As the parcel express market heads into summer, a perfect storm of carrier challenges, market shifts, an unsettled economy, and weakening demand is threatening to upend the best-laid plans of shippers—just as supply chains are beginning to normalize after two years of pandemic-induced turmoil.
Among the challenges:
John Janson has seen this movie before. A 25-plus year veteran of logistics and transportation, he remembers the last UPS strike, in 1997, and the disruption, however temporary, that rippled through not just the parcel markets but the LTL (less-than-truckload) and other trucking and delivery sectors as well. He recalls that back then, carriers were so swamped they were drafting sales and administrative personnel to make deliveries. “It was a crazy time.”
As vice president of global logistics for branded apparel and promotional products distributor SanMar, he’s on the front lines, with his team responsible for managing some 10 distribution centers that ship over 100,000 packages every evening. “Nobody can afford a UPS strike,” he says. “UPS ships some 20 million packages a day. There is no home for those.”
Janson believes the negotiations will be “very noisy and contentious” and will go very late. “The Teamsters president has come out swinging. His goal will be to get a great contract for his members. It will not be settled early, but it will be settled.”
“It’s going to be a crazy summer around the parcel industry,” he says.
Dan Johnston, chief executive officer and co-founder of Workstep, which provides software that helps companies measure and understand worker sentiment and reasons for turnover, thinks the eventual contract the Teamsters get from UPS will be a big signal for the rest of the market.
“If the union gets what looks like a win for its members, that could certainly [be a catalyst] for more organizing activity.”
Negotiations for the next round of union contracts at LTL operators are coming up, he notes. Union wins at Amazon and Starbucks have added momentum to union organizing efforts. These have been more aggressive organizing activities, which is “something that 3PLs and warehouse operators need to keep top of mind,” he observes.
Johnston argues that since the last half of 2020, a tight labor market for supply chain workers has given labor more leverage, as evidenced by rising pay rates for material handlers, truck drivers, and other supply chain workers.
“Companies are doing all they can to keep employees and provide competitive wages,” he notes, adding that even with softening demand for freight services and slower growth of e-commerce, experienced supply chain workers remain in high demand. Right now, “labor is in the driver’s seat in a way we hadn’t seen in supply chain prior to the last three years.”
UPS Chief Executive Officer Carol Tomé, in UPS’s recent first-quarter earnings conference call, noted that “good progress has been made on many of our local supplemental agreements” with the Teamsters. “Together we’ve set up five subcommittees to take on key areas of the contract, which enables us to move faster.”
She echoed the view of SanMar’s Janson, commenting that “while we expect to hear a great deal of noise during the negotiation, I remain confident that a win-win-win contract is very achievable, and that UPS and the Teamsters will reach agreement by the end of July.”
The effects of a tepid economy and softer overall demand for package delivery services did show up in UPS’s first-quarter 2023 results. Average daily volume was down 5.4% year over year. A shift in product mix from air to ground that the company saw in the fourth quarter continued into the first quarter “as customers made cost tradeoffs and took advantage of the speed improvements we made in our ground network,” said Brian Newman, UPS’s executive vice president and chief financial officer.
Nevertheless, the company is optimistic about the year. “We have confidence that the volume will come back [after] the summer, related to customer conversations and some of the macro, which we think will trough in the middle part of the year,” Newman said in the call. The company continues to invest for growth, sticking with a $5.3 billion capital expenditure plan for 2023 to support its strategy and capture growth coming out of the current cycle.
In April, FedEx dropped a bombshell with its announcement of plans to consolidate operating companies. The phased transition, which the company says it expects to be fully implemented in June 2024, will bring together FedEx Express, FedEx Ground, FedEx Services, and other operating units into a single operating company under the FedEx brand, explained President and CEO Raj Subramaniam.
“Our new structure will provide a distinct focus on air and international volume, while facilitating a more holistic approach to how we move packages on the ground, utilizing both FedEx employees and contracted service providers,” he said.
Jenny Robertson, FedEx’s senior vice president of integrated marketing and communications, emphasized that the company is being deliberate and methodical in the effort, moving to a streamlined organization that will “help our customers compete through a fully integrated ground and air network.”
The plan will help the company execute an initiative it calls Network 2.0, which involves integrating its networks through facility consolidations and reducing some redundancy of routes, she noted. Under the plan, the company has committed to closing at least 100 facilities by 2027, although that number could change.
And while FedEx says it has always offered a full portfolio of services to customers, “there are some elements that can be streamlined with this change, such as billing, invoicing, who to call with an issue,” she explained. With the integration and the rollout of One FedEx, “customers … can look forward to a more seamless experience and a more flexible, efficient organization.”
She noted that FedEx had begun implementing some strategic consolidation initiatives before the pandemic, such as optimizing last-mile residential deliveries where FedEx Express contracted with FedEx Ground for the transport and delivery of certain shipments, but then the pandemic hit and e-commerce-driven package volumes went through the roof.
“We were focused on handling the volume spikes during that period,” she recalled. “Now as we come out of that, we have an opportunity with innovations in AI and data to rethink our operating structure,” she said.
Robertson emphasized that for FedEx as it emerges into its new, leaner form, “e-commerce and residential delivery are still the No. 1 area for growth. We see a lot of opportunity to realign our network to address and capture that growth.”
Package volumes have clearly slowed and demand remains soft, but that hasn’t prevented parcel carriers from implementing tactics to protect yield and expand revenue per shipment, noted Micheal McDonagh, president of parcel for AFS Logistics, an audit and cost management specialist that manages over $4 billion in parcel spend annually for about 900 customers. He noted that in FedEx’s most recent earnings call, the company reported per-package revenue increased 11%, even with decreased volume.
“It’s interesting what is happening to yield” as well as stubbornly resilient parcel rates, he notes. Among the factors (or culprits if you are a shipper): fuel surcharges that go up quickly, but when fuel prices decline, don’t drop as fast; surcharges that were once instituted for weeks, but now extend for months or a full year; and one especially “under the radar” item—late fees charged by carriers.
“[Carrier] payment terms used to be 30 days; now they want payment in seven to 15 days,” he explains. “So getting everything turned around and paid that much quicker is a much bigger ask when you have less time to do it.” And with some carriers, the late fee has increased from 6% to 8%.
Then there are what used to be “peak” surcharges. In 2018, McDonagh recalls, peak surcharges started around Black Friday and ended around Dec. 23.
“Now, post Covid, peak charges start in October and extend to January. And in some cases, they never go away.” What once had a time limit, in some cases “is now indefinite” and charged all year. Large and oversized shipments are particularly vulnerable.
Another area is “remote” delivery surcharges, where the carrier charges an extra fee for rural or extended-delivery areas. “Delivery area surcharges extended during peak were $7.15. Now they are $13.25 for specific ZIP codes, and they don’t go away. No added service but an extra charge. It’s a great way [for the carrier] to increase revenue without adding cost,” he says.
As for how shippers can best protect themselves, McDonagh counsels customers to be strategic yet careful about spreading out their volumes among multiple carriers.
“Our recommendation is to have at least two carriers, but be careful,” he emphasizes. “A lot of discounts are based on revenue spend. The more you spend [with the carrier], the higher the discount. When dividing your volume among carriers, be sensitive with spend levels. If you fall down a tier, you lose the discount, and that could negate the savings you expected.”
He notes as well that with any backup carrier, it’s critical to thoroughly test it and run shipments through its network ahead of time to make sure your transportation management system (TMS) and the carrier’s systems work well together.
McDonagh suggests further caution in cases where shippers might consider temporarily moving some parcel volume from UPS to another parcel provider as a hedge against labor disruption. While he thinks the two parties will come to an agreement and avoid a strike, “FedEx and the regional parcel carriers don’t want to mess up their networks with a few days of volume that they will never see again after a strike is over.”
He warns that unless you are committing that freight to the carrier for the long term and make it a part of your parcel solution, either the carrier won’t take it short term or it will be priced so high as to blow your budget.
Amazon has built out an extensive network to provide parcel delivery of goods bought through Amazon. With all the turmoil currently roiling the parcel market, is now the time for Amazon to open its network to non-Amazon packages?
Jess Dankert, vice president of supply chain for the retail trade group the Retail Industry Leaders Association (RILA), says she “would not be surprised” if that happened sooner rather than later. And while she stresses that RILA is not in any conversations about such a plan, she believes it would complement Amazon’s current operations and the moves of other big retailers, such as Target and Walmart, who have established some dedicated last-mile delivery services that are available to other retailers.
One issue is inefficiencies in the current parcel market, and how better data sharing and interoperability could promote competition and improve service. “For the parcel market generally, more competition is an interesting ingredient to add,” she says. “It remains to be seen how that is going to shake out.”
In the meantime, the past three years have seen dramatic changes in how RILA members stock, fulfill, and ship goods—driven by the surge in e-commerce and emergence of new technologies. “The supply chains our members have built were made to be flexible, responsive, and able to manage through disruption,” she notes. “When it comes to e-commerce, retailers are managing cost to serve.”
She adds that for some retailers, up to 80% of fulfillment may be done from retail store locations, either with parcel carriers handling the last mile or through the consumer BOPIS (buy online/pick up in store) model. For others, e-commerce package fulfillment is primarily centralized at DCs.
Each retailer has to figure out what makes the most sense for the customer and the product line, she adds. At the end of the day, “it’s a balance between customer expectation, the product itself, the resources required and their cost, and the need for speed—or not,” she says.“There are clear benefits to having fulfillment start closer to the consumer, with dedicated providers doing the last mile, but it’s a calculation that’s done every day as retailers work to meet their cost and service goals and drive a superior customer experience.”