Case $1$:UPS and FedEx turn focus to consumer behavior

On the ground floor of United Parcel Service's $$2\mathrm{.}2$bn World port Hub, workers are stunting into huge air freight containers' some of the roughly $1\mathrm{.}1$ million packages that the center in Louisville, Kentucky, handles every night.

Most of the containers have sped through World port's maze of whirring conveyor belt.and been reloaded in less than four hours. At $2$:$30$ am$,$ some of the $100$ or so flights that will carry the packages around the US and the world are starting to leave.

Amid the dazzling efficiency, however, is evidence of the significant challenge that UPS and FedEx, its main US rival, are facing. Many of the boxes bear the logo of Zappos.com, the internet footwear retailer, Another box contains frozen artificial skin for use in surgery, while one bears the simple legend, Live Tropical Fish.

Online retailing and business$-$to$-$business ordering$*$ are driving up traffic volumes for both UPS and FedEx but also making flows harder to predict.

The question for both companies is whether management changes and technology investments can help them to avoid a repeat of the chaos that engulfed UPS last Christmas.when demand surged more than anticipated. Volumes on its busiest day, December $23,$ were $13$percent up on $2012\text{'}$s peak and the network was clogged. any packages were delivered after December $25.$

The problems reflect the behavior of the individual consumers who increasingly drive big operators deliveries worldwide, according to Alan Braithwaite, a UK$-$based logistics consulamtThey are more likely than logistics operators' corporate customers. to order at the last minute.

The peaks are getting even peakier,:he says.

Fewer goods are being delivered in bulk via single stops on vehicles routes to retail outlets,according to Henry Maier,chief executive of FedEx Ground,the companys road$-$delivery division..

"Now those individual items get boxed up and sent to somebody's house, so that creates a stop," Mr$,$ Maier says, "The challenge across the industry is managing the stops.

UPS is improving its management systems and investing $$500$ million in extra capital spending this year to boost capacity, according to Kurt Kuehn, the group's chief financial officer.

We're very focused on expanding capabilities and capacity to meet the current growth $,$not to mention the peak season," Mr Kuchn says, We have what is in many ways an enviable problem.

One of UPS's efficiency$-$boosting investments is on display at the Louisville Centennial Hub, a base for UPS's ground operations near Worldport. Jerry Durham, a driver, each morning consults a bank of computers running Orion, a new computer system, to work out the most efficient route between his scheduled drop$-$offs.

The technology has raised the average number of drop$-$offs per mile from $1\mathrm{.}9$ when drivers devised their own routes to $2\mathrm{.}2$ now, says Roger Hicks, UPS's business manager for Louisville East.

The system has overcome his initial skepticism, according to Mr$.$ Durham. Ive gotten to like it a lot more," he says. Mr$.$ Maier praises new hand$-$held scanners for boosting FedExs efficiency. The scanners know the GPS coordinates of every address in the US and will alert drivers if they appear to be delivering in the wrong place. Such technology helps to cut down worker errors, especially among temporary staff taken on for the peak season.

It makes our temporary resources much more effective,Mr$..$ Maier says.

An innovation at Centennial typifies UPS's approach. In the past year, sorters have been given technology that scans package labels and tells them into which delivery bag they should

post them. The technology has cut down on wasteful mis$-$sorts.

Mr$,$Kuehn says most investments are focused on such local hubs, rather than the efficiet Worldport, and predominantly into computer systems.

Yet, for UPS, last Christmas's biggest failing may have been in communication rather than in technology. UPS failed to spot its customers higher than expected order volumes in timeMuch of the short$-$term effort has focused on ensuring future volume forecasts and communications with customers are better than last year's, FedEx says that such forecasting also plays a key role in its peak$-$season planning.Were working with some large customers to get enhanced visibility, Mr$.$ Kuehn says.

In the long run, meanwhile both companies expect to overcome the challenges partly through making more of their facilities like Worldport.

FedEx already operates all $33$ of its ground network's hubs in the US on Worldport's highly automated model, with minimal handling by humans, Mr$,$ Maier says it expects to start introducing such advanced technology in still more, smaller facilities.

For UPS,meanwhile,Worldport, the world's biggest fully automated package$-$handling facility, remains noticeably more advanced than smaller hubs such as Centennial, where much sorting is still by hand.

As the company adapts to the challenges of handling more shoes, medical supplies and fish, that will have to change, Mr$.$ Kuehn says.

Worldport is a highly automated,incredible asset, driven by technology,"he says. There are several other generations of buildings around the country that we're going to be renovating to look more like Louisville.

Customized needs

In the middle of a warehouse near the end of Louisville Airport's runway stands a line of heavy$-$duty freezers,, an electronic stopwatch sitting on the lid of one. The stopwatch is intended to protect the delicate sheets of artificially$-$grown skin inside the freezers, used to treat diabetics foot ulcers. Supervisors time how long each freezer is open when stocks are being retrieved,to ensure the temperature stays low enough.

The business in the warehouse illustrates how thoroughly UPS and other logistics companies have involved themselves in some customersoperations. Next to the skin freezers.workers are preparing to ship batches of influenza vaccine. In another section of the building.workers are putting together packages of mobile telephones for Sprint, the mobile telecoms company. They customize devices for customers with special requirements, including government departments that want employeesphone cameras disabled.

Such supply chain business is separate from the flagship express parcel operations of UPS,FedEx and other logistics operators but adds a vital extra dimension to the services they can offer companies. According to Rich Shaver, division manager for healthcare in UPS's Americas Central District, the growing popularity of outsourcing reflects the increasing pressure on healthcare companies to save money and compete more effectively.

The customers have to have a competitive advantage," he says. The only way they can have competitive advantage is if they have a very nimble, flexible supply chain that at the same time is looking for what regulations and changes are coming.

The healthcare business, unlike high technology, remains relatively conservative and goods are shipped mostly to retail outlets, hospitals and other corporate customers.

However,the Louisville warehouse already employs pharmacists to handle prescription for some goods heading direct to customers. The company is receiving increasing numbers requests to suggest ways that customers can deliver more healthcare products direct to consumers, according to Mr$.$ Shaver.

Most times, it's going to be a progressive, step$-$by$-$step process, he says.

Questions for discussion

$1.$ What issues are UPS and FedEX facing here?

$2.$ How do UPS and FedEX contribute to their clients achieving a competitive advantage?

$3.$ What are the drivers for collaboration in the examples given?