Thomas Black: UPS said domestic parcel volume fell 1.5% in the third quarter of the prior year and that that decline will continue into the fourth quarter. Given this background, how is the peak season shaping up and will a weak consumer undermine it?
Carol Tomei: When you look at volume trends in the third quarter, it’s been better than it was in the first half of the year. One of the things we started doing a couple of years ago was to rely on the parts of the market that really value our comprehensive network, which meant that we tended to segments like SMEs, healthcare and some enterprise accounts and move away from others who don’t really value our comprehensive network. What this has allowed us to do is improve the quality of revenue in our business and improve the overall customer experience.
For one of our biggest and many of our clients, we came to an agreement on what packages we would offer them and what packages they would offer themselves. This has freed up volume in our networks to take care of the rest of our businesses. When we look at our fourth-quarter guide, that volume is going to go down year on year, it’s really because of contractual agreements, not because the consumer isn’t healthy. We expect a very strong peak. Just to put things in perspective, our network size will increase from Q3 to Q4 by about 25%.
Tyler: Looking ahead, how do you see the demand for the package and how is that going to affect contract renewals with these big shippers?
CT: I’m really happy with the business we’ve won this year. In fact, we have earned more business now than we did in any year prior to 2019. This is because of the service we provide. I am convinced of this. Our service levels are better than any other player, especially during peak period. So, we’ve won new accounts because of our service, and as we look to 2023, I think the environment is pretty fragile right now. It’s uncertain, isn’t it? There is economic uncertainty, there is political uncertainty. So, we plan conservatively and frankly, but we also know we’re winning. TB: Can you put some numbers behind that?
CT: If you look, for example, at our small to mid-sized businesses here in the US that make up over 28% of our volume, we’re gaining a share in terms of average daily volume as well as revenue.
Tyler: Before the pandemic disrupted everything, UPS had extensive service guarantees. When will you return home service guarantees?
CT: When you offer 98% effectiveness, service guarantees are not necessary.
TB: UPS announced an overall increase of 6.9% for next year. How can UPS maintain this pricing strength with weak delivery demand?
CT: We are winning new accounts with great revenue quality because of the service we provide. Service is really important. With the explosion of e-commerce sales, our retailers are looking to make sure their customers get their packages on time, and we do. Everyone has faced inflation. Our GRI announced for next year is indicative of inflation. But shippers are willing to pay that because of the service.
TB: You always drop stories on the news in your conference calls. This time it was logistics as a service. How will this logistics as a service work?
CT: There are five pillars of logistics as a service. All this is enabled by technology. The first is to provide visibility from start to finish. So, from the manufacturer all the way to the last-mile delivery point, shippers look for that comprehensive view. The second pillar is returns and exchange. We have great returns being offered today for Amazon. You can bring an item you bought on Amazon to one of our UPS stores – we have over 5,000 of them in the US – and we just pack it and get it back to you. We want to build it.
Then there is the density improvement in the delivery process. We know that if we can offer more packages at each stop, we will unlock the value. We have tried to do this using downstream solutions. We are now moving upstream to hold orders in the cart so we can drive density in the cart, which then translates to density on delivery. Fourth is financial solutions. We’re offering one today with a great insurance product through UPS Capital. And then finally there’s what I call advanced logistics. This technology is used to assist small and medium-sized businesses in order planning, warehousing and fulfillment. Therefore, we are already leveraging a technology platform through our physical network to deliver the right and best solution to our clients.
Taha: Regarding density, which is kind of the holy grail of conduction efficiency, describe how do you do this? Does UPS slow down if you keep those packages a little longer to get that match?
CT: We work with a company called CommerceHub, which is an e-commerce order engine for most of the world’s retailers. They keep the order in their cart and look to match it with another order, but it’s all within the merchant’s SLA. If we don’t find the match, we will issue the order. But if we find the congruence, we get the density. We piloted this with one client and started working with them in the third quarter, and we’re seeing very good results.
Taha: What are some of the numbers behind that?
CT: For every tenth of an improvement in conduction density, it’s $300 million worth of value to us. And the math suggests that if we can get a 5% match in the cart, we can get to one in 10.
Terabyte: How quickly do you think this could be rolled out more broadly?
CT: We’re preparing additional clients as we speak. This is going to take a while to translate into real value, but I’m really excited because for the first time ever we’re really starting to see some movement on the intensity.
TB: You have an initiative with RIFD labels, which you’re now putting on packages at 101 facilities. How much do these stickers cost and what do they do for UPS?
CT: We’ve lowered the cost of posters to the point where we can do that. This is transformative for our company. Every package is manually checked in today’s car package. You can estimate the effort involved in scanning the packet manually. Then sometimes the packets get wrongly loaded, so they go to the wrong vehicle. In fact, 1 out of every 400 packages in our company is incorrectly loaded. What this means is the package is out for delivery and cannot be delivered because it is in the wrong car. He returns to the center and is turned to and exits again. Where we put the technology, the package is checked and we know it’s going in the right vehicle. False loads have gone from 1 in 400 to 1 in 800, and are trending toward 1 in 1000. We avoid misloads, and minimize manual work. Our preloaders that load these packages into the automotive package use wearable devices to inspect the package. On the way, the car will clear the parcel, so that the work activity is reallocated to something else.
TB: Discuss the overall service plan and how automation plays a role in that as well.
CT: The total service plan only runs the network the way the network is designed to run. This means really focusing on arriving and leaving on time. We saw some notable improvement in this area in the third quarter alone. On-time arrivals and departures for our feed trucks improved by 6.5%.
TR: What do you see with this overall service plan a year or two from now, for example?
CT: If we take 10 minutes off the grid or add 10 minutes to the grid, the cost is $257 million. If we can get the network to work the way it was meant to, there is some real value to unlock. And we saw that happen in the third quarter. Our expenditures grew more slowly than our revenues in the United States.
The other area we’ve covered is what we call our seat. Our bench is just like a basketball bench with players sitting on the sideline waiting to be called. We have UPSers sitting on the sideline waiting to be called if someone is out on vacation or sick leave. We don’t pay them until they are called to play, if desired, but we collect all the benefits even if they are on the bench. A year ago our seat was about 29%. Today we bench about 20%.
TB: UPS’s five-year contract with Teamsters expires at the end of July. Union leadership worked in its wake to eliminate hybrid drivers known as 22.4s in the decade. The Teamsters want to make them all regular drivers. Are you going to give it up at this point?
CT: We’ll leave negotiating terms to the table, but our approach to renewing this contract is win, win, win. One thing I will say is how, how grateful we are to our organizers because they are such wonderful employees. I am very proud of what they have done over the past two and a half years of serving as key factors in the face of unprecedented scale.
The other thing I will say about the contract that will be renewed next year is that these are great jobs. If you drive for us, you make $93,000 per year plus $50,000 in benefits and pay nothing for healthcare.
TB: Amazon is UPS’s largest customer, but sales from Amazon as a percentage of UPS’s total revenue are declining. Why is this and will continue?
CT: So, we have a great relationship with Amazon. We have agreed which packages we will take into our network and which packages they will provide. We’ve done it so carefully and selectively that it’s a win-win relationship. The result is their lower revenue as a percentage of our total. And we’re okay with that because it makes room in our network for the areas of business that we want to grow, like small and medium-sized businesses and healthcare.
Taha: You became a CEO of a very large company in the midst of a pandemic. How was that trip?
CT: What can I say? Pandemic, social upheaval, political upheaval, war in Eastern Europe, and extraordinarily volatile economic conditions in parts of the world. It was just another thing. No matter what comes our way, our people can respond. Keep this in mind. In the third quarter in China, 40 cities were closed for at least five days. Our team did not become a victim of that. rallied. In some cases, we’ve had people sleep on the floor of our centers to make sure the trade continues to flow. In some cases, we canceled and redirected flights to Europe, where, by the way, we grew our export business in the third quarter. Our people are steadfast.
Tyler: What will happen with China? Are you worried there?
CT: What we see and hear from our customers is that there are changes happening in the supply chain as customers move their sources away from China to other parts of the world. The way I look at it is that we will follow up on our customers. If our clients go to Vietnam, Malaysia or Mexico, we will follow them so that we can provide them with great service.
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This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.
Thomas Black is a columnist for Bloomberg Opinion covering logistics and manufacturing. Previously, he has covered US industry and transportation companies, industry, economy and government in Mexico.
More stories like this are available at bloomberg.com/opinion