Parcel Cost Drivers

About LJM Consultants

• Shipping Cost Management – Since 1998

• More than 1,100 Clients Nationwide

• Leader in Parcel Audit and Cost Management

• Inc. Magazine's Top 5,000 Fastest Growing Private Companies in America (#1622 in 2013)

• Frequent contributors to Parcel Forum, Parcel Magazine, & others

• Named "Best Parcel Auditing Company in America” by Trusted Consumer Review

• Industry Consultant and Expert Advisor For TAG - Telsey Advisory Group

About the Presenters

Kenneth Moyer

LJM Consultants: Executive Vice President of Supply Chain Strategies

• Carrier background: 23 years of industry experience, including a 16-year multidisciplinary tenure at UPS

• 8 years in UPS Pricing, developing, analyzing and implementing UPS pricing and costing models

• Has built thousands of UPS incentive agreements and reviewed many thousands more

• Nearly 10 years assisting shippers with UPS, FedEx, and additional Carrier contract and supply chain optimization

• BS in Marketing from the University of Maryland

About the Presenters

Thomas Andersen

LJM Consultants: Executive Vice President of Supply Chain & Logistics Services

• More than 15 years transportation and revenue management experience

• Negotiated thousands of parcel agreements

• Carrier background: Senior Pricing Manager at DHL Express

• Contributed extensively to the development of the internal activity based cost models

• Nearly 8 years assisting shippers with UPS, FedEx, and additional Carrier contract and supply chain optimization

• BS in International Business and MBA from Florida Atlantic University

Learning Objectives

• Learning to “think like a carrier” when it comes to cost to serve your business

• What is true carrier cost vs. what is fluff; what is flexible vs. what is not

• Carrier operating ratios and what you can do to influence them

• Learn what’s negotiable, such as dimensional weight, accessorial charges, minimums, rebates, payment terms, and terms & conditions

• Real-world case studies on how companies have achieved cost reduction and operational improvements

Think Like a Carrier

District, Region and Corporate Perspectives• Cost• Profitability• Asset utilization optimization• Business plan• Market penetration• Competitive environment• Market perception• Shareholder perception

Market position• Local• National• Global

Carrier Operating Ratios

What is OR?• Definition: The operating ratio is a financial term defined as a

company's operating expenses as a percentage of revenue.

• Calculation:

• An OR of “100” represents the break-even point for a carrier

• Usage: OR ratios are the PRIMARY consideration used to determine shipper pricing…..but far from the only consideration

Carrier Operating Ratios

Different types of OR• Fully Allocated vs. Long Run Marginal

Fully Allocated• Definition: Includes ALL company costs• Examples: Marketing, support functions, R&D, etc.

Long Run Marginal• Definition: includes only costs DIRECTLY related to moving

specific packages • Examples: Fuel, driver & pilot expenses, hub operations, etc

Carrier Operating Ratios

What impacts Operating Ratio at the account level?

• Package characteristics• Pick-up processes• Delivery density• Hub operational needs• Geographic location• Special services• Equipment requirements• Seasonality• Distribution pattern• Etc.

Carrier Operating Ratios

What is a “Favorable” Package? What is “Unfavorable”?

• Good = High cubic density

• Example: “The 3 B’s”

• Bad = Low cubic density

• Example: Empty water bottles, Stuffed Animals, light bulbs

Carrier Operating Ratios

How is the OR used?

• Pricing authority is generally set within OR targets

• Authority levels differ for District, Region, & Corporate Pricing Groups

• These targets are determined by a number of factors

• Two factors to consider are:

• Account size• Competitive threat

Carrier Operating Ratios

Example 1:• Carrier Retention• Under $5MM in gross revenue• No competitive threat• Pricing authority to offer up to a FA OR of 85

Example 2:• Carrier Retention• Under $5MM in gross revenue• Perceived competitive threat• Pricing authority to offer up to a FA OR of 92 & LRM OR up to 85

Example 3:• New Business• Under $5MM in gross revenue• Pricing authority to offer up to a FA OR of 98 & LRM OR up to 92

The Art & Science of Carrier Pricing

Science = Cost• Data driven• Time studies• Very precise & calculated• Based on package characteristics, distribution pattern,

geography, etc.

Art = Market & Perception• What are the other carriers offering?• What do clients view as a “good Deal”?• Is this business truly “At Risk”? If so, at what level?• How does the carrier stand to it’s business plan?• Are there other “non-cost” considerations?

Mostly Cost VS. Mostly Profit

Low Margin:• Special Handling• Adult Signature Required• Etc

High Margin:• Address Corrections• Residential Charges• Late payment fees• Etc

Variable Margin:• Oversize• DAS• Etc

What's Negotiable & What’s Not

The Negotiation Levers to Pull• Evaluate where the carrier truly has cost and where they do

not• Determine where your transportation spend is focused• Evaluate overall incentive program, what giveth and what

taketh away

The Operational Levers to Pull• Are there any operational changes which can be made to

improve the carriers cost picture?• Can you help the carriers margins so they can help yours?• What concessions can the carrier make in return?

Thank You