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.
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 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.
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:
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.
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.)
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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