Current contracts between shippers and carriers are often overly complex and hinder innovation. Instead of aligning incentives, they create risks for both parties and limit adaptability in a changing market. The most damning aspect is that, once an agreement is reached, both parties often cease further exploration and improvement.
The current procurement process for package transport and delivery needs significant change. Predetermined volume commitments in existing contracts put pressure on both shippers and carriers, regardless of market fluctuations or disruptions. This inflexibility can harm value for both sides as they struggle to meet outdated commitments or invest energy in finding loopholes. The lack of adaptability also prevents businesses from responding effectively to changes in consumer preferences, market trends, or supply chain issues.
The Challenges in the Current Procurement Process
- Bureaucratic RFP Process. Many RFP processes lead to suboptimal outcomes due to their bureaucratic nature. These processes are frequently complex, lack transparency, and fail to incentivize both carriers and shippers - producing contracts that are often flawed from the outset. Generally, overly detailed contracts become less relevant over time, not more, due to the increased "noise" they contain. Bureaucrats sell this complexity as sophistication - when in fact a simple solution would be better.
- Undue Reliance on Package Volume Commitments. Excessive reliance on fixed volume commitments limits potential. Generally, the supplier’s contract is designed around a shipper’s multi-year volume forecasts (impossible to predict with specificity) set against the supplier’s capacity forecast, which is just as impossible to predict. Due to the inherent unpredictability of future market conditions, this approach creates risks for both parties. The inability to adapt to changing circumstances often leads to suboptimal results for all involved.
- Capacity is Expensive: Carriers are challenged to onboard capacity that aligns with actual business needs. This is especially difficult to achieve in the small package industry since the supporting infrastructure is expensive and comes with a long lead-time to deliver.
Better mechanisms
Contracts need to be principle-based, not rules-based. Carriers need to relax some of the control they exert on shipper options and shippers need to improve their inputs into the carriers’ networks. Contracts need to encourage (in fact inspire) innovation. The new contracting model should prioritize flexibility, collaboration, and transparency - enabling shippers and carriers to work together more effectively to meet the evolving demands of the market. This means that shippers should be allowed to pick-and choose components that complement their existing capabilities and they should not be punished for conducting business with a competing supplier.
Shippers and carriers both benefit from sharing ownership of the delivery process
- Increase Shipper Participation. The bifurcation of roles between shippers and carriers needs to be blurred. Contracts should reward shippers for presorting packages into the carrier system and producing timely and accurate manifests. Shippers need to be rewarded with lower rates for building pre-sorted containers.
- Embrace Technology (that is not your own). Shippers should not be forced to use technology that is an order of magnitude worse than competitive technology outside of the walled garden. Network carriers need to be more open to plugging into emerging technologies that could actually benefit them through improved inputs (both data inputs and physical packages).
- Adopt Pricing Strategies from other Industries. Subscription-based pricing is rarely used in contracts between shippers and carriers, but it can be a powerful mechanism to align incentives. It eliminates step-function changes associated with volume tiers. Instead, every additional package tendered to the carrier lowers the fixed cost per package. The carrier benefits by having a recurring revenue stream.
- Reduce Capital Expenditures. By having shippers pre-sort packages into containers, carriers can lower the capital investment required to handle increased package volumes. This is a solution that scales relatively easily for the peak months. Or, at least it scales more easily than having carriers carry excess capacity throughout the year, or having carriers launch peak-only operations.
The package delivery market is ripe for innovation and the contract process is a non-trivial aspect of a better future. Company leaders on both the supply and demand sides can adopt a strategic approach that puts them at the forefront of reshaping the industry. Parties need to consider ways to deploy subscription-based pricing - a valuable option for businesses seeking predictable costs, increased flexibility, and improved efficiency in their package transportation contracts. Most importantly, by adopting an agile approach to procurement, the industry can create a more sustainable and resilient supply chain that benefits all parties involved.
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