It seems as though the U.S. west coast port disruption as well as the recent holiday period provided positive benefits for some global carriers. Earlier this week FedEx reported rather rosy fiscal third-quarter financial results reporting a 53 percent surge in earnings as a result of a highly successful holiday shipping season as well as significantly lower fuel costs.
Total reported revenues were up 4 percent to $11.8 billion and operating income nearly doubled from the year-earlier period. Total profit for the quarter increased to $580 million, 53 percent higher than year earlier period.
In briefing analysts, executives pointed to reduced costs as a significant contributor to earnings growth. Higher volumes across all transportation segments and improved yields at FedEx Ground and FedEx Freight were reported as key drivers of operating results.
According to its recent quarterly filing, average per-gallon fuel costs for ground vehicles have dropped from $3.69 per gallon in fiscal Q1 to $2.71 in the latest quarter. Similarly, average FedEx per gallon costs for jet fuel have dropped from $3.08 per gallon in fiscal Q1 to $2.07 per gallon in the latest quarter. A significant restructuring undertaken in the largest segment Air Express division resulted in the buyout of 3600 employees while fleet modernizing and route optimizations contributed to reduced costs.
Further noted was that the January introduction of dimensional pricing has already provided positive financial benefits with average revenue per package increasing 3 percent from the combination of base rate increases and new pricing. One important statistic shared by FedEx CEO Fred Smith was that about 85 percent of shipments from the top three online e-commerce shippers average less than 5 pounds in weight. That, by our lens is another indication of the magnitude of change implied by dimensional pricing on carriers and eventually on online shopping practices.
FedEx’s Freight division nearly doubled operating income from the year earlier period.
Executives additionally forecasted revenue and earnings growth to continue into the fourth quarter of 2015, driven by ongoing improvements in the results of all transportation segments.
So while FedEx impresses Wall Street, is the same perception shared by shippers large and small, as well as industry supply chains?
The following is a Supply Chain Matters guest blog commentary contributed by Ken Sickles, Vice President of Product & Strategy, 1WorldSync. As a result of a recent briefing regarding the increasing importance of the product information supply chain we invited 1WorldSync to contribute this educational commentary for all readers.
In the retail industry, the supply chain has long been viewed as critical to success and profitability. Companies with tremendous reputations like Apple and Wal-Mart have long enjoyed the fiscal and customer satisfaction benefits of an efficient supply chain. But the retail industry is changing, and so will the supply chain.
In the past decade, advances in primarily mobile and social technologies have allowed consumers to become much more digital and connected to information and each other, and it has altered the way they discover and purchase products. While e-commerce has grown to almost 10% of the overall retail industry, analysts estimate as much as 50% of the retail industry is influenced by a consumers digital interactions. These “digital consumers” have a thirst for transparency about the products they are buying, and their thirst for information about them seems unquenchable. In some cases, digital consumers are so vocal about their needs; we are seeing governments put regulations in place requiring consumer transparency (e.g. EU 1169 – a European Union regulation requiring digital access to nutritional, ingredient, and allergen information for consumers at the point of sale).
The result is retail and manufacturing organizations have to be better at capturing, managing, and sharing product data through the supply chain. In fact, the need is so great, a data supply chain in its own right needs to be developed. Developing a Product Information Supply Chain, tightly integrated with the traditional supply chain, will help organizations ensure that ultimately consumers in the digital world have complete, up to date, and quality information where and when they need it in their purchase lifecycle.
We are already seeing evidence of the product information supply chain taking shape. The industry is investing heavily in the software and processes that create and share product information. From the product development – aggregation and management of product data at the manufacturer – to setting an item up for sale at a retail or online store – to presenting that information to the consumer. Industry organizations such as GS1 are investing in new initiatives and capabilities to support the product information supply chain.
While the supply chain has long been a critical component to success in the retail industry, the product information supply chain may be an even more important to success in the future of the retail industry, as every consumer becomes a digital consumer.
For the fourth quarter, the company’s loss widened to $108 million and reflected a shortfall in the delivery of 1400 vehicles along with described manufacturing inefficiencies related to the recently introduced Model S P85D as well as Autopilot functionality. Currency headwinds reflected by the current strong value of the U.S. dollar further weighted on earnings. The bulk of Tesla’s manufacturing supply chain is within the U.S.
Revenues in the quarter increased to nearly $957 million from $615 million recorded in the year earlier quarter. The electric car company sold 9834 vehicles vs. 6892 in the year earlier quarter. Operating expenses nearly doubled.
During the fourth quarter, production increased to a record 11,627 vehicles, meeting its target to produce 35,000 vehicles in 2014. However, deliveries in the quarter amounted to 9834 vehicles. Tesla has adopted a rather industry-unique finished goods distribution model electing to take more end-customer orders directly online and delivering new cars direct to consumers, shunning the need for a vast dealer network. As a result, Tesla could not deliver 1400 vehicles because of challenges described as either customers being on-vacation, severe winter weather and termed shipping problems. According to its 8K report, the 1400 vehicles have since been delivered in the current quarter, but weighed on revenues in Q4. Keep in mind that Tesla has invested in advanced technology to provide deeper visibility to overall delivery and customer fulfillment needs.
For the full year, Tesla recorded nearly $3.2 billion in revenues and an operating loss of $294 million, roughly three times the losses recorded for 2013. Inventories increased nearly $613 million. According to its SEC filing, about 55 percent of new Model S vehicles were delivered to North America customers while 30 percent were delivered in Europe and 15 percent were delivered to Asia Pacific customers. More vehicles were directed into Asia Pacific markets to support the initial year of deliveries for that region.
Looking toward 2015, Tesla faces a number of added supply chain challenges in order to support its global sales goal of 55,000 vehicles. A number of added investments in expanded manufacturing capacity are planned to increase production volume to 2000 vehicles per week by the end of 2015. Tesla entered 2015 with over 10,000 orders for its Model S and nearly 20,000 customer reservations for its new Model X, which is expected to begin customer deliveries in Q3 of this year. G&A expense growth is expected to be more modest with a particular emphasis on increased operational efficiency.
Added production capacity investments include a new state-of-the art automated casting and machining operation for various aluminum components and increased production volume investments to meet expected demand for All-Wheel Drive Dual Motor product demand. A new paint shop operation is further planned for combined painting of Model S and Model X models. Tesla additionally plans to further increase its sales and service resources in all existing markets including China.
One rather positive note is Tesla’s indication that steel fabrication is underway at the planned battery manufacturing Gigafactory near Reno Nevada. That new facility, being constructed in partnership with major battery supplier Panasonic, is reported as on plan to begin equipment installation later in 2015 and battery production in 2016.
Thus while showing some supply chain strains at the end of 2014, even more challenges remain for Tesla’s supply chain in 2015. Tesla has often demonstrated the effective use of advanced technology applied to manufacturing and supply chain business processes, and 2015 will be no exception to that trend.
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.
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.