The founder of UPS Inc., James E. Casey, didn’t think of himself as an innovator. In an industry in which success depended on the mastery of repetitive tasks, Casey took pride in improving on processes already in place. His mission, encapsulated in three words during a 1957 speech to mark UPS’ 50th anniversary, was to “keep sawing wood.”
Nearly 115 years since its founding and 39 years since Casey’s death, UPS (NYSE: UPS) is still brandishing the saw. It is working on multiple projects that, if they come to fruition, could dramatically transform an operation that delivers 22 million packages a day, about 19 million of those in the U.S.
The big kahuna, which is on the drawing board, is to affix radio frequency identification devices (RFID) tags to every daily shipment, a monumental task even for a company of UPS’ size and technological prowess. The program is underway in 100 buildings and is being rolled out to support the expansion of the company’s “Premier” health care logistics initiative, in which high-value, mission-critical shipments get delivery priority.
Taking the RFID program systemwide would effectively eliminate the need for UPS to manually scan parcels prior to loading, an expensive, time-consuming task that is subject to an uncomfortable degree of human error, CEO Carol B. Tomé has said.
On Tuesday, UPS announced it had rolled out a program on July 11 in the U.S. called Total Service Plan designed to increase precision and predictability into its vast domestic business. Nando Cesarone, head of UPS’ U.S. operations, said the program is aimed at fostering
“a predictable environment where our operators can plan with a lot of confidence on start time, finish time, sorts bands and how we can better utilize our automated facilities and move volume from legacy facilities to our newer, more automated facilities.”
The scale of UPS’ U.S. network is such that a 10-minute improvement in delivery times and schedules translates into $257 million in cost savings, Tomé said.
One area that executives singled out for improvement was road feeder arrivals and departures. In a sign of the impact such a program would have on UPS drivers, operations executives have met face-to-face with 64,000 drivers to discuss how their schedules would fit with the initiative.
In addition, UPS teased out more information about a program, first made public last October, to build package density at the front end of a customer’s supply chain. UPS plans to go live next quarter with an unidentified IT provider that runs most retailers’ order management systems. Under the program, the IT company will hold an order until it can match another order bound for the same address. At that point, the system will release two orders, Tomé said.
By building density at the front end, UPS can lower its cost to serve per package and return those savings to customers, according to Tomé. The so-called virtual hold on packages would not violate the company’s service-level agreements (SLA) with customers because the hold would last only as long as the SLA allows, Tomé said. She called this a new way for UPS to support customer supply chains because the traditional approach of trying to build package density via the final mile wasn’t working.
UPS’ efficiency drive has somewhat of a sense of urgency to it. Starting Sunday, a 12-month clock will begin ticking toward the July 31, 2023, expiration of UPS’ five-year contract with about 370,000 Teamster union members. Negotiations won’t begin in earnest until the first half of next year. However, given the militancy of new Teamster General President Sean O’ Brien and broad concerns about labor cost inflation and supply chain disruptions, it would likely be prudent for UPS to seek cost savings and productivity gains wherever it can find them.
Last year’s contractual wage increase of 90 cents an hour, combined with a cost of living adjustment (COLA), resulted in an aggregate increase per union worker of $1.23 an hour, according to UPS CFO Brian Newman. This year, the aggregate increase is $1.82 cents an hour, which is a $1 hour wage increase combined with a 82 cents per hour COLA. One analyst, Bascome Majors of Susquehanna Investment Group, has modeled a $600 million year-over-year second-half bottom-line hit due to the near-term impact of contract cost escalation.
