else’s then I must be doing okay.” Wrong! In fact, nothing could be further from the truth. Since no other company has the same parcel characteristics as yours, comparing incentive rates is a waste of time. I can guarantee you that the company next door and your competitor across the country, doesn’t have the same parcel characteristics as you. So when you compare rates, you are really comparing apples and oranges and driving yourself bananas!
There are many factors to be considered when determining what incentive is warranted for your parcels. These include physical parcel sizes, weight and zone distribution, parcels per pick-up and delivery stop. And the list goes on and on.
Why is benchmarking so enticing? For one thing, upper management encourages it throughout the organization, particularly in the financial area. So people are familiar with it and, unfortunately, many distribution managers are unable to explain why it does not work for carrier rate analysis. Secondly, there is a certain amount of comfort derived from talking with peers and comparing carrier rates. But it is a false comfort.
Let’s consider just one variable, parcel size, to make the point. In this example, all other variables – zone distribution, parcels per pick-up, etc. – are identical. Company A’s parcel size is 1 cubic foot, while Company B’s is 2. When comparing the cost to service the two companies, a parcel carrier’s per package linehaul cost will be twice as much for Company B as it is for Company A. That’s because the carrier can fit twice the number of Company A’s parcels in a trailer compared to Company B. So Company A’s incentive rate should be higher by that cost difference. Benchmarking cannot provide that answer. You need an engineered, cost-based approach to understand the impact that your unique parcel characteristics have on carrier costs. Only then can you accurately assess your incentive level!
So what does this mean to you? For one thing, turn a deaf ear to all those consultants knocking on your door or inviting you onto their Web site proclaiming that they can assess your current carrier incentive if you simply tell them how many parcels you ship each day along with your incentive rate! It simply can’t be done. They are probably throwing darts in some back room to come up with their recommendation. So don’t waste your time.
One of the greatest myths perpetrated on you, the shipper, is that incentive levels are driven by volume. That’s simply untrue. Do you think a carrier would offer an incentive to a shipper whose parcels could not be serviced profitably? Of course not, regardless of how much volume they had. The only thing that drives incentive levels is the profitability of your parcels. If your parcel characteristics translate into a low operational cost for the carrier and a high profit margin, they can significantly discount their rates. Naturally, it is a great sales tool for a carrier representative to say, “If you only had a little more volume I could get you some more incentive.” Especially when the sales representative knows that you have no other parcels to give them.
Very few shippers receive a fair incentive rate because they lack an understanding of how their parcel characteristics relative to carrier costs. Carrier cost-based knowledge is required to accurate evaluate your incentive. Without this understanding, you will continue to overpay your carrier.
So the next time someone tells you that they can assess your incentive levels, ask them how that will be accomplished. If the answer is a form of benchmarking, don’t waste your time. Seek an engineered, cost-based approach if you want a reliable analysis. Remember that there are no short cuts to an accurate answer.
Joe Loughran is President of Parcel Rate Solutions and an expert in the parcel industry. Parcel Rate Solutions is a transportation consulting company offering services in Carrier Rate Analysis and Carrier Agreement Analysis. Joe can be reached by phone at (724) 934-0626 or email: email@example.com.