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The post-COVID courier, express, and parcel (CEP) environment continues to grow, even as it sends mixed market signals. The shift toward direct-to-consumer (D2C) freight remains constant, with volumes stabilizing at around 3% to 4% CAGR for the coming decade, fueled in large part by organic e-commerce growth.
Demand for faster and more reliable delivery has added cost and complexity, but has also lured a proliferation of new competitors into the market. Tech-based start-ups focused on last-mile delivery and fulfillment now offer lower costs per delivery using innovative business models with minimal reliance on fixed assets such as crowdsourced drivers and even, in Europe, autonomous vehicles. In North America, companies like Ontrac and ShipBob have carved out last-mile niches in both B2B and e-commerce segments.
Meanwhile, Amazon, itself a non-traditional player and last-mile fulfillment innovator, has become the largest U.S. parcel carrier by volume, while incumbents FedEx and UPS saw both declining volumes and revenues in 2023, putting their profitability in jeopardy.
Shippers, as a result, are enjoying exciting new possibilities for cost savings via rate shopping—a strategic approach to comparing parcel shipping costs across carriers, service levels and modes to achieve optimal service and pricing. Leading shippers are already moving away from single-sourcing and diversifying carrier and third-party options to include regional and local players offering lower unit costs and faster service.
Taking full advantage of potential benefits, however, requires companies to adopt a holistic, strategic approach to parcel freight that is integrated end-to-end, data-driven and more collaborative.
An emerging market for rate shopping
Three relatively new developments in the parcel market have taken rate shopping to the next level, tilting rate negotiating advantage toward shippers: 1) the rise of online, non-asset-owning intermediaries in response to pricing complexity and fragmentation; 2) an explosion of new regional and local last-mile physical delivery competitors to address fulfillment gaps; and 3) new digital analytic tools that rapidly scan carrier parcel rate structures against shipper contracts to identify areas of potential pricing leverage and mutual benefit in RFP preparation.
It is important for shippers to appreciate the importance of these developments, and the potential economic benefits from a focused, well-planned rate-shopping strategy.
A comprehensive pricing reset, nationally or at local distribution centers. Rate shopping forces a full review of existing contracts and use of analytic tools to dynamically compare relevant carrier rates and choose the best price for a given parcel based on service level and other constraints.
A wider choice of carriers by location. Optimization and automation enable shippers to compare, select and manage multiple carriers efficiently, provided the location/DC has the necessary capacity and freight-handling capabilities.
Greater price and service flexibility to manage complexity. Shippers can move easily among modes, spot, and contracted service, and a diversified mix of national, regional, local, and emerging players as market conditions dictate via dynamic pricing.
The first step: Securing best rates from carriers
A critical first step for shippers is to develop a full understanding of what they are currently paying and why, establishing a benchmark cost per parcel (CPP).
They can then apply that benchmark against available logistics market intelligence data from third-party vendors showing relevant carriers’ moving rates and charges in the market by service, zone, weight and DIM factors.
Finally, they can adjust pricing estimates for their own dimensional objectives—cost, service performance, customer experience, resilience, sustainability, and so on.
Knowing what they are paying relative to comparable customers, and then comparing what competing carriers—alone or in combination—are offering, provides shippers with an RFP baseline as a starting point for rate discussions. From there they can identify further opportunities for service efficiencies, cost savings and optimal volume allocation among carriers.
Once a shipper has the best rates for their particular shipment profile, it can begin to utilize rate shopping to determine optimal volume allocation.
Levels of sophistication in rate shopping
Companies can vary widely in their approaches to rate shopping, based on their size, sophistication, and technology maturity, from manual processes, to basic software-enabled solutions, to full AI-enabled optimization, automation and analytics.
- Basic. Manual rate research and comparisons among different carriers for specific shipment types and destinations. While time-consuming, compilation can be done by entry-level staff.
- Optimized. Software solutions aggregate quotes from various carriers and present them in a user-friendly dashboard format for faster comparisons and identification of cost-effective options.
- Predictive. More advanced solutions allow back-end integration of shipper contracts and instant analysis against internal and external data and defined shipper objectives; analytics recommend options based on relevant contract terms and a total cost of ownership (TCO) approach. Higher data input and interpretation skills are required to manage input data and to verify processes and results.
Of course shippers must be realistic about their current and future needs, and balance those against limits on staffing resources, technology spend and implementation timelines. But the growing complexity of carrier and 3PL pricing structures (GRIs, ancillary charges, DIM formulas across zones, etc.) add time and potential for error to the rate comparison process.
To the extent that third-party carrier, contract and other external data is integrated with optimization software and analytics, the faster and more accurate unit price benchmarking and rate-shopping analysis are likely to be.
Comparing apples to apples
Just as with initial benchmarking, accurate comparisons are vital given the variability and complexity across carriers, modes, and service levels.
Whether using manual processes or a rate-shopping software tool, here are some useful beginning tips for ensuring valid, accurate vendor price comparisons against existing contracts.
- Understand fully the contract in place and its terms and conditions regarding pricing and service features such as rate cards, base rate discounts, surcharges based on demand profile or non-compete clauses.
- Isolate and focus on locations where rate shopping is feasible and not limited by location, predefined contract clauses, availability of multiple carriers, operational factors like dock doors or pickup hours, and so on. Rate shopping is most effective in locations where regional and local carrier options are available.
- Ensure updating of key contract terms that fluctuate with market conditions and affect rates, among them GRIs, effective base rates, fuel surcharges or peak surcharges.
To assess effectiveness of rate shopping and carrier services, regular monitoring of key metrics is necessary. Primary metrics for cost optimization and compliance with master carrier agreements are savings, revenue by carrier and shipment volume by service level. Key indicators of carrier performance include on-time/in-full (OTIF) consistency, delivery time, accuracy, lead time, complaints, and overall contract compliance.
Deploying rate-shopping tools
Best practices and innovative approaches deployed by leading shippers help to illustrate available capabilities in the marketplace, as well as comparative advantages among on-premises versus cloud-based solutions that support near-real-time decision-making.
Conclusion
New online, regional, and local market entrants to the U.S. CEP market are adding capacity and competition, as inflation is easing and prospects brighten for a turn in the two-year down freight cycle. This is all pointing toward a shippers’ market.
At the same time, technology and AI is driving innovation in the parcel space with rate-shopping tools becoming more sophisticated and available.
These trends clearly show a path for shippers to leverage rate shopping in order to unlock higher benefits in terms of cost, operational efficiency and carrier risk management.
Shippers of all sizes, regardless of their budget or level of technological maturity, can benefit after a brief learning curve by focusing on careful planning, attention to detail and a modest investment in accessible, affordable data management and analytic tools. The stars are aligning. There won’t be a better time.
About the authors
Korhan Acar is partner, Strategic Operations and can be reached at [email protected]; Marc Palazzolo is principal, Strategic Operations and can be reached at [email protected]; Aishwarya Kaul is manager, Strategic Operations and can be reached at [email protected]; and Faisal Ghoury is an associate, Strategic Operations and can be reached at [email protected]m.