Earlier this week, global package delivery provider UPS reported its first quarter operating results and provided a succinct message to online e-commerce customer fulfillment providers that the provider will protect its profitability in servicing this segment. The results were far different than the disappointing news delivered for the end-of-year quarter and an indication that last-mile delivery strategies associated with online commerce are subject to increased cost changes and implications.  These results are a further indication of the revenue and profitability boost brought about by the change to dimensional pricing of shipments, along with other operational changes.

For the March ending quarter, UPS reported an overall 1.4 percent increase revenues and an 11 percent increase in operating profit to $1.7 billion, demonstrating profitability increases across all operating segments. Results for U.S. based operations reflected a 5.3 percent increase in revenues while profits rose over 10 percent to $1.02 billion. U.S. Domestic Package revenues, where dimensional pricing went into effect, experienced a 3.8 percent increase in revenues.

Total shipments increased 2.8 percent to 1.1 billion packages reportedly led by European export growth of 9.4 percent.  No doubt, that was an indication of a positive impact from the increasing value of the U.S. dollar, allowing European goods to be more price-attractive in export markets such as the United States. For the quarter, UPS generated $2.4 billion in free cash flow. UPS raised rates and increased fuel surcharges across the board at the beginning of the year.

Brown further announced that it has declined to renew contracts with “a couple of substantial customers” whose business was not profitable enough, especially concerning e-commerce shipments. While UPS executives declined to name any specific customers, in its reporting, The Wall Street Journal indicated that children’s toys retailer Toys “R” Us was one of those customers. Reportedly, UPS raised it rates, prompting this retailer to move to FedEx in February.  We would surmise that other customers were well-known e-tailors as well.

Further announced was an increase in the number of Access Point locations where online customers can pick up their purchases themselves, thus decreasing the number of overall package trips for UPS’s last-mile delivery efforts. UPS executives were quick to point out that the carrier’s business goal was not to just increase costs for its customers but rather to facilitate improved efficiencies in shipping methods and packaging of shipments. Obviously, industry supply chain teams accountable for transportation costs and delivering cost reduction goals will likely have a far different perspective.

As Supply Chain Matters observed in our June 2014 commentary, dimensional pricing implied a major revisit of packaging and transportation practices for bulky items as well as policies related to free shipping. With recent operating results from both FedEx and UPS now indicating a renewed focus on carrier profitability, the implications are indeed broader from both shipper and carrier perspectives, especially in the light of online consumer preferences for same-day or Sunday delivery.  Shippers and especially e-tailors will be responding with revised practices to protect their operating costs and margins.  The overall effect can either be a different, more efficient delivery fulfillment process that emphasizes customer pick-up or the development of more innovative delivery strategies.  The U.S. Postal Service as well as up and coming logistics disruptors may well benefit.

Supply Chain Matters continues to anticipate that major online retailers will initiate a different form of planning for the 2015 holiday fulfillment surge later this year, and that will be how to balance continuing consumer preferences for free shipping with the new realities of higher parcel shipping and logistics costs. New or different business models and strategies will continue to emerge in the coming months as this dynamic unfolds and both B2B as well as B2C shippers need to be prepared for such industry changes.

Bob Ferrari

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