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.

Bob Ferrari

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