SUPPLYCHAINSUCCESS
NEGOTIATING PARCEL SURCHARGE RATE CAPS By Andy Johnson
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n today’s fast-moving e-commerce era, it would be extremely difficult to find a company that doesn’t use one of the major parcel carriers like UPS and FedEx. And as anyone who has ever shipped a package with these two behemoths can tell you, it’s not getting any cheaper. But while base shipping rates grab attention, it’s the surcharges — fuel, residential, oversize, demand, dimensional weight, and many more — that quietly eat into margins. That’s why smart shippers are no longer only negotiating a rate cap on base transportation rates; their new strategy also tackles a cap on accessorial surcharges as well. Here’s how to approach it.
Understand the Surcharge Landscape The original concept of a surcharge was simple — it was a way to keep carriers whole when extra costs began to chip away at a specific load or package. Yet over time, surcharges have morphed from a way to stay profitable into a profit center. The COVID pandemic only accelerated this shift, with both carriers adding new and revised surcharges every year until it now just feels like a money-grab — a way to pad the ever-growing bottom line.
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Everyone expects the General Rate Increase each year and it isn’t going away anytime soon. Likewise, the fuel surcharge has been one of, if not the most, volatile surcharges for the past 15+ years. Other heavy hitters typically include Additional Handling, Large Package, Residential Delivery, and the suite of Delivery Area Surcharges. But maybe not so obvious are the smaller fees such as Address Correction and UPS’s new Payment Processing Fee of two percent. Some of these charges have increased over 40% in the past few years. But before sitting down at the negotiating table, you must understand what you’re up against. It’s not enough just to understand that some of your packages will incur these costs; you must know the total cost of each of these accessorial charges and, specifically, which ones are having the most impact. Accessorial fees can add as much as 30% to a package, so knowing your entire shipping profile is key. And while many shippers realize that accessorial discounts are negotiable, they may not realize that an annual cap on increases can also be negotiated.
proverbial carrot and stick. Often, carriers will only consider capping surcharges if you offer them something in return: volume, consistency, growth, or strategic value. You need to come prepared with: A 12- to 24-month historical shipping report, broken down by service level, weight, zone, residential vs commercial, dimensional weight incidence, oversize shipments, and any surcharges applied. Benchmarking data or industry comparators: What are other shippers paying for similar services? A forecast of your upcoming volume growth (or contraction) and strategy: Are you moving more direct-to-consumer? Expanding zones? Introducing new SKUs? Alternate carrier options: You don’t need to threaten, but you should know what regional or secondary carriers would cost you if you shifted some volume away. This increases your bargaining power.
Build Your Data-Driven Leverage In any negotiation, there has to be some type of bargaining chip. Some type of leverage that can be exercised — the
Negotiate the Contract Structure Here are key contract elements to address when building your surcharge cap into your negotiations:
In short, you must show the carrier that capturing your business is worth forgoing some surcharge revenue in exchange for a long-term, stable win.