With fewer than 330 shopping days until Christmas, UPS is already preparing for the next holiday peak, determined to avoid mistakes made in 2013 that led to a last-minute delivery debacle and stripped $178 million from its domestic package operating profit in the fourth quarter. The express package giant was hit with between $125 million and $150 million in extra transportation costs and $50 million in service refunds this holiday season, as a surge in online shopping shocked its network, UPS executives said in an earnings conference call Jan. 30.
On Dec. 23, UPS delivered more than 31 million packages, a 13 percent year-over-year increase and a figure that consultant Satish Jindel of SJ Consulting Group said includes 5 million packages delivered to post offices for final delivery by the U.S. Postal Service. The number of temporary workers UPS had to hire in December — when global deliveries climbed 20 percent — was 30,000 higher than expected, for a total of 85,000.
This year, “we are going to spend extra money operationally,” said Scott Davis, UPS chairman and CEO told investment analysts on the earnings call. However, UPS can’t just spend its way out of the problem. “We know that there is still going to be an issue,” Davis said. “Every year, e-commerce is going to be bigger at Christmas.”
Preparation for Christmas 2014 starts with increased collaboration with “high-impact customers” — the retail shippers whose last-minute online bargains helped clog the UPS network — to improve peak demand forecasting, said David Abney, chief operating officer and senior vice president for UPS, which increased revenue 2.4 percent to $55.4 billion in 2013. “UPS volume forecasting methods were challenged” by a surge in online shipping, Abney said. “The paradigms for planning no longer apply due to the rapidly evolving marketplace.”
Plans include closer cooperation with retailers, more network capacity
On the conference call (a transcript of the call is available from Seeking Alpha), Abney outlined steps UPS will take to avoid another holiday debacle. Closer cooperation and communication with online retailers is essential to better forecasting, planning and allocation of assets, he said. In December, “last-minute promotions by online retailers drove extraordinary volume growth,” Abney said. More than 70 online retailers promoted guaranteed next-day delivery on purchases made as late as 11 p.m. on Dec. 23, he said. UPS wants to develop predictive models that will better reflect changing consumer behavior as well as last-minute sales promotions.
The second step is adding network capacity — whether by expanding facilities or putting package vans on the road or automating processes with new technology to make better use of existing capacity. UPS will expedite the rollout of ORION, a program launched in 2013 that uses fleet telematics to optimize UPS package van routes. “We plan to have 45 percent of our drivers routed using the technology” by year’s end, Abney told analysts. That means adding 200 people to the team rolling out ORION, bringing the team’s headcount to almost 700.
UPS will also work to “better manage the impacts certain customers have on our network during peak,” Abney said. For instance, the carrier will work with shippers to get better visibility into the contents of trailers before they are dropped at UPS facilities. “This will improve tracking and exception reporting,” he said. New package exception codes will be rolled out to help better track packages, with proactive notifications for customers.
Will UPS change its pricing to reflect the higher cost of operations as the peak season progresses, or adopt a peak-season surcharge as recommended by at least one consultant, Satish Jindel of SJ Consulting Group?
When asked about pricing, chairman and CEO Davis said “everything is on the table, and that will be one of the things” UPS will look at in an “all-of-the-above” approach to avoiding a repeat of last year’s crunch.