UPS: Innovating or not?
UPS is taking steps to digitize it’s freight business, but is it letting the small parcel business fall through its fingers?
Digitization in Freight Shipping
The move towards digitization in supply chains will help companies become more flexible, faster, efficient, granular, and accurate. [1]. This future requires each company to have visibility into each link in the supply chain. Manufacturers, wholesalers, distributors and retails are the links in the supply chain; logistics and transportation firms connect them all. UPS will need to provide constant and reliable information to their customers to support a digitized supply chain. UPS already estimates expected arrival time, but weather conditions, customs issues, and simple operational issues like lost paperwork limit UPS’s ability to consistently deliver on time. Freight shipping still operates largely on a paper-based system [5], making it difficult to recognize missing customs information and update delivery times.
UPS recently joined the Blockchain in Trucking Alliance (BiTA) to help address some of these issues. Blockchain is a digital platform that distributes information across multiple computers but ensures all computers have the same information. This redundancy makes the information more easily accessible and more difficult to corrupt. It also allows any user to update information and leaves a track record [2]. While originally used for tracking transactions for digital currencies, UPS sees promise in its customs brokerage business to improve accuracy by replacing the current paper-based system [3]. Shipment originators and insurers can access the database and update shipment information for the US Customs agencies to see, eliminating UPS’s need to be involved in handling that information. Digital systems are far better at recognizing when missing information may hold up shipments at the border, expediting shipments overall. Lastly, customers have real-time visibility into the status and waypoint location of a shipment and can flag delayed shipments ahead of time [4]. This transparency allows customers to more closely track their supply chain.
Blockchain allows the easy transfer of information between stakeholders, but as customers continue to demand added transparency, UPS will be wise to invest in additional digital infrastructure to more closely track shipments. First, GPS-enabled (or driverless) trucks will allow UPS to observe delays sooner and better forecast arrival times in the event of a delay. Second, predictive analytics using external information, such as weather forecasts, will improve the reliability of UPS’s delivery commitments. Third, UPS can consider using RFID tracking within its freight facilities to observe when pallets are misrouted or to find lost material. In addition to improving shipment accuracy, this location information could be leveraged to improve operations and material flow in their facilities. UPS has been exploring the use of RFID tags since at least the early 2000’s, but has not adopted them for widespread use [9].
Missing Digitization in Small Parcel Shipping
UPS managers should also focus on innovating in the small parcel shipping space. Added visibility and increased digitization in small parcel shipping would benefit shippers and customers as well. Currently, a package shipping from Boston to New York will travel from the originator’s warehouse to a Boston sortation facility, then to a New York sortation facility, then to the end destination. If UPS learned earlier in the process where packages were destined to, originators could pre-sort packages in their own facility based on destination and UPS could eliminate one sort step, shaving up to a day off delivery.
Today, some companies side step one sortation facility stop by trucking directly from their facilities [6]. Companies with scale can afford to do this, but UPS leaves on the table an opportunity to serve smaller originators who whose customers would benefit from quicker delivery. In addition, there is clear demand to hasten the shipping process. Amazon is developing their own carrier infrastructure to ensure reliably delivery during the peak season, but if successful could utilize their system for most shipments to cut costs [7, 8]. By not acting, UPS risks foregoing business to Amazon.
Outside of automating it’s facilities [10], UPS seems to have little in the pipeline to address potentially huge disruptors to its business. Amazon’s development of drones [11], Amazon’s move into the delivery space [12], and UPS’s hands-off approach to driverless cars [13] may prove to be prudent preservation of shareholder capital, or could lose UPS the edge in the small parcel shipping space.
Continued questions
To what degree will disruptive technologies, like Amazon’s drone delivery and driveless cars, be a threat to UPS’s business? Will they be able to easily adopt these technologies, or will they be left behind?
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[2] https://blockgeeks.com/guides/what-is-blockchain-technology/
[4] http://www.businessinsider.com/ups-joins-blockchain-initiative-2017-11
[6] My own experience from a previous employer.
[9] https://www.secureidnews.com/news-item/upss-rfid-initiative/
[10] http://www.dcvelocity.com/articles/20160801-ups-to-fully-automate-30-largest-us-hubs/
[11] https://www.digitaltrends.com/cool-tech/amazon-prime-air-delivery-drones-history-progress/
[13] https://www.trucks.com/2016/07/11/ups-drone-delivery-self-driving-trucks-alternative-fuels/
Thank you for the perspectives on UPS. In addition to your comments, I would add:
1. Though Amazon could disrupt the existing delivery system that UPS works with, there is a privacy issue. Many would for example, refrain from importing through Amazon since Amazon could use that information and overtime, use it for its own advantage and growth.
2. Amazon on the other hand has an advantage of owning much more of the supply chain than just delivery like UPS does, offering a bundle of services to firms and could grab businesses from UPS. For example – Amazon’s online reviews being used to persuade adding additional items to brick and mortar stores in anticipation of the December holiday sales.
Source: https://www.wsj.com/articles/todays-top-supply-chain-and-logistics-news-from-wsj-1511350942
3. UPS gets the indirect advantage of increasing its own business as Amazon’s e-commerce grows by delivering more products to more people.
It would be interesting to see what happens and if both can co-exist depending on the purpose of the task at hand.
In my opinion, some of the areas suggested for UPS to further evaluate (i.e. drones, driverless trucks and Amazon move into delivery), are very relevant to ensure UPS does not miss significant opportunities in its markets. However, I believe that these disruptions do not only threaten the small parcel shipping business, but the entire UPS freight business. If new technologies key in the delivery business (i.e. drones or driverless trucks) take off due to enhanced economics versus current technologies, those players who enjoy an advanced access and development of these would have a significant advantage over the rest, enjoying the opportunity to achieve a very large market share before anyone can catch up, given the investment and time required to make complex technologies work with a sustainable business model.
I agree that small parcel shipping could be more prone to disruption given its nature (clients are smaller, parcels are easier to handle, the cost of shipping can be very expensive relative to the goods transported etc.) but if this business is disrupted, any disruptor might be particularly tempted to enter as well the regular freight business, particularly if it has a financial capacity as large as Amazon’s.
Thanks for sharing your insights on UPS’s freight and small parcel shipping businesses! Regarding the freight business, I agree with your suggestions to enhance their information technology capabilities and incorporate RFID tracking into their supply chain. RFID will not only automate the tracking of inventory throughout the supply chain, it will also increase transparency for the customer and hopefully improve customer satisfaction metrics for the business.
With respect to disruptive technologies like Amazon’s drone delivery and autonomous vehicles, I do believe that UPS should invest in these technologies moving forward to position itself for the future of delivery services. But I do not think that Amazon poses as large of a problem for UPS as many may think. For one, UPS has been in the delivery business for over 100 years and knows an incredible amount in terms of predicting and solving for delivery problems, something that Amazon may not be able to replicate over night. In addition, UPS makes most its revenues from its B2B freight business and not its personal parcel business, the arena that Amazon would likely dominate if it enters this market. So although I do believe that UPS must invest in technology to stay abreast of the latest trends from a competitive standpoint, I think they will fair better than most predict if Amazon or other technology firms enter the delivery business.