As social and business media lit up with outrage over consumers not receiving promised shipment deliveries by the end of the day of Christmas eve, it was clear this was a previously unseen scenario, linked to a surge in last minute orders. But that’s not the whole story.
Absent from the narrative this year, unlike in some past years, was consumers being unable to buy what they wanted; outside a few items like Playstation, Xbox or the Microsoft Surface, I found few reports of retailers being out of stock during this holiday season. No, this was something new: a very specific almost momentary transportation capacity squeeze that was cleared within days. And making the story even more specific was that it wasn’t — as several news organizations claimed — a result of capacity shortages at both UPS and FedEx.
FedEx was quick to tell the Wall Street Journal on Dec. 26 that that other than “isolated” incidents, it “experienced no major service disruptions during this holiday season, and we experienced no major service disruptions in the week before Christmas, despite heavy volume."
UPS meanwhile, said it was analyzing why its air network was overwhelmed by the surge in last minute orders. Part the answer lies in the surge of last minute orders itself, encouraged by retailers like Amazon.com and Walmart that promised delivery by Dec. 24 for orders made as late as the 22nd. Online purchases between Dec. 20-22 grew by 37 percent versus the same period a year ago, according to IBM data.
That led some commentators to blame the retailers, who it is alleged should be held responsible for the breakdown at UPS. But there’s not enough information yet to conclude that. UPS was expecting growth but not the volume it saw, but what assurances had it made to its retailer customers? Amazon claimed not to be late in tendering packages to carriers and is reviewing their performance, suggesting it does not see itself as contributing to the problem.
While retailers might try to blame UPS, there is caveat emptor in freight transportation. This was not the first time a transportation network got overwhelmed; it’s happened many times before. The smartest shippers are the ones that closely monitor supply and demand of capacity, looking for warning signs, which often are very difficult to spot. They know that if they get caught, they and their own customers are the ones who suffer.
But offering gift cards to disappointed shoppers, Amazon and others showed how they can’t deflect blame. Shippers of ocean containers, for example, understand labor disruptions at ports have the potential to impact their supply chains and don’t simply blame their ocean carrier for delays. Rather, they closely follow developments, accelerate shipments or divert them to other ports. Could a careful analysis of UPS’ capacity and the last minute demands placed upon it have led to a Plan B?
In saying it will review what happened, will Amazon be contemplating setting up its own freight network? In building distribution centers near major metropolitan markets, markets where it already has huge scale, Amazon could see an opportunity in building a last mile network; it’s made previous investments in last mile provides like Kozmo and its vision of delivery drones shows it’s already thinking of ways to control deliveries to customers from nearby DCs.
There are other indications of a convergence between online retailers and transportation: Alibaba in China is investing more than $350 million in developing a domestic delivery network, largely because package delivery networks have not yet reached scale in China and so it’s stepping into a void. But further back in the supply chain the idea even for Amazon makes less and less sense. It’s hard to envision Amazon freighters flying around, just as a massive ocean shipper like Walmart has never launched its own steamship line.
It was also suggested in the aftermath to Christmas this year that delivery pricing was somehow to blame; with low-cost shipping options like Amazon Prime available, the low cost of delivery was out alignment with the high cost of airfreight. But this is a non-starter. Competition among retailers will make shipping charges as competitive as they need to be in order to retain or grow market share. As Amazon has shown for years, it will accept low profits to build a customer base and those economics will define e-commerce for years to come.