Combining Small Parcel and LTL Earned Discounts with FedEx (A Word of Warning)

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Earned Discount Overview

Most com­pa­nies that have a ship­ping con­tract are famil­iar with earned dis­counts.  The car­ri­ers have economies of scale that come from deal­ing with clients who ship more pack­ages (such as being able to pick up many pack­ages in a sin­gle trip), and so they pro­vide dis­counts that increase based on how much the com­pa­ny is shipping. 

Many com­pa­nies who use FedEx for their small par­cel ship­ping, also use them for LTL ser­vices.  As not­ed in a recent arti­cle on Logis­tics Man­age­ment, FedEx is the largest LTL provider by a con­sid­er­able mar­gin, with close to twice as much rev­enue as Old Domin­ion Freight Line, the next largest provider.[1]

For com­pa­nies that only ship small par­cel, or only ship LTL, FedEx will have a sep­a­rate con­tract for each (with a very dif­fer­ent for­mat, to reflect the dif­fer­ences in how freight is priced and viewed).  For com­pa­nies that are ship­ping both small par­cel and LTL, FedEx will often com­bine the two in one agree­ment, in order to sim­pli­fy the terms and make it eas­i­er for com­pa­nies to use FedEx for both ser­vices.  (Many com­pa­nies come to FedEx freight because they are using FedEx’s par­cel ser­vice, and it is eas­i­er to have every­thing with one com­pa­ny, in one place.

The Benefit of Combined Earned Discounts

The most obvi­ous ben­e­fit of hav­ing the con­tracts togeth­er is the oppor­tu­ni­ty to lever­age the com­bined spend to get high­er dis­counts.  Often though, there is a seri­ous down­side that needs to be considered.

The Drawback of Combined Earned Discounts

When FedEx offers a dis­count for com­bin­ing LTL and small par­cel ship­ments, they often set the rev­enue tiers at lev­els so that there is a sig­nif­i­cant penal­ty that is incurred by mov­ing either the small par­cel ship­ments, or the LTL ship­ments away from FedEx.  In extreme cas­es, (such as one we saw recent­ly), the com­pa­ny would have lost all of their dis­counts on their small par­cel ship­ping, had they moved their LTL busi­ness away from FedEx.

There are a num­ber of rea­sons why using an earned dis­count struc­ture that is based on the com­bined ship­ping vol­ume can be risky:

  • Over the last cou­ple of years, there have been sig­nif­i­cant dis­rup­tions to the sup­ply chain as well as capac­i­ty issues. It is impor­tant to have the flex­i­bil­i­ty around your LTL ship­ping in particular
  • Small par­cel con­tracts have his­tor­i­cal­ly been for 24–36 months (there are excep­tions, both short­er and longer, but a large por­tion of agree­ments fit this length) where­as LTL agree­ments are gen­er­al­ly year-to-year. An agree­ment with com­bined rev­enue tiers essen­tial­ly means that your LTL agree­ment lasts for as long as your par­cel agree­ment is in place
  • Often LTL and small par­cel are han­dled by dif­fer­ent divi­sions with­in the com­pa­ny, and they may oper­ate and select car­ri­ers inde­pen­dent­ly. A change on the LTL side might not have neg­a­tive impli­ca­tions for the divi­sion han­dling LTL, but have enor­mous impact on the divi­sion that pri­mar­i­ly ships parcel
  • The small par­cel mar­ket is dom­i­nat­ed by two play­ers (FedEx and UPS) along with the Unit­ed States Postal Ser­vice. There are oth­er, more niche ser­vices avail­able, but com­pa­nies may know which small par­cel provider is ide­al for them.  The LTL mar­ket has dozens of com­pa­nies, each with its own strength and weak­ness­es.  Unlike the par­cel mar­ket, where for the most part, FedEx and UPS try to stay fair­ly close to each oth­er on pric­ing since they (gen­er­al­ly) only have one oth­er car­ri­er to beat to be com­pete on price, the LTL mar­ket is a much freer com­pe­ti­tion, and at dif­fer­ent times, dif­fer­ent providers are more aggres­sive on pric­ing.  Lock­ing in your LTL with one com­pa­ny can lim­it your abil­i­ty to take advan­tage of the market

Determining if your revenue tiers are based on combined spend

FedEx will some­times state explic­it­ly in your agree­ment which ser­vices are includ­ed in the cal­cu­la­tion of spend which is used to deter­mi­nate earned dis­count tier. In such an instance, the answer is very clear.  (FedEx will often do this if the LTL ship­ments are includ­ed in a sep­a­rate agree­ment.  When both small par­cel and LTL are priced with­in the same agree­ment, the spend will almost always be combined.

If you are unsure whether your annu­al­ized trans­porta­tion charges from are com­bined (or how much of these charges are from small par­cel vs LTL, you can ask your rep.

Determining when it matters

Whether the fact that the com­bined spend is being used actu­al­ly mat­ters depends in large part on how much you spend on both small par­cel and LTL rel­a­tive to your rev­enue tiers.  Com­pa­nies who ship very lit­tle LTL be able to move their LTL ship­ments with­out impact­ing their tiers.  Alter­na­tive­ly, com­pa­nies who are spend­ing far beyond their rev­enue tiers, may be able to main­tain their pric­ing even should they decide to move their LTL busi­ness else­where.  (Note that com­pa­nies who are spend­ing far more than their rev­enue tiers should con­sid­er rene­go­ti­at­ing with the car­ri­er to pro­vide addi­tion­al incen­tives for their spend.  For more on the cal­cu­la­tions for rev­enue tiers, please see )

If you are unsure how much of your rolling aver­age is dri­ven by your par­cel spend and how much by your LTL spend, you should ask your rep for a break­down.  Note that because of the way small par­cel and LTL are dis­count­ed, and the fact that earned dis­count tiers are gen­er­al­ly based on gross (pre-dis­count­ed) pric­ing, the for­mu­la for deter­min­ing how much your rev­enue tiers are based on your par­cel spend and how much is based on your LTL spend, can­not be eas­i­ly cal­cu­lat­ed based on what you are actu­al­ly paying.)

What to do if your agreement has combined revenue tiers

If you review your con­tract and dis­cov­er that your rev­enue tiers are com­bined, (or if you are in a nego­ti­a­tion with FedEx and they come with a pro­pos­al with com­bined earned dis­counts, ask your­self whether you are com­fort­able being locked in with FedEx for both small par­cel and LTL.  If you are com­fort­able, make sure that you are using the com­bined spend to push for steep­er dis­counts than you would have oth­er­wise.  (It is impor­tant to keep an eye on the rev­enue tier thresh­olds as you grow.  FedEx likes to adjust the tiers up as you grow to ensure you can­not move your small par­cel spend else­where.  Make sure that you are get­ting the ben­e­fit of addi­tion­al dis­counts if they adjust your tiers.)

If you are con­cerned about lock­ing in LTL for a longer peri­od of time, (and you have deter­mined what your small par­cel gross spend is) you can include requests for rev­enue tiers based on small par­cel spend in your nego­ti­a­tion and high­light the dan­gers of com­bin­ing the two.  (In the year before this arti­cle was ini­tial­ly writ­ten in 2022, FedEx was declin­ing to ser­vice cus­tomers due to capac­i­ty con­straints, so an argu­ment that you need the abil­i­ty to be flex­i­ble is very reasonable.

To read an exam­ple of how we helped a client who was nav­i­gat­ing this issue, please see Sep­a­rat­ing FedEx Par­cel and LTL as Part of a Nego­ti­a­tion Strategy


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