Satchel Paige, the legendary baseball pitcher, used to warn folks, "Don't look back. Something might be gaining on you." In tapping David P. Abney to be the 11th CEO in its 107-year history, UPS Inc. could be taking a page from the old fireballer's quote book.
By choosing Abney, currently chief operating officer, UPS sends a clear message that, branding expansion programs aside, it remains an industrial engineering and operations company. But it delivers a broader point: The U.S. ground parcel network that has been largely functioning on operational autopilot is due for a significant refresher, and Abney—a 40-year lifer and hard-core operator—is the executive best suited to keep UPS ahead in a market it has controlled for more than a century. Abney starts Sept. 1.
UPS' core business is hardly struggling. The U.S. ground parcel segment accounted for more than 40 percent of the company's $55 billion in revenue in 2013. Revenue last year increased by 5 percent year-over-year. Average daily volumes rose 4.1 percent over 2012 totals. Yields increased by 0.9 percent.
But there haven't been any major improvements to its U.S. physical infrastructure for some time. Perhaps that's why UPS is allocating more than 20 percent of its $2.5 billion capital expense budget for 2014 to expand capacity and modernize older facilities by incorporate more automation.
The issue isn't as much with UPS as it is with factors beyond its control. Its chief rival, FedEx Corp., has been expanding its ground parcel network that took form in 1998 when FedEx bought the parent of Roadway Package System Inc., a UPS competitor at the time. As part of a major companywide revamp in 2012, FedEx said it would expand the ground unit's capacity so it could handle 45 percent more shipments within five years.
Mark S. Schoeman, president of The Colography Group Inc., a research and consulting firm, said FedEx's ground delivery transit times have improved dramatically. Schoeman produced a chart comparing transit times from Chicago, San Francisco, Dallas, and Washington, D.C., to 17 markets from each. The lengths of haul were divided into six segments from less than 150 miles to more than 1,800. Of the 68 city-pair combinations, FedEx was faster in 18, while UPS was faster in seven, according to the data.
In addition, the world that UPS delivers in has changed rapidly and profoundly. The business-to-business segment, which dominated U.S. ground parcel for decades and which UPS ruled with an iron fist, has effectively plateaued. By contrast, the business-to-consumer (B2C) market, with different ordering, packaging, and delivery characteristics, has exploded.
B2C traffic, driven by e-commerce, today comprises about 40 percent or maybe more of UPS' overall mix. It has hit that threshold faster than anyone at the company ever expected. B2C shipments are smaller, lighter, and are often shipped as individual consignments rather than multiple pieces. Those characteristics are negatives for most parcel carriers.
In the B2C arena, UPS faces competition not only from FedEx but also from the U.S. Postal Service and from massive e-tailers like Amazon.com, which increasingly controls shipper fulfillment and calls the shipping shots.
TAKING ACTION
UPS doesn't miss much, and it clearly has the resources to take corrective action both for peak-season shipping and for
the secular changes it confronts every day. Besides the network capacity and facility improvements, it is working to enhance
its forecasting methods. UPS has acknowledged its planning tools need updating, especially after the 2013 holiday mess when an
unforeseen blizzard of last-minute deliveries overwhelmed its systems and led to late deliveries of millions of packages.
UPS has also sped up the rollout of its On-Road Integrated Optimization and Navigation (ORION) software that directs drivers to the most efficient delivery route. On Jan. 30, Abney (who UPS did not make available for an interview for this story) told analysts that the technology would be deployed on 45 percent of its 55,000 U.S. routes by year's end. It will be deployed throughout the U.S. by 2017.
Dubbed by the company as the world's largest operations research project, ORION evaluates more than 200,000 alternative ways a driver can run a single route. "The number of route combinations a UPS driver can make in a day is far greater than the number of nanoseconds the earth has existed," according to a factoid posted on the company's website.
All the investments are unlikely to pressure UPS' finances; it generated $1.9 billion in free cash flow during the 2014 first quarter alone.
Abney's first task as CEO will be to manage the upcoming peak season. It won't be easy. There is only one more shopping day this season than last year's calendar-compressed cycle. No one expects the pace of e-commerce activity to lessen. Few think that consumers will modify their behavior and order merchandise well ahead of time. Few also expect that retailers, worried about alienating their customers during the most important time of the year, will pressure them to do so.
Abney began working on that task back in January, when UPS issued a letter to key customers apologizing for the holiday delivery problems, explaining why it happened, and assuring them there would be no repeat. The letter, according to industry sources, outlined four steps that UPS would take to avoid a similar scenario: increasing collaboration with "high impact" customers to refine predictive forecasting models, beefing up its network capacity, providing more timely and accurate shipment visibility, and doing a better job of communicating with shippers and consignees.
On the Jan. 30 analyst call, Abney said UPS would issue new package exception codes designed to improve the quality of tracking messages. It will also develop "proactive notifications" to help customers adjust their shipping or receiving plans if necessary, he said.
Abney, who is known for his candor, said on the call that the "paradigms for planning no longer apply due to the rapidly evolving marketplace." That rapid evolution includes, in no small part, a dramatic change in the way UPS receives and delivers packages.
The holiday season will come and go. For UPS, the hope is that all of the changes it is making will extend beyond the peak and put everyone on notice that, in the U.S. at least, the drowsy lion is now fully awake.
"The message is that 'We remain formidable, and we are still here to play,'" said Schoeman of Colography.
