Thomas Black: UPS said domestic package volume fell 1.5% in the third quarter compared to the year-ago period, and that the decline will continue into the fourth quarter. Given these circumstances, how does the peak season shape up and will it be reduced by a weak consumer?
Carol Tome: Looking at the volume trends in the third quarter, they were better than the first half of the year. One of the things we started doing a couple of years ago was getting into the parts of the market that really value our entire network, which meant we went to segments like SMB and healthcare. and certain corporate accounts and distance ourselves from others that simply didn’t value our network as a whole. And that has allowed us to really improve the quality of revenue in our business and improve the overall customer experience.
For one of our largest customers and several of them, we have reached an agreement on which packages we will ship to them and which to ourselves. And that freed up the scope of our networks to take care of the rest of our businesses. When we look at our fourth quarter guidance, that volume would be down year-over-year, that’s really due to contractual agreements, not because the consumer isn’t healthy. We expect a fairly strong peak. To put that in perspective, our network volumes will increase by almost 25% from the third quarter to the fourth quarter.
TB: Looking ahead to next year, how do you see package demand and how will that affect contract renewals with those big shippers?
CT: I am very happy with the business won this year. In fact, we are winning more business now than in any year before 2019. This is because of the services we offer. I am sure of it. Our service level is better than any other player, especially during peak times. So, we win new accounts because of the service we provide. Looking ahead to 2023, I think the environment is pretty fragile right now. It’s so vague, isn’t it? There is economic uncertainty, there is political uncertainty. So, we’re planning conservatively, with an open mind, but we also know we’re winning. We are taking share.TB: Can you provide some numbers?
CT: If I look at, for example, our small and mid-sized businesses here in the US, which are over 28% of our volume, we’re growing both in terms of average daily volume and revenue.
TB: Before the pandemic disrupted everything, UPS had extensive service guarantees. When will you return these household service guarantees?
CT: When you deliver 98% efficiency, no service guarantees are necessary.
TB: UPS has announced an overall rate increase of 6.9% next year. How can UPS maintain this pricing power when delivery demand is falling?
CT: We get new accounts and great revenue quality because of the service we provide. Service is really important. With the rapid growth of e-commerce sales, our retailers are looking to ensure that their customers receive their packages on time, and we do just that. All faced inflation. Our GRI for next year is a function of inflation. However, shippers are willing to pay this for the service.
TB: You always give updates on 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 of this is made possible by technology. The first is to ensure end-to-end visibility. So, from the manufacturer to the last-mile delivery point, shippers seek this end-to-end visibility. The second pillar is return and replacement. We’ve got a great return deal on Amazon today. You can bring an item you purchased from Amazon to one of our UPS stores—and we have more than 5,000 across the United States—and we’ll simply package it and ship it back to you. We want to create it.
Then the delivery density is increased. We know that if we could deliver more packages per stop, we would unlock value. We have tried to do this with the following solutions. We are now moving upstream to keep orders in the cart so we can increase cart density, which then translates to delivery density. The fourth is financial decisions. Today we offer such a great insurance product through UPS Capital. And finally there is what I call advanced logistics. It uses technology to help small and medium-sized businesses plan for demand, warehousing and fulfillment. So, we really leverage the technology platform with our physical network to provide the right and best solution to our customers.
TB: When it comes to density, which is the holy grail of delivery efficiency, describe how you do that? Does it slow UPS down if you hold those packages a bit longer to get a match?
CT: We work with a company called CommerceHub, which is the e-commerce order engine for most retailers around the world. They hold the order against the cart to match it with another order, but all within the merchant service level agreement. If we can’t find a match, we’ll place an order. But if we find an equivalent, then we have density. We tested it with one client and started with them in the third quarter and we are seeing very good results.
TB: What are the numbers behind it?
CT: For every 10th improvement in delivery density, that’s $300 million for us. USD value unlocking. And the math shows that if we got a 5% match in the basket, we could get to that 10th.
TB: How soon do you think this will be implemented more widely?
CT: We are bringing in additional clients as we speak. It’s going to take some time to translate into real value, but I’m very excited because for the first time we’re really starting to see some density movement.
TB: You have an initiative with RIFD labels that you are now putting on packages at 101 facilities. How much do these labels cost and what do they do for UPS?
CT: We’ve brought the cost of the labels down to the point where we can do that. This is transforming our company. Each package is manually scanned into the packaging car today. You can grade work that needs to be scanned manually. Then sometimes the packages are loaded incorrectly, so they end up in the wrong package car. In fact, one out of every 400 packages in our company is loaded incorrectly. This means that the package is sent for delivery and cannot be delivered because it is in the wrong car. He returns to the center, addresses himself and leaves again. Where we’ve implemented technology, the package is scanned and we know it’s going into the right car. The number of invalid loads has decreased from 1 in 400 to 1 in 800, towards 1 in 1000. We avoid invalid loads and reduce manual work. Our front loaders, which load these packages into the packaging cars, use wearable devices to scan the package. Along the way, the car will scan the package to redistribute the work activity to someone else.
TB: Discuss your overall service plan and how automation plays a role as well.
CT: The full service plan only works on the network the way the network was designed to work. This means that you really need to focus on arriving and departing on time. In the third quarter alone, we saw significant improvement in this area. The number of trucks arriving and departing on time improved by 6.5%.
TB: What do you see coming out of this overall service plan, say, in a year or two?
CT: If we go off the grid for 10 minutes or add 10 minutes to the grid, it will cost $257 million. USD. If we can just run the network the way it was meant to run, the real value can be unlocked. And we saw that happen in the third quarter. Our spending has grown at a slower pace than our income in the US.
Another area we’ve looked at is what we call our bench. Our bench is like a basketball bench where players sit on the sidelines and wait to be called upon. There are UPS employees sitting around waiting for someone to take vacation or sick leave. If you want, we don’t pay them until they’re called up to play, but we collect all the benefits even if they sit on the bench. A year ago, our bench had about 29 percent. Today, we have about 20 percent on our bench.
TB: UPS’s five-year contract with the Teamsters expires at the end of July. Union management pushed for the contract to exclude hybrid drivers, known as 22.4s. The Teamsters want them all to be regular car package drivers. Will you give it up on this issue?
CT: We’ll leave the terms at the negotiating table, but our approach to this contract renewal is win, win, win. I will say one thing – how, how grateful we are to our team members, because they are amazing employees. I’m very proud of what they’ve accomplished over the past two and a half years as key personnel in the face of unprecedented volume.
The other thing I will say about the contract extension next year is great job. If you drive for us, you earn $93,000 a year plus $50,000 in benefits and you pay nothing for health care.
TB: Amazon is UPS’s largest customer, but Amazon’s sales as a percentage of total UPS revenue have been declining. Why is this and will it continue?
CT: So, we have a great relationship with Amazon. We have agreed on what packages we will accept into our network and what packages they will deliver. We’ve done it very, very carefully and selectively so that it’s a mutually beneficial relationship. The result of this is a decrease in their income as a percentage of all of us. And that’s good for us, because it frees up space in our network for the business areas we want to grow, like SMBs and healthcare.
TB: You became CEO of a very large company in the middle of a pandemic. How was that ride?
CT: What can I say? Pandemic, social unrest, political unrest, war in Eastern Europe, economic conditions that are extremely volatile in some parts of the world. It was just something else. Whatever happens, our people can respond. Consider this. In the third quarter, 40 cities in China were closed for at least five days. Our team did not fall victim to that. They got together. In some cases, people have slept on the floor of our centers to ensure that trade continues. In some cases, we canceled flights and diverted them to Europe, where, by the way, we expanded our export business in the third quarter. Our people are resilient.
TB: What will happen to China? Are you worried there?
CT: We are seeing and hearing from our customers that the supply chain is changing as customers move sourcing from China to other parts of the world. The way I see it, we follow our customers. If our customer goes to Vietnam, Malaysia or Mexico, we follow them to provide them with excellent service.
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This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Thomas Black is a columnist for Bloomberg Opinion covering logistics and manufacturing. He has previously written on US industrial and transportation companies and Mexican industry, economy and government.
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