UPS: The rising tide of sustainability
Sustainability initiatives at UPS are integral to business strategy and impacted by consumer and client behaviors.
United Parcel Service (UPS) is a global provider of supply chain solutions and package delivery logistics. Through its extensive network of operations, the company delivered 19.1 million pieces per day totaling roughly 4.9 billion packages during 2016 [1]. To achieve its delivery objectives, the company must strike a delicate balance between large capital expenditures such as warehouses, aircraft, and delivery vehicles as well as the efficient use of these assets while adjusting for externalities such as regulation, volatile commodity markets, and changing consumer preferences. There are only so many levers that a capital-intensive business can employ; pricing increases, of approximately 4.9%, and lower thresholds for oversized packages are just two changes that UPS recently announced [2].
Shifting consumer purchase behaviors and global trade demand has led to increased use of UPS’ logistics network leaving the company with many strategic considerations going forward. In 2016 alone, domestic package volumes increased 9%, largely driven by growth in e-commerce fulfilment services [3]. Consumers expect packages at faster rates, with increased delivery options and flexibility, significantly impacting the way in which UPS must optimize its logistics networks and technology investments. Not all growth is driven by e-commerce, as some may suspect, which can be evidenced by UPS’ recent $2 billion investment in international operations [4]. Such large investments certainly emphasize the company’s need to monitor cost of inputs in the form of fuel, both for ground operations and air transport, capacity utilization in delivery vehicles, and last mile operations. Additionally, there are a number of regulatory hurdles that must be carefully evaluated as the company operates in multiple jurisdictions through a variety of transportation modes. These factors are all critical considerations for UPS—sustainability is not simply an ancillary focus, it’s an integral component of future strategy and margin protection.
UPS outlines a number of sustainability initiatives annually, benchmarking their progress against a set of material issues facing the business and publishing results through a Corporate Sustainability Report. Environmental responsibility is one of 4 key pillars, primarily focused on emissions, fuel supplies, reduction of greenhouse gases, and traffic congestion within cities [5]. Each of these issues pose challenges to the company’s reputation, ability to manage cost, and operational capacity as e-commerce increasingly drives up volumes across the distribution network. Actionable milestones have been outlined with target dates extending through 2025 with annual targets and capital investments to introduce, upgrade, or replace technologies that will increase efficiencies throughout the supply chain.
Across its operations, most energy consumption is in the form of fossil fuels used within air and ground operations. This has led to a 12% reduction target in absolute greenhouse gas emissions by the year 2025 [Ibid, p9]. The emissions target will be achieved through a variety of approaches that blend both traditional best practices and enhanced technology. One interesting example is the use of Orion, a system implemented in 2008, which optimizes driving routes and minimizes stops to reduce fuel consumption. When coupled with a long-standing company best practice of favoring right-hand turns for truck deliveries, UPS is able to save 10 million gallons of fuel each year and reduce 100,000 metric tons of CO2 annually [6]. UPS also recently announced a partnership with New York State to develop technology that will convert diesel powered trucks to electric power sources. The near-term goal for this program is for 25% of all ground transportation vehicles to be powered with alternative fuel sources by 2020 [7].
In the short and medium term, it’s imperative that UPS continue a culture of transparency and partnership with respect to the ongoing sustainability initiatives that have been outlined. Recognizing that none of the initiatives set forth are entirely binding, there is still an element of reputation risk that the company could potentially face if it is unable to meaningfully execute these objectives. Additionally, UPS could partner with clients such as Amazon to find ways in which delivery behavior could be influenced, from single item purchases to more “add-on” and bundled deliveries. This would require additional education and awareness with consumers.
In closing, I’d ask classmates provide commentary as to how, if at all, consumer behavior could be influenced to reduce the sheer volume of packages delivered through UPS’ networks, and, whether or not they believe this reduction would have a meaningful effect on greenhouse gas emissions.
Footnotes
[1] United Parcel Service, 2016 Annual Report, p. 1, http://nasdaqomx.mobular.net/nasdaqomx/7/3521/5025/, accessed November 2017.
[2] Paul Ziobro, “UPS Ramps Up Spending to Keep Up With Online Shoppers,” The Wall Street Journal, October 26, 2017, https://www.wsj.com/articles/ups-profit-falls-amid-higher-costs-1509022468, accessed November 2017.
[3] United Parcel Service, 2016 Annual Report, p. 29, http://nasdaqomx.mobular.net/nasdaqomx/7/3521/5025/, accessed November 2017.
[4] Thomas Franck, “Buy FedEx and UPS on global trade upside, overblown amazon fears: Golman Sachs,” CNBC, November 13, 2017, https://www.cnbc.com/2017/11/13/buy-fedex-and-ups-on-global-trade-upside-overblown-amazon-fears-goldman-sachs.html, accessed November 2017.
[5] United Parcel Service, 2016 Corporate Responsibility Report, p. 12, https://sustainability.ups.com/media/ups-pdf-interactive-2016/UPS_2016_CSR.pdf, accessed November 2017.
[6] Jacopo Prisco, “Why UPS trucks (almost) never turn left,” CNN, February 23, 2017, http://www.cnn.com/2017/02/16/world/ups-trucks-no-left-turns/index.html, accessed November 2017.
[7] Andrew Liptak, “UPS Is hoping to convert most of its New York City fleet from diesel to electric,” The Verge, November 11,2017, https://www.theverge.com/2017/11/11/16638036/ups-nyserda-convert-trucks-diesel-electric-new-york-city, accessed November 2017.
Thank you for the thorough analysis and great read! As you pointed out, distance travelled is a primary lever UPS can pull to reduce fuel consumption and thus greenhouse emissions. One strategy to reduce average distance travelled is forward deployment. The idea is that if retailers can stock the right products in warehouses that are close to its final customers, shipping distance and time would be greatly reduced. The only player that has done this successfully thus far is Amazon, due its large scale and management’s willingness to heavily invest in infrastructure. Unfortunately most retailers cannot afford to build a warehouse near every major city. One strategy UPS can consider to address this problem is investing in warehouses that can be leased as shared forward deployment centers to smaller retailers. Retailers save on shipping cost by storing inventory in UPS warehouses distributed throughout the country. These savings can be used toward leasing such warehouses, generating a new revenue stream for UPS while helping reduce overall fuel consumption.
One downside of the above recommendation is that building a network of warehouses is capital intensive and takes a long time to complete. A more near term solution could be for UPS to change its pricing structure such that customers are incentivized to minimize distance. For example, UPS could charge a flat rate for trips <100 miles, a higher per mile rate for 100-200 miles, and then an even higher per mile rate for 200+ miles. Currently, the pricing structure is the exact opposite, where customers pay less per mile for longer distance shipments than shorter ones. This scheme may also have the added benefit of attracting customers who are able to minimize distance, giving UPS a competitive advantage in its sustainability efforts (but unfortunately will drive longer trips to competitors and still have the same impact on the environment).
There are certain means such as pricing and bundling to influence consumer behavior to reduce packages delivered, but I do not think that is a good solution to solve the emissions problem, partially because there is not too much room for reduction, as people will still need packages delivered for the foreseeable future – and this is likely only increase given the rise of e-commerce. Instead of trying to manage customer demand, I think USPS should look into the supply side. I believe using electric vehicles as the method of transport is effective in reducing emissions – in fact, just last week, environmental groups wrote a letter to the leadership team of USPS to select electric vehicles for the next generation of delivery trucks. [1] This will not only help USPS achieve its 2025 emissions target (which they are currently not on track to fulfill), but also will also catalyze the clean delivery market and accelerate the adoption of electric vehicles by other logistics companies, given USPS’ leadership in this space.
[1] “Next generation delivery vehicles selection”. Sierra Club. https://www.sierraclub.org/sites/www.sierraclub.org/files/uploads-wysiwig/USPS%20Letter.pdf
Great article! A fascinating take on a highly relevant issue for UPS.
To address your question, I believe that although a reduction in volume of UPS packages might be substantive in its effect on emissions, it is an unrealistic goal that should not be pursued. Demand for deliveries, powered as you note by Amazon and other e-commerce sites, is unstoppable. It reflects a new method of ‘from-home’ consumption, and there is little chance of it slowing. Additionally, a slowdown in the market for packages will not be beneficial for UPS, so they can hardly be expected to pursue it. The only way that logistics companies can affect emissions is on the supply side, as Jennifer suggested above. UPS appears to have been strong in its sustainability practices so far, but perhaps it could do more. Electric vehicles, for example, have been noted in many TOM Challenge essays to be more carbon-efficient than their gas-powered equivalents. You note that they are seeking to move 25% of their New York fleet to electric, is this enough?
Fundamentally, UPS need to publicize their own targets more aggressively. This will have two effects. First, it will demonstrate their practices to consumers, which will boost their B2C business segments through brand-building. Second, and more importantly, it would hold themselves to a high standard for their results, and ensure that standards do not slip. They could, for example, publish in detail the mileage of each of their drivers, and link that to total emissions. As you note, UPS have the potential to be a significant polluter in the 21st century, and they need to take drastic action.