How much is your organization spending on shipping?
A business typically spends up to 4% of its total sales on shipping, but this percentage can vary depending on the company’s size, total sales volume, or the type of products being shipped and received. In short, shipping costs represent a significant expense for companies of all sizes—and that expense is only increasing.
Ecommerce growth, rising carrier rates, proliferating surcharges, and customer expectations for fast, free delivery have created a perfect storm of shipping cost challenges that directly impact bottom-line profitability. Due to a lack of parcel spend visibility, many businesses struggle to maintain control over their shipping expenses.
The solution? Parcel spend management (PSM) technology. PSM offers a comprehensive solution to these challenges by providing the strategies, technologies, and processes needed to optimize shipping expenses while maintaining service quality. As shipping costs continue to climb, effective parcel spend management has become essential for maintaining competitive pricing and healthy margins.
This guide explores the fundamentals of parcel spend management, its increasing importance, key strategies for implementation, and the significant benefits it offers to businesses navigating today’s shipping landscape.
What is Parcel Spend Management?
First things first: what is parcel spend management?
Parcel spend management is a systematic approach to analyzing, optimizing, and controlling all aspects of parcel shipping expenditures. It encompasses the strategies, processes, technologies, and expertise used to ensure businesses ship packages in the most cost-effective manner while meeting service requirements and customer expectations.
A comprehensive parcel spend management strategy includes several critical components:
- Visibility and Analytics: Systems and processes that provide complete transparency into shipping costs across carriers, service levels, origins, destinations, and customers. This includes data collection, normalization, analysis, and reporting capabilities that transform shipping data into actionable insights.
- Contract Optimization: Carrier contracts are complex. Each carrier uses different terms and formats, so it can be difficult to keep it all straight. Parcel spend management provides expertise and methodologies for negotiating favorable shipping contracts based on a company’s specific shipping profile, volume, and requirements. This includes benchmark analysis, proposal evaluation, and ongoing compliance and contract monitoring.
- Operational Efficiency: Practices that optimize day-to-day shipping operations, including service level selection, packaging optimization, address quality management, and shipping execution. These operational improvements translate directly into cost savings and service enhancements.
- Audit and Recovery: $1.25 billion worth of UPS and FedEx credits go unclaimed every year. PSM is equipped with systematic processes for identifying and recovering refunds for service failures, billing errors, and contract non-compliance. This ensures carriers are held accountable for service commitments and contracted rates.
- Continuous Improvement: Ongoing analysis and optimization based on changing shipping patterns, carrier offerings, and business requirements. This prevents cost creep and ensures alignment with evolving business needs.
How Does Parcel Spend Management Differ from Traditional Shipping Cost Management?
Traditional approaches to shipping cost management typically focus on limited aspects of the shipping equation, such as:
- Basic carrier rate negotiation based on volume
- Reactive addressing of obvious shipping problems
- Annual or semi-annual review of shipping expenses
- Disconnected management of different shipping aspects
It’s a basic model for shipping management. It may suffice, but it doesn’t help your organization perform at its best. In contrast, modern parcel spend management:
- Takes a holistic view of all shipping expenses across carriers, modes, and business units
- Provides continuous visibility into costs and performance
- Employs sophisticated data analytics to identify optimization opportunities
- Applies specialized expertise to contract negotiations
- Implements automated processes for ongoing audit and recovery
- Aligns shipping decisions with broader supply chain and business objectives
- Proactively adapts to changing market conditions and business requirements
This comprehensive approach delivers significantly better results than traditional methods, particularly as shipping environments grow more complex.
The Growing Importance of Parcel Spend Management
Whether you’re a small business or an enterprise organization, parcel spend management is crucial to ensuring that your finances remain in the black. However, the shipping industry is going through some pretty intense growing pains. The ecommerce boom in 2020, rising carrier rates, last-mile complexities, and high customer demands are putting pressure on shippers to do the impossible: ship parcels fast and ship them in a cost-effective way. But it’s not as easy as it seems.
Today’s consumers expect fast, free, and transparent shipping. Meeting these expectations while factoring in carrier increases of upwards of 7% every year requires advanced parcel management capabilities. That’s why parcel spend management has become one of the most critical areas for shippers this year.
The Costs of Inefficient Parcel Spend Management: 4 Key Challenges
In the shipping industry, profit margins are razor-thin, and unfortunately, parcel spend management isn’t something you can check off your to-do list. It’s a critical area of your business that requires constant monitoring and ongoing improvement.
Inefficient parcel spend management can lead to 4 key operational problems.
1. Overpaying for Shipping Services
Shipping budgets are too tight to be overpaying. Without proper management, businesses routinely overpay for parcel shipping in numerous ways:
- Suboptimal Contracts: Companies without specialized shipping expertise often accept standard carrier pricing that includes minimal discounts and unfavorable terms. While a parcel spend management solution can transform a standard contract to a well-negotiated one, saving your business up to 30% of total shipping costs.
- Unnecessary Service Level Selection: Many businesses default to faster, more expensive shipping services when less expensive options would suffice for their delivery requirements.
- Billing Errors: Carrier invoices frequently contain errors related to service level, weight, dimensions, and surcharges. Without systematic auditing, these errors go undetected and result in significant overcharges.
- Dimensional Weight Inefficiencies: Improper packaging or failure to optimize for dimensional weight pricing results in millions of dollars in avoidable charges.
2. Service Issues and Delivery Delays
Poor parcel spend management often correlates with increased shipping problems. Service failures, a lack of contingency options, and poor planning can significantly impact logistics. Without performance tracking from PSM software, carriers have less accountability for meeting service commitments, resulting in more frequent delays. Businesses without visibility into shipping patterns often fail to anticipate seasonal volume increases, leading to delivery delays during peak periods.
These service issues directly impact customer satisfaction and can damage brand reputation in today’s review-driven marketplace.
3. Customer Dissatisfaction
Nearly 80% of consumers won’t purchase from a company again after a bad shipping experience. Is your organization willing to take on that risk? Shipping problems from poor parcel spend management practices can quickly translate into customer dissatisfaction due to:
- Delivery Expectations: Modern consumers expect accurate delivery predictions and on-time performance. When these expectations are not met, satisfaction plummets, and the likelihood of repeat purchases decreases dramatically.
- Communication Gaps: Without proper visibility into shipment status and potential delays, businesses aren’t able to proactively communicate with customers about their orders.
- Price Sensitivity: As shipping costs increase, businesses must either absorb these expenses (reducing margins) or pass them to customers (reducing competitiveness). It’s a hard game to win!
4. Ineffective Carrier Relationships
The relationships with your carriers should be approached as a strategic partnership. Suboptimal carrier management creates ongoing challenges, such as:
- Imbalanced Negotiating Position: Without data on shipping patterns and carrier performance, businesses enter contract discussions at a significant disadvantage. You can’t back up your claims without reliable data!
- Limited Leverage: Companies using a single carrier lack the competitive pressure that drives better service and pricing.
- Reactive Problem Resolution: Without established communication channels and relationship management, shipping issues take longer to resolve and often require escalation.
- Missed Opportunities: Carriers frequently offer programs, pilots, and specialized services that could benefit shippers, but these opportunities are missed without strategic relationship management.
In the aggregate, inefficient parcel spend management typically costs businesses 15-30% more than necessary on shipping expenses while simultaneously reducing service quality and customer satisfaction.
7 Key Strategies for Effective Parcel Spend Management
Successful parcel spend management requires a multi-faceted approach that addresses all aspects of shipping cost optimization. With rising carrier rates and customer demands, optimizing shipping spend is essential to remaining a competitive force.
Here are 7 top-performing strategies for shippers to implement to start effectively managing parcel spend:
1. Rate Optimization
Rate optimization focuses on securing the best pricing for your specific shipping profile. You can do this through a benchmark analysis, which compares your current rates against market standards and similar shippers to identify negotiation opportunities. This analysis should include base discounts, minimum charges, dimensional factors, and surcharges.
It’s also important to analyze your service levels. Review actual transit times versus service level commitments to identify opportunities to shift volume from premium to standard services without impacting delivery expectations. For many shippers, ground service delivers within the same timeframe as more expensive air services for regional destinations.
Parcel spend management technology can automatically detect changes in service levels, ensuring that the service you receive is always accurately reflected in your carrier agreement.
2. Carrier Contract Negotiation
Carrier agreements are incredibly complex. With page after page of terms and conditions, it can be nearly impossible to manage on your own. However, carrier contracts are one of the highest ROI activities in parcel spend management. A successful negotiation involves:
- Preparation: Compile comprehensive data on your shipping profile, including volume by service level, weight distribution, zone distribution, and surcharge incidence. This data provides the foundation for effective negotiation.
- Multi-Carrier Strategy: Develop relationships with multiple carriers to create competitive pressure during negotiations. Even maintaining a secondary carrier relationship with 10-15% of volume can significantly improve your negotiating position with your primary carrier.
- Term Management: Avoid excessively long contract terms that limit flexibility, and negotiate appropriate early termination provisions that allow you to respond to changing business needs or competitive offers.
- Performance Clauses: Include specific performance commitments in carrier agreements, with financial remedies for consistent service failures. These provisions create accountability and offset costs associated with service issues.
- Regular Renegotiation: Don’t wait for contract expiration to address changing needs or market conditions. Establish regular review points to address volume changes, service issues, or competitive offers.
3. Package Consolidation Techniques
Consolidating multiple items into fewer shipments can reduce shipping costs. Shippers can improve order packing through:
- Order Batching: Combine multiple orders shipping to the same address into a single package when delivery timing permits. This eliminates duplicate minimum charges and reduces per-package fees.
- Warehouse Slotting: Organize warehouse inventory to facilitate efficient order picking and consolidation. Items frequently ordered together should be stored in proximity.
- Shipping Schedule Optimization: For non-urgent shipments to regular customers, consider implementing scheduled shipping days that allow for order consolidation.
4. Dimensional Weight Management
Dimensional (DIM) weight pricing makes budgeting for shipping challenging. In addition to other surcharges, with DIM pricing, manufacturers are required to pay more based on the space their packages occupy, rather than their actual weight, further driving up costs. To better manage DIM weight pricing, shippers should focus on:
- Right-Sized Packaging: Implement a comprehensive packaging strategy that matches package size to product dimensions, minimizing void space and dimensional weight charges.
- Packaging Material Selection: Choose packaging materials that provide adequate protection with minimal weight and thickness. Consider air pillows instead of packing peanuts, right-gauged corrugate, and poly mailers for appropriate items.
- Regular DIM Audit: Periodically audit how packages are being measured by carriers and challenge incorrect dimensional assessments. Automated systems can flag packages where the carrier’s dimensions differ significantly from expected measurements.
5. Parcel Audit and Recovery
Without a parcel spend management system, you’re likely paying more than you should for shipping services. Systematic auditing processes have various cost-saving features such as:
- Automated Invoice Auditing: These systems automatically compare carrier invoices against contracted rates, shipped weight, and service levels. Reveel’s parcel audit and recovery solution can also identify billing errors, incorrect surcharges, duplicate charges, weight discrepancies, and service failures that are eligible for refunds.
- Service Failure Claims: PSM solutions can track actual delivery times against service guarantees and automatically file claims for late deliveries. Major carriers typically waive these claims unless specifically requested.
- Lost and Damaged Claims: Establish efficient processes for filing and tracking claims for lost or damaged packages. Proper documentation and systematic follow-up significantly improve recovery rates.
6. Data Analytics and Reporting
Sophisticated analytics capabilities can transform shipping data into actionable insights. One of the most critical areas that shippers need support with is predictive analytics. Parcel spend management solutions can uncover historical shipping data to forecast future volumes, costs, and potential issues. These predictions support more effective budgeting, capacity planning, and carrier negotiations, ensuring your logistics operations always perform at their best.
7. Carrier Diversification
Many shippers will find a carrier they like and stick with them for the long haul. But what if you want to expand to a different geographical area? Or what if that carrier can’t meet peak season demands? That’s when a strategic multi-carrier approach provides numerous advantages, including:
- Risk Mitigation: Maintaining relationships with multiple carriers reduces dependency risk and provides alternatives during capacity constraints or service disruptions.
- Service Optimization: Different carriers often excel in different geographical areas or service types. A multi-carrier strategy allows you to leverage each carrier’s strengths.
- Competitive Leverage: When you’re at the negotiation table, it’s helpful to have some leverage. Carriers offer better terms when they know you have viable alternatives. Even allocating a modest portion of volume to secondary carriers can improve your primary carrier relationship.
What Features Should You Look For In a Parcel Spend Management Platform?
There are hundreds of different parcel spend management platforms available on the market, but they’re not all created equal. As you evaluate these solutions, you should prioritize 4 essential capabilities:
Robust Parcel Analytics
A sophisticated PSM solution will focus on data within the 8 key performance indicators to monitor your shipping performance. These include:
- Service spend
- Surcharge spend
- Average cost per shipment
- Minimum charges
- Shipping weight (including average weight and % hitting DIM weight)
- Average zone
- Delivery performance (on-time vs late)
- Time in transit
Along with the 8 key performance indicators, a robust analytical platform will have comprehensive data integration, customizable dashboards, drill-down capabilities, and trend analysis.
Contract Negotiation and Management Technology
Carrier contracts can be a lot to digest. Carriers use varied terminology, and nothing directly matches up. Specialized contract management tools support more effective carrier negotiations through:
- Rate Benchmarking: Access to anonymized market data that shows how your rates compare to similar shippers provides powerful negotiation leverage.
- Proposal Analysis: Capabilities to model the impact of different carrier proposals against your specific shipping profile help identify the most favorable options.
- Scenario Modeling: The ability to model how potential business changes would affect shipping costs under different contract structures supports more forward-looking negotiations.
- Contract Compliance Monitoring: Ongoing verification that carriers are adhering to negotiated terms prevents gradual rate erosion through incremental non-compliance.
Rate Shopping Tools
Who has the time to manually find and compare carrier rates? Rate shopping tools do the hard work for you, automatically finding the best carrier rates to optimize your shipments (and bottom line). By integrating with multiple carriers, rate shopping tools can provide instantaneous rate comparisons based on package characteristics and delivery requirements.
Billing Audit Automation
Speed and billing accuracy are two of the most important factors in a successful logistics operation. Parcel spend management solutions with billing audit automation will feature:
- Automated Invoice Processing: A 360-degree view of carrier invoices into the audit system without manual intervention.
- Rate Verification: Automatic comparison of billed rates against contracted rates for each shipment component.
- Service Verification: Confirmation that billed service levels match shipped service levels and that service guarantees were met.
- Dimensional Weight Verification: Validation that dimensional charges are applied correctly based on actual package dimensions.
- Duplicate Billing Detection: Identification of potential duplicate charges across invoices or within consolidated billing.
6 Benefits of Parcel Spend Management
Substantial cost savings are the most significant benefit of parcel spend management. Organizations that partner with Reveel can achieve savings of 22% through their parcel spend management 2.0 solutions.
However, there are numerous benefits that go beyond simple cost reduction. Here are the 6 main benefits of parcel spend management:
1. Enhanced Parcel Visibility and Control
Effective parcel spend management provides transparency into all areas of your shipping operations:
- Complete visibility into all shipping costs by carrier, service level, origin, destination, and customer
- Real-time tracking of budget performance against forecasts
- Early identification of cost anomalies before they become significant issues
- Clear attribution of shipping expenses to appropriate business units, products, or customers
This visibility transforms shipping from a cost center to a strategic advantage with clear accountability and control mechanisms.
2. Improved Carrier Relationships
Carrier relationships are the foundation of your logistics operations. At the end of the day, it’s the carriers that call the shots.
Strategic parcel spend management strengthens carrier partnerships through:
- Data-driven conversations replace anecdotal discussions about service and pricing
- Clear performance metrics create mutual understanding of expectations
- Proactive issue identification allows for collaborative problem-solving
- Structured review processes maintain alignment as business needs evolve
These enhanced relationships deliver benefits beyond contractual terms, including better service recovery, access to capacity during constraints, and consideration for new service offerings. It’s a win-win.
3. Operational Efficiency Gains
The goal of any business is to streamline operations. Parcel spend management drives operational improvements throughout the shipping process:
- Streamlined carrier selection based on objective criteria
- Optimized packaging processes that reduce material costs and handling time
- Reduced exception processing for address issues and delivery problems
- Automated audit and recovery processes that eliminate manual claims filing
These efficiency gains reduce labor costs and manual work while improving total capacity, which can be particularly valuable during high-volume shipping periods.
4. Competitive Advantage (In An Increasingly Competitive Environment)
Every organization is looking for how to get the upper hand in their respective industry. The answer is almost always parcel spend management. Optimized shipping operations create meaningful competitive differentiation by:
- Offering better shipping options at a lower cost than competitors
- Delivering more consistent on-time performance
- Providing greater flexibility during capacity constraints and peak seasons
- Adapting faster to changing market conditions
These advantages are particularly valuable in competitive markets where shipping costs and performance significantly influence purchase decisions.
5. Improved Budgeting and Forecasting
There’s nothing worse than going over your shipping budget for the year in Q2. Data-driven parcel spend management enables more accurate financial planning, such as:
- Precise forecasting of shipping expenses based on historical patterns and known changes
- Earlier identification of potential budget variances
- Better understanding of how business changes will impact shipping costs
- More accurate profitability projections that incorporate true fulfillment costs
This means you can better allocate your resources and make more informed investment decisions across the organization.
6. Safeguarding Operations
When a product leaves your warehouse, there’s always some level of risk. But comprehensive shipping management reduces numerous operational risks through:
- Reduced dependency on single carriers or service providers
- Better preparation for peak shipping periods and potential disruptions
- Decreased exposure to unexpected cost increases or service failures
- Lower compliance risk related to hazardous materials or restricted item shipping
Case Study: Boot Barn Saves Millions With Shipping Intelligence
Today’s consumers are omnichannel shoppers—they purchase both in-store and online for their favorite products. To support this surge in omnichannel growth, Boot Barn used Reveel’s Shipping Intelligence™ platform to increase the performance of its fulfillment operation and significantly decrease its net parcel spend.
With parcel spend management, Boot Barn was able to:
- Track expiring surcharges and revenue band changes
- Actively monitor for discounts and agreement compliance
- Recover refunds for late shipments and billing errors
- Monitor for security and fraud
“Parcel shipping analysts can always tell you how to save money, but their recommendations are subjective and reactive. With Reveel we would be able to act in the moment on actual data analyzed and parsed with powerful data science in real time. No one else offered that.” – Donald Petersen, Vice President of Supply Chain and Logisitcs
Traditional Parcel Spend Management Versus PSM 2.0
The difference between traditional parcel spend management and PSM 2.0 primarily lies in their approach, capabilities, and technological foundation.
Traditional parcel spend management focuses on basic cost reduction through carrier negotiations and rate analysis. It offers a reactive approach to managing shipping costs with limited visibility into complex shipping data. Think of it as the basic tier of parcel spend management—it’s a generic process without the bells and whistles.
PSM 2.0, on the other hand, is the superior shipping technology. It transforms complex data into actionable insights using advanced analytics, modeling and simulation, statistical analysis, and near real-time reporting.
PSM 2.0 offers:
- Data-driven approach leveraging advanced analytics and AI
- Proactive spend optimization beyond just rates
- Comprehensive visibility across the entire shipping ecosystem
- Automated processes and predictive analytics
- Strategic decision-making based on real-time insights
- Seamless integration with other enterprise systems
- Focus on the total cost of delivery, including accessorial fees, dimensional weight charges, etc.
- Continuous improvement through machine learning algorithms
- Consideration of broader business objectives beyond just cost reduction
PSM 2.0 represents a more sophisticated, technology-enabled approach that views parcel shipping as a strategic business function rather than simply a cost center to be minimized.
Take Control Of Shipping Operations With Reveel
Effective parcel spend management delivers tangible benefits that directly impact your bottom line—from substantial cost savings and improved carrier performance to enhanced visibility and better decision-making capabilities. Reveel’s PSM 2.0 software is equipped with machine learning and AI, best-in-class visualization, and automated parcel invoice auditing to transform your shipping operations. Request a demo with our team here to get started.
