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.
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.
It is Friday, December 19 and the peak holiday surge of in-store and online customer fulfillment is just a two business days and hours away and the final crunch is underway. Thus far, our community already has some acquired learning from the 2014 holiday surge, learning, that stings goods producers, shippers as well as retailers and e-tailers.
Business and industry media have each reported how the U.S. West Coast port crisis impacted various brand-name retailers and exporters and their efforts to get inventory where it was needed. Goods arrived late or not at all, forcing retailers to shuffle planned merchandising and promotional plans. Yesterday, The Wall Street Journal reported on frustrations expressed by Ann Inc. owner of Ann Taylor, Chico’s, Lululemon Athletica, Perry Ellis International, Tommy Bahama and others not only for positioning holiday inventory but upcoming January inventories as well. Western U.S. exporters missed their holiday shipment windows because of the port back-ups, and will likely suffer the financial implications.
This week, FedEx reported its fiscal second-quarter earnings and beyond the numbers, reported that its network was impacted by the port crisis. The global parcel carrier implemented additional flexible airfreight capacity out of Asia to accommodate a surge of shipment re-routing needs, but capacity was described as very tight. FedEx management indicated that the carrier had to place limits on customer volumes in order to fulfill service requirements. As Supply Chain Matters has previously indicated, regardless of how the final numbers turn out, the west coast port crisis will result in noteworthy shifts in transportation strategies in the months to come.
Executives indicated that the current peak season represents the busiest in Fedex history, and volumes have been “more rational” and evenly spread. Black Friday and Cyber Monday turned out to be week-long events which FedEx executives expressed as a positive impact moving forward. Winter weather has generally cooperated with the exception of incidents of some severe storms impacting both the western and eastern U.S. coasts.
The U.S. Post Office made its presence as the Sunday delivery partner for Amazon Prime customers, and business and other media report that USPS workers are drained from having to work continuous 60 hour weeks without a break. Speaking of Amazon, the online retailer communicated to its Prime members that this weekend was the deadline to insure two-day holiday delivery. That is a hopeful sign that Amazon is cooperating with the pleas of parcel carriers to not promote the last-minute overnight shipments that crippled UPS in 2013.
Brick and mortar retailers implemented broader aspects of ship from retail store to fulfill 2014 online orders. Retailer Target is utilizing 136 of a total of1800 U.S. retail stores as local online pick and pack shipment nodes. According to the WSJ, Wal-Mart is utilizing 83 of its Supercenters as online ship from store nodes and Macy’s broadened its in-store shipping capabilities by allocating time prior to store opening for pick and pack of online orders.
The final crunch within logistics and fulfillment networks has begun. Today at Supply Chain Matters, we have placed a number of online orders with standard delivery terms as our own test of last-minute response. Already, one of our online orders has moved delivery date to December 23 from the original indication of two days prior. We placed one online, two-day delivery order with Samsung which was received on-time, as confirmed. We will initiate another test on Monday.
This author pulled into a local Mobil branded gasoline station at 7pm local time this evening and observed a UPS delivery carriage re-fueling at the diesel pump. Apparently, there were more deliveries to complete.
The last verse of the poem: Stopping by Woods on a Snowy Evening by Robert Frost exclaims:
The woods are lovely, dark and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.
And so it is for brick and mortar, online retailers, carriers and logistics networks for the last days of holiday peak 2014. The last mile crunch of fulfillment is about to commence.
We continue with our series of postings reflecting on our 2014 Predictions for Global and Industry Supply Chains that we published in December of last year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. We not only publish our annualized ten predictions, but scorecard the projections as this point every year. After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.
As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.
In our previous Part One posting, we score carded 2014 Predictions One and Two related to economic forces to expect in 2014. In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.
We now revisit Prediction Five.
For the past few years, our annual predictions have specifically addressed particular industries that we felt would undergo extraordinary challenges during the calender year. For 2014, we identified B2C Retail, Consumer Product Goods (CPG) and Aerospace industry supply chains as undergoing special challenges.
Retail and B2C Supply Chains
We predicted challenges for both the consumer demand and supply fronts. On the demand side, many lessons were learned during the final stages of the 2013 holiday surge, not the least of which was consumers waiting until the very last minute to initiate their holiday purchases. At the conclusion of 2013, many studies concluded that retail consumers were permanently altering their shopping habits in favor of online options with less visits to physical stores.
Throughout 2014, parcel firms FedEx and UPS concentrated on efforts to avoid being “thrown under the bus” which occurred during the final days of the 2013 holiday period. FedEx, and especially UPS, re-examined their delivery network infrastructure practices for maximum peak surge periods. UPS itself invested $500 million in augmented network infrastructure. For the first time in the parcel shipping’s firm’s 107 year history, UPS operated full U.S. based air and ground operations on the day after the Thanksgiving holiday, the traditional Black Friday shopping period, in order to stay ahead of expected surge in delivery activity. UPS is also implementing plans to augment its package-car capabilities by an additional 10 percent over last year’s levels as well as dramatically flexing its capacity and intermodal capabilities at its Worldport central hub. Brown will also deploy what it terms as pop-up “mobile distribution center villages” that will function across various U.S, network points beginning with the expected holiday delivery surge.
Retailers themselves entered the 2014 holiday period with higher expectations regarding consumer spending. Both FedEx and UPS re-doubled efforts to influence major B2C volume retailers to stagger promotional programs during the 2014 holiday surge and increase two-way visibility into that status of last-mile delivery networks. The U.S. Postal service stepped-up its efforts in offering retailers a new alternative for Sunday delivery along with more price competitive shipping rates. As we pen our prediction rating, preliminary reporting data surrounding the four day Thanksgiving and Black Friday holiday shopping period for 2014 indicates that consumers have indeed shifted even more buying preferences towards online channels with some online sites suffering periodic outages.
On the supply side, the “perfect storm” scenario unfolded among U.S. west coast ports starting in August. A combination of factors: stalled labor contract renewal talks among the Pacific Maritime Association and the longshoremen labor union, a shortage of inter-modal truck chassis, the appearance of much larger container vessels, along with efforts by independent truckers in seeking added wages and benefits all converged to bring port unloading and loading operations to a near standstill. The backlog poses a major threat for retailers and exporters in fulfilling revenue and profitability targets for the December ending quarter.
By our lens there is no doubt that B2C retail industry supply chains have indeed encountered extraordinary challenges in 2014.
Consumer Product Goods Supply Chains
In 2013, permanent changes in shopping habits among the majority of consumers were already evident and our prediction called for CPG industry supply chains to be especially challenged with the effects of these actions in 2014. Our prediction further noted the heightened influence and actions of short-term focused activist investors, applying dimensions of financial engineering to one or more CPG companies as continuing to have special impacts. CPG companies continued to view emerging markets such as China and India as important regions for future growth but experienced the effects a far more complex and risk-laden supply networks.
Most all of these forces were in-effect during the year.
In February, we highlighted supply chain implications presented at Consumer Analyst Group of New York (CAGNY) Annual Conference by CPG firms Campbell Soup, General Mills, Hershey Company, Mondelez International and PepsiCo. Campbell Soup CEO Denise Morrison described market conditions as “tumultuous” “persistently challenging” adding that “a new normal is coming to food.” … “The winners will be the companies that adapt successfully to a changing world.” Kraft CEO Tony Vernon described the industry challenge: “Our customers (are) coming to terms with changing shopping patterns and channel shifting; the rise of digital media, breaking established marketing principles and best practices. In some ways, we have to unlearn what we believed to work in the past and re-learn what will make a difference today. In the short-term, adjusting to such momentous shifts favors the smaller, more nimble players that are working from a small base.”
By mid-year, multiple CEO’s from well-noted CPG branded companies were each describing the blunt realities of a rapidly changing industry scenario where revenue growth was at a premium and profitability pressures dominated. In August, Procter & Gamble announced a re-structuring of its businesses to once again shed under-performing brands. Similarly, Coca-Cola, Mondelez, General Mills embarked on a business re-structuring efforts to boost sales and shed costs with a multi-year cost savings initiatives. Some CPG firms such as Kellogg, elected to acquired other smaller firms in growth segments.
Entering the closing month of calendar year 2014, many CPG supply chain organizations find themselves navigating the need to once again reduce long-term cost structures to free-up funds for strategic business initiatives while being called upon to be more nimble to rapidly changing consumer preferences and tastes. For some, these goals continue to add extraordinary challenge.
Aerospace Supply Chains
The unique challenges within aerospace supply chains have stemmed from a rather enviable position, namely unprecedented demand for newer technology-laden aircraft and aircraft components while volume capacity limitations have stretched into multi-year customer delivery windows to airlines and aircraft lessors. The literal duopoly of Airbus and Boeing did indeed dominate industry news in 2014 as both global OEM’s continued to balance unprecedented increases in new orders for aircraft while challenged to dramatically increase the production volumes for finished aircraft. After publishing our prediction concerning continued unique challenges for aerospace in December, we were pleased to note a published Bloomberg report in late January, With Epic Backlogs at Airbus and Boeing, Can Business Be Too Good?. Bloomberg pretty much mirrored our prediction.
By mid-year, Airbus and Boeing reported first-half delivery performance that would slightly exceed 2013 levels, but not at the pace required to step-up production momentum for the coming years. Once more, the latter part of 2014 featured considerable reductions in the cost of aviation fuel, and the open question is whether this will help or hinder the pressures for increased capacity and production of aerospace component supply chains. Airbus completed international certification test trials for its new carbon fibre A350 XWB aircraft program as well as the maiden flight of the new A320 Neo in September and both programs are reported to be on-track for initial delivery of first operational aircraft to launch customers. The A350 launch will represent a competitive offering to the Boeing 787 Dreamliner for wide aisle, long-distance travel, while the Neo version of the A320 will continue to compete with Boeing’s next generation 737.
Throughout 2014, Boeing announced a series of strategic, multi-year supply agreements to ensure supply of critical materials and components. The most notable involved strategic supply of material required for producing titanium, in a long-term supply agreement announced at the height of hostilities among Russia and Ukraine. The most recent announcement involved a 10 year agreement to supply carbon fibre composite material from a key supplier in Japan.
Other smaller industry OEM’s such as Bombardier, COMAC and Mitsubishi Industries continue to compete for smaller niche aircraft segment needs, and each of these players faced setbacks during 2014 as they dealt with the realities of more complex, globally dispersed suppliers sharing in product innovation. Bombardier encountered a significant program setback concerning its C-Series program as pre-maiden flight tests encountered an engine malfunction. Reports indicate that China based COMAC is also dealing with some unspecified setbacks.
Thus, the commercial aerospace industry did indeed manifest its own unique set of industry supply chain challenges this year, challenges that other industry teams would perhaps envy. Order backlogs extending beyond 10 years, technology innovation as a driving force, and supply chain scale-ups remain critical challenges in the months to come and commercial aerospace may indeed appear as an extraordinary challenge for 2015.
This concludes Part Three of our report card on our Supply Chain Matters 2014 Global Supply Chain Predictions. Stay tuned as we assess the remainder of our 2014 predictions in follow-on postings.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.