As we have often noted in our commentaries, when businesses need to communicate bad news, it is often done late in the Friday new cycle. Thus, we often check our news feeds on a Saturday morning for any meaningful supply chain focused news.
Yesterday, UPS pre-announced expected fourth quarter 2014 results which communicated added unforeseen expenses related to its support of the all-important holiday surge shipping quarter. Noted in the release: “While package volume and revenue results were in line with expectations, operating profit was negatively impacted by higher than expected peak-related expenses.”
Of further note was this statement from UPS CEO David Abney:
“Clearly, our financial performance during the quarter was disappointing,” said David Abney, UPS chief executive officer. “UPS invested heavily to ensure we would provide excellent service during peak when deliveries more than double. Though customers enjoyed high quality service, it came at a cost to UPS. Going forward, we will reduce operating costs and implement new pricing strategies during peak season.”
In today’s edition of The Wall Street Journal, the headline article is aptly titled: UPS Has a Holiday Hangover. It reports that UPS surprised Wall Street in its pre-announcement indicating an unplanned $200 million in additional expenses to handle the holiday rush. According to the report, $100 million of the added expense was attributed to low productivity while the remaining $100 million attributed to higher vehicle rental and staffing costs. While Brown was prepared to support the Thanksgiving holiday to Cyber Monday surge, slower than anticipated volumes in the first two weeks of December led to the overhang in expenses. UPS further warned that its 2015 earnings projection is now likely out of reach.
The initial reaction from Wall Street was a decline in UPS stock of nearly 10 percent.
So much for Wall Street’s view. Let’s instead attempt to put a supply chain operations view to what might have occurred.
As Supply Chain Matters has noted in pre-holiday surge commentaries, UPS and FedEx planned and invested considerable resources to avoid the snafus that occurred during 2013 when UPS was thrown under the bus for not being able to deliver holiday packages during the final days before the Christmas holiday. Beyond resource planning, both carriers actively worked with retailers to influence the pace of promotional activity to avoid a last-minute surge of volume that would exceed network capacity. Both worked with manufacturers and retailers when significant slowdowns occurred at U.S. west coast ports supporting requirement for alternative routings or flex air freight capacity. As we and other media have reported, that planning paid off, and holiday surge delivery performance occurred pretty much flawlessly.
Now let’s speculate on the internal organizational aspects of “We Love Logistics”. Those that have first-line experience in operations management can attest to management directives or zeal, perhaps to the notions that our network is not going to be cited as the point of failure ever again. It could have been: We will not be the party that gets thrown under the bus and will do what’s necessary to insure that does not happen. Thus, UPS operations teams may have well taken on that challenge and flawlessly executed what needed to be done, including the hiring of even more temporary workers, added equipment and staging space. The network and its added resources performed at the expense of planned budget.
For consumers, retailers and B2B firms, there is now a dilemma. UPS will now initiate efforts to restore its Wall Street cred and more importantly, respond to perceptions that E-Commerce or Omni-channel commerce has become a high-cost, low margin trap for transportation and logistics providers. As noted in the UPS statements, businesses can anticipate higher peak ground pricing in 2015. That’s in addition to the new dimensional pricing that was implemented this year.
Remember this date, since it may foretell the start of a new dynamic for parcel shipment and delivery. We anticipate that major online retailers will initiate a different form of planning for the 2015 holiday surge, and that will be how to balance continuing consumer preferences for free shipping with the new realities of higher parcel shipping and logistics costs. We should not be surprised if new or different business models and strategies begin to emerge in the coming months.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
We strive to bring learning for our Supply Chain Matters readers that supply chains, and flawless execution of customer fulfillment do matter in business strategy.
Last week, the retail industry took special notice of the news that Target, after less than two years of making its presence in Canada, made a painful decision to close all 133 of its retail outlets in Canada. According to business media reports, Target is now expected to report a pre-tax write-down of $5.4 billion in its fiscal fourth quarter and release over 17,000 retail workers as a result of its decision, a rather expensive lesson on the importance of supply chain strategy and execution. Target’s Canadian operations reportedly incurred upwards of $2 billion in losses.
To be balanced, not all of Targets challenges related to Canada rested solely to supply chain strategy and execution, but Canadian consumers witnessed the most visible aspects, namely large stores that consistently lacked inventory and products that were not competitively priced.
A New York Times published article (paid subscription or metered complimentary view) observed that while Target stores in the United States were long popular over the border destinations for Canadian consumers, it struggled to translate that formula directly within Canadian stores. Differences in suppliers and what was described as a poorly executed distribution network made goods in Canadian stores far more expensive than U.S. outlets. Consistently empty shelves caused added consumer impressions “giving the appearance of the end of a going-out-of-business sale.” Consumers then avoided Target stores because of limited selection and an unproductive shopping experience. Further noted by the Times was that Target failed to distinguish its brand from other existing Canadian retailers such as The Loblaw Companies, Canadian Tire and others. Also noted is that Target was not the only large or even smaller specialty retailer to stumble in Canada because of in-depth experience in merchandising and distribution in international markets.
Fortune and CFO.com published articles noted that Target’s strategy was to take over existing retail stores operated by discount chain Zellers, which were located in predominately economically distressed Canadian neighborhoods. That turned out to be a conflict with Target’s upscale sheik retail branding in the U.S.
That theme was brought forward in an article published by Canadian Broadcasting, CBC, Target Canada’s Failed Launch Offers Lessons for Retailers. By our lens, it provides insightful perspectives on the unique retail challenges within Canada and that Target is one of many other retailers who have struggled. According to CBC, price matters: “The major sticking point is price.” It points out that if retailers are not providing a compelling experience and flawless execution, than price becomes the default decision criteria. Further noted is that many U.S. retailers turned their sights toward Canada after the severe economic recession of 2008-2009, since Canada was mostly spared from the economic effects. Target opened 124 of the former Zeller stores in less than a year: “a pace far too fast to execute the experience properly.”
In the end, Target’s Chairman and CEO Brain Cornell had to make and communicate the tough decision that enough was enough. It was time to pull the plug on the Canadian effort.
In contrast, U.S. based retailers such as Costco, Wal-Mart and Zara continue to exhibit successful retail execution strategies within Canada.
We amplify this Target experience because of the important learning it provides to retail and B2C focused supply chains with international presence. Know your market, understand its unique nuances and strive to have the voice of supply chain strategy and customer execution at the decision table. That may not always be easy, when marketing and merchandising teams have broad influence on senior management decision-making, but history provides constant learning that supply chain does matter. It is not just a cost center for conducting business.
In conjunction with last week’s Annual National Retail Federation (NRF) Conference held in New York, retail sales figures were released for the previous November-December 2014 holiday sales period. With the price of gasoline plummeting in the last two months of 2014, there were a lot of pent-up expectations that holiday retail sales would exceed the NRF’s original forecast of a 4.1 percent increase in 2014. The actual NRF figures came in at $616.1 billion, a 4 percent increase which shook Wall Street investor confidence for about a day before economists and forecasters eased speculation that consumers held back spending more than expected. According to NRF, the November-December sales data marked the first time since 2011 that sales has reached this level.
A separate ShopperTrak report, which tracks primarily brick and mortar sales at malls and retail outlets reported growth of holiday sales at 4.6 percent, higher than that firm’s initial forecast of a 3.8 percent increase and representing the largest increase since 2005.
From a supply chain lens, 4 percent retail sales growth was very good, given the challenges of retail inventory either arriving earlier or far later than expected because of the backlogged slowdown conditions among U.S. west coast ports. Online and brick and mortar focused retailers were influenced to run product promotions earlier rather than later, with some retailers kicking off holiday promotions in October. Other reports indicate that retailers were conservative on their overall holiday inventory investments, not wanting to end-up with overly excessive unsold inventory by the end of December. Considering another short holiday shopping interval between the Thanksgiving and Christmas holidays, coupled with all the logistical challenges that occurred, B2C supply chain teams deserve a pat on the back.
Of course, the real benchmark comes in the coming weeks when retailers begin to formally report their financial performance spanning the critical holiday period. The question is whether logistical challenges led to higher unexpected costs and lower margins.
Obviously, the most sensitive metric affecting global supply chain planning and budgeting activity is the cost of energy. The economics related to the cost of energy drive global product sourcing, transportation and forecasts of retail sales spending on consumer goods. What about all of the fuel surcharges currently tacked on existing transportation rates?
The most significant question for supply chain leaders, planners and sales and operations planning forums in 2015 is how long will the extraordinary lower cost of oil last? Will it be the rest of 2015? How will it impact product demand and product margins?
Beyond retail and online B2C supply chain product demand planning, assumptions on the cost of energy are going to be fundamental aspects of this year’s business plans.
This week, the National Retail Federation (NRF) is conducting its annual conference in New York where all forms of traditional brick and mortar and online retailer teams gather for the latest business insights. Perhaps as a prelude, digital analytics firm comScore released an estimate of 2014 desktop online holiday sales that by our lens, adds even more evidence of the permanent shift of consumers toward online channels.
According to data gathered by the analytics firm, U.S. retail e-commerce spending emulated from desktop computers for the November-December 2014 holiday surge period increased 15 percent to $53.3 billion as compared to this same period in 2013. The comScore data depicts the top ten desktop spending days and cites Cyber Monday (December 1) as the busiest online day with over $2 billion in order activity. Keep in mind that this data reflects desktops as the originating device. Mobile based estimates would add even more volume, especially in light of an Amazon end of year report indicating that nearly 60 percent of its orders were sourced from mobile platforms. When all the channel data is combined, Supply Chain Matters believes it will reflect more evidence of continued permanent shifts in shopping behaviors.
The data further reflects that the 2014 holiday peak periods were the three weeks spanning the weeks of November 30 thru December 14. That peak volume period was the blessing that package shipping providers such as FedEx and UPS had anticipated and planned with retail customers. We previously highlighted an NRF sponsored Consumer Spending Survey analysis and IBM’s Digital Analytics Benchmarking service each indicating that holiday order volumes peaked in mid-December. That pattern helped in avoiding a repeat of the 2013 scenario where last-minute shipments did not reach consumers before the Christmas holiday.
As we approach the start of the New Year, B2C and Omni-channel focused supply chains teams can begin to take a much needed breather. While reverse supply chain activities continue to ramp over the remaining days of the calendar year, it’s a good time to reflect on the initial learning from the 2014 holiday surge.
From all the sources Supply Chain Matters has tapped thus far, it would appear that the many weeks of pre-planning have yielded a rather smooth fulfillment period. If there is to a single headline related to the supply chain Grinch of the 2014 season, it remains the very ill-timed west coast port disruption and its impact on multiple other supply chain and logistics fulfillment teams.
A National Retail Federation (NRF) sponsored Holiday Consumer Spending survey released in mid-December indicates that the average holiday shopper had completed nearly 53 percent of shopping activity by mid-month, up from nearly 50 percent reported during this same time period in 2013. The survey pointed to two profiles of shoppers, those who were compelled to act on early, hard to pass up in-store and online promotions, and others waiting to the last minute to wrap-up their shopping. That data is generally what was reported as shopper profiles in 2013. Regarding last-minute shopping, the NRF survey indicated that nearly 34 percent of those last-minute shoppers were planning to buy the last holiday gift before December 18. For us, that is an indicator that consumers helped in avoiding a last-minute crunch.
Today’s Wall Street Journal cites data from online tracking software developer Shipmatrix indicating that 98 percent of express packages reached their destinations on time by December 24th. Shipmatrix calculated its reliability metrics from data on the millions of packages tracked for retailers and customers. The 2013 data reflected 90 percent on-time reliability for FedEx and 83 percent for UPS. At this point, we all know how UPS was thrown under the bus in 2013. The added infrastructure investments by both FedEx and UPS in surge capacity and added seasonal workers coupled with a lot of up-front pre-planning with retailers paid off this year. Heavy volume prompted FedEx to continue delivery activities on Christmas day but UPS curtailed on the 24th. Fewer retailers risked last-minute shipping promotions because they faced caps from both package carriers that limited last-minute shipping capacity, and because they headed the warnings. We suspect the shortage or late arrival of certain inventories had some play in the final on-time results but we will all have to wait for those results to come forward.
We rechecked online sales analytical data tracked by IBM’s Digital Analytics Benchmarking service and it further reinforces that order surges in both November and December were generally in-line with Black Friday, Cyber Monday and pre-holiday surge order volume periods. (See below extracts) The final peak of online activity in December was between December 15 and 17.
Rather interesting is the chart reflecting average order values among the various weeks. It reflects average order values of $115-$125 per order with mobile-based ordering reflecting a lower average.
Winter weather across the U.S. cooperated as well, with some minor exceptions. Our own Supply Chain Matters smaller-scale experiments in last-minute online ordering all turned out in on-time delivery. Amazon released a post-holiday summary of its holiday season activity which indicated that nearly 60 percent of its customers shopped using a mobile device and that trend accelerated later into the shopping season. That is a significant development.
Further, 10 million additional members joined Amazon Prime (free shipping) for the first time. That is yet another indicator of the power of free shipping in hitting the online Place Order button. Among other important supply chain and online fulfillment highlights:
- Amazon shipped to 185 countries and this holiday, Amazon customers ordered more than 10 times as many items with same-day delivery than in 2013. The last Prime one-day shipping order was placed on December 23 at 2:55pm EST and shipped to Philadelphia PA. The last Prime Now (same day) order was placed on December 24 at 10:24pm and delivered at 11:06pm. We won’t attempt to comment on the listed contents of that order.
- Sunday delivery expanded this year. As noted in our previous commentary, the U.S. Postal Service was the prime recipient.
The Amazon release further includes an extensive listing of holiday best-selling items which is in itself rather interesting. To no surprise, Disney’s Frozen Sparkle Elsa Doll topped the toys category while Disney Kids’ Frozen Anna and Elsa Digital Watches topped that category. What we do for our children and grandchildren! Chromebooks topped the computer category.
While we have not heard from Wal-Mart.com as yet, we anticipate that they had a very good holiday season as well.
For combination brick and mortar and online retailers, 2014 featured more cross-channel fulfillment experimentation including more direct ship from nearest retail store. We anticipate that challenges in distributed order management, inventory pooling and supply chain segmentation may come forth from 2014. Some readers may have noticed some not so flattering packaging, a sure sign of immaturity in pick and pack operations. It will be interesting to note the results of those efforts in the weeks to come when retailers report on their financial and operational results for the quarter. The open question is whether these efforts add or take-away from profitability.
The learning of the 2014 holiday surge is finally not complete without the ongoing byline of the west coast port disruption and ongoing contract labor talks. A previous Supply Chain Matters commentary highlighted the impacts among inbound and outbound container activity as well as how carriers like FedEx and UPS rallied to assist in added air capacity and multi-modal re-routing efforts. Even at this point at we close out calendar 2014, the two parties cannot agree as to how much progress is being made in resolving both contract and port productivity issues. The NRF’s latest news release continues to add scathing comments regarding the ongoing situation. We repeat our view that at this point, industry supply chains care less about the full resolution of labor contract renewal talks and more about the implications and learning associated with this series of events. There will be less tolerance for this magnitude of disruption and one of our 2015 Predictions is to anticipate alternative inbound and outbound container port inter-modal routings in 2015. The difference in financial bottom-lines may well be those supply chain teams that anticipated this disruption ahead of time to be able to initiate alternative planning.
More will go regarding the 2014 peak holiday season and like every other year, the learning will help in planning for the coming years.
Two FedEx Acquisitions Point to Changing Needs and Market Dynamics for Third Party Logistics Services
FedEx recently announced two acquisitions related to third-party logistics (3PL) and information technology services, an indication of the impact of today’s Omni-channel commerce implications on customer and consumer fulfillment requirements. This news is significant because in our Supply Chain Matters 2015 Predictions for Industry Supply Chains, we predict other acquisitions surrounding the 3PL sector in the year to come.
The first and most prominent announcement was the acquisition of GENCO, a specialty 3PL that operates more than 130 warehouse and distribution facilities. GENCO is a premier North America 3PL based in Pittsburgh Pennsylvania with revenues of $1.6B. providing a rather diverse collection of forward and reverse logistics services including distribution, contract packaging, customer returns processing product refurbishment, disposition and recycling.
According to the FedEx announcement, GENCO has processed more than 600 million returned items annually for many leading brands. Today, returns processing and disposition is a big-deal for online fulfillment processes and having a one-stop logistics provider can provide significant benefits. As part of the recent fiscal earnings briefings with equity analysts last week, Fred Smith, Chairmen and CEO of FedEx acknowledged that in the past, his firm was not enamored with expanding its presence in the 3PL sector because it was perceived as a low margin business. What changed was the emergence of online and e-commerce and the empowered consumer, particularly in demanding a full range of services. Mike Glenn, President and CEO of FedEx Services indicated that GENCO will significantly expand FedEx services to include returns, test, repair and remarketing of products. Executives noted that they have admired GENCO for many years along with their belief that the culture is a perfect alignment. The transaction is subject to closing conditions including compliance with U.S. and Canadian antitrust law requirements.
The global package delivery firm further announced the acquisition of Bongo International, a provider of cross-border information technology services for retailers and online providers to fulfill needs from internationally-based consumers. Among this firm’s services are duty and tax collections, export compliance management, currency conversion and fraud protection. According to the announcement, Bongo, headquartered in St. Petersburg Florida, provides a customer base of over 2000 retailers across Europe, the United Kingdom and the United States. The IT firm was recently listed for the second year on Deloitte’s Technology Fast 500™, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America.
The announcement indicates that Bongo will operate as a subsidiary of FedEx Trade Networks.
The added complexities and service needs inherent in Omni-channel and online commerce demand broader service and technology support requirements and retailers and shippers will increasingly demand a one-stop resources presence among 3PL’s. The above FedEx acquisition announcements by our lens are evidence of shifting markets for 3PL services. Individual 3PL’s will therefore be pressured to invest in broader services and technology services or risk losing business to larger more versatile players.