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UPS’ Fork in the B2C Road

By Mark Solomon | March 16, 2015 | 4:59 PM

 

 

How does UPS Inc. manage the seismic shift from steady-Eddie B2B commerce to the volatile and less-margin friendly world of B2C? Bill Greene, lead transport analyst at Morgan Stanley & Co. and one of the scene’s more astute observers, says UPS can try to maintain its margins and risk losing market share, or maintain share –at the expense of margins—by sticking with an aggressive pricing stance. Greene says UPS should pursue market share, even if it means a short to medium-term hit on margins. 

Unlike the B2B segment where UPS and its rival FedEx Corp. enjoy a virtual monopoly, the B2C market is more competitive. Besides FedEx, the U.S. Postal Service is a major player and becoming more formidable. In addition, there are smaller players that, while they could never directly challenge UPS, could affect pricing on the margins. Greene reckons that if UPS pursued market share growth by offering cheaper capacity to the market, it could take share from USPS, FedEx, and the smaller players. Growth at UPS's competitors would become more expensive, Greene said. This could force competitors to pull back on their own capacity investments, and would remove incentives for potential entrants like Amazon.com to build delivery capabilities.

If managed correctly, UPS could ramp up revenue growth from market share gains while discouraging rivals from re-investing in their networks and new entrants from taking the plunge, Greene says. This, in turn, could improve UPS’ B2C delivery density, the lack of which today is the biggest impediment to the company’s profit outlook in B2C.

Such a move is not without risks, Greene acknowledges. UPS’ margins would fall (the only question would be by how much) and investors seeing margin compression could flee the stock. It would not be an easy choice for UPS management, Greene says, but it may be preferable to the alternative, which is to keep rates high in a bid to preserve margins. What should also be recognized is that FedEx, with its independent contractor driver network, is in a better position to attain suitable margins on B2C deliveries than UPS’ unionized system and the higher labor costs that accompany it.

 

A new warehousing model?

By Susan Lacefield | March 06, 2015 | 11:33 AM

My colleague Mark Solomon has done an excellent job of covering “Uber-like” service providers—like 10-4, Cargomatic, and Box Smart—which match loads with unused truck capacity.

 A similar phenomenon is also being seen in the warehousing space with the company Flexe.

Flexe is a service provider that helps companies share underutilized warehousing capacity by matching those that need space to store their products with those that have excess space. In a sense, it provides a spot market for warehousing space.

Last week, the event and research company eyefortransport did an interesting webcast with Flexe CEO and Co-founder Karl Siebrecht and one the company’s customers, Dhruv Agarwal, CEO of True Fabrications, which sells wine accessories. Cleverly the webcast title described Flexe as being “AirBnB for Warehousing.”

In his presentation, Agarwal said that using Flexe has allowed his company to grow without having to expand its warehousing space. “It allows us to act as if we have a warehouse twice as big [as what we currently have],” Agarwal said. 

That’s one of the biggest advantages of Flexe, according to Siebrecht. “Warehousing is the most fixed of all assets in the supply chain,” he says. By allowing companies to tap into other organizations’ unused warehousing space, Flexe helps companies create much more flexible and responsive supply chains without having to increase fixed cost.

This type of model does seem to have a lot of potential, in particular for seasonal products. Additionally retailers might find this one way to respond to the need to have more product stored closer to the customer to fulfill omnichannel retailing and e-commerce demands. 

The big question, of course, is security. After all, there have been numerous reported cases of Uber drivers sexually assaulting customers and the unforgettable story of the AirBnB customer that refused to leave. How can you prevent the warehousing equivalent of this from happening to you? Flexe insists that it screens all its partners to meet standards of service and has a rigorous training and onboarding process. 

While there are certainly a lot of unknowns about this new model that may make a cautious person hesitate, it’s definitely an idea worth keeping an eye on, and I would love to hear from anyone who has had experience with Flexe or other similar models.

The expanding supply chain

By David Maloney | February 21, 2015 | 12:33 PM | Categories: Transportation, Warehousing

The recent move by FedEx to acquire Genco Supply Chain Solutions is proof of the growing trend of companies looking to stretch their traditional supply chain borders. The huge transportation company sees embarking into the contract warehouse business as an integral part of its future.

In doing so, it matches UPS, DHL, and other transportation providers who see a link between moving products and processing them in a distribution center.

Up until now, FedEx has not been a big player in this arena. With Genco under its umbrella, it has a proven commodity that has a nationwide footprint in warehousing and distribution – 35 million square feet in 130 locations.

Genco is also recognized as a leader in handling returns, which of course must be transported back to the distribution center. Once processed, FedEx can leverage its transportation network to deliver the returns to other parts of the supply chain. It should be a profitable union – one that recognizes the symbiosis within the supply chain of these important functions.

The move comes as no surprise to those of us at DC Velocity, confirming a core belief here. From its initial edition, DC Velocity has stressed the marriage of both transportation and distribution in an evolving, forward-thinking supply chain.

Manage like a coach, not a dictator

By Mitch Mac Donald | February 17, 2015 | 1:31 PM | Categories: Lift Trucks, Material Handling, Warehousing

Common sense sometimes isn’t as common as it should be. This came to mind in correspondence with the folks at West Monroe Partners.

 

Michael Harris, manager of workforce optimization at WMP makes a very strong case for a shift in mindset and approach for warehouse managers in dealing with team management. The bottom line: managers who coach their team will yield more positive result than those who dictate.

 

Harris notes it is very common in warehouses with standards to discipline based solely on a performance percent – for example, John only achieved 80% of his target for the week.  The problem is deeper than John’s performance, though, because there is typically no detail on what caused the subpar performance. For example, was it because an environmental condition was not present, i.e., a wheel on John’s picking cart is broken? Or was it due to something John is or is not doing? 

 

Managers have two ways to approach this matter with John. They can discipline him for poor performance, or they can coach him to improve his performance.

 

In a disciplinary approach, says Harris, the associate is instructed to react to a course of action dictated to them through the company’s formal discipline process. There is little to no opportunity for the associate to have input into this course of action and it ends up creating low morale and a lack of trust. It can also strain the relationship between the associates and the management team.

 

By instead taking a coaching approach, he suggests, a manager engages John to actively work together to address the issue. This creates a process of supervisors observing the associates and their environment to determine a root cause. It also gives the management team and the associates an opportunity to improve their relationship and create a team environment where both sides are working together towards a common goal.

 

If the root cause is a methods issue with the associate, the supervisor can explain what the associate is adding to the work or doing different from the preferred methods and how that equates to their underperformance.

 

Coaching should be utilized as the initial steps to newly-identified underperformance, Harris states. “Supervisors should give the associate an opportunity to learn from mistakes and fix any issues prior to launching into the formal discipline process, which may still be necessary if the associate continues to show an inability or unwillingness to address the issue.”

 

According to Harris, this approach helps the associate understand exactly what activities hurt their productivity and gives them hands on understanding of how to fix the issue as well as how it benefits them to do so. It also gives the supervisor and manager insight into any issues outside of the associate’s control that are affecting overall productivity.

 

Managers, Harris maintains, can foster this environment by utilizing the same coaching approach between themselves and their supervisors. In addition, having regular discussions on the process and helping supervisors to understand how a coaching approach will benefit the operation in the long run will go a long way. Some key benefits include:

  • Increased morale
  • Stronger relationship between management team and associates, manager and supervisors
  • Reduced turnover
  • Consistent performance and increased productivity

Supervisors applying the coaching approach have an intimate knowledge of the functions under their responsibility (the methods for each job) and incorporate the following steps into their typical day:

  • Identify consistently underperforming associates.
  • Schedule time to observe identified associates as soon as possible.
  • Address any root cause issues immediately during observations.
  • Practices good listening skills when working with associates.
  • Utilize proper training techniques to ensure understanding and buy in.
  • Document each associate interaction related to coaching or discipline.
  • Spends as much time as possible in the operation even when not performing formal observations.
  • Have an “open door” policy and a process for associates to report operational concerns or other issues.

Managers applying the coaching approach also have an intimate knowledge of the operation and incorporate the following steps into their typical day routines:

  • Have an “open door” policy and a process for associates to report operational concerns or other issues.
  • Works with supervisors on a regular basis (including occasional role plays) to help them develop their communication and conflict resolution skills which are essential to the coaching approach.
  • Develops and trains supervisors on how to identify coaching opportunities versus when discipline is necessary.
  • Performs regular walk through of their operation over the course of each shift to ensure visibility and to give the opportunity for associates to approach with questions and concerns.

The Fuel Surcharge Head-Scratcher

By Mark Solomon | February 11, 2015 | 8:05 AM

I’ve been doing this stuff for awhile, and I must confess that I don't really get the mechanism of fuel surcharges.

 

In its fourth-quarter conference call last week, UPS Inc. executives talked about the headwinds its three units—in particular less-than-truckload operator UPS Freight—would face as a result of lower fuel surcharges that would negatively impact revenues. But all the comments did was reinforce a basic question: Wouldn’t UPS offset those revenue headwinds from the lowered costs that would come from the cheaper cost of fuel purchases?

 

I have asked this general question of many analysts, especially in the wake of a dramatic fall in oil prices and recent moves by FedEx Corp. and UPS to raise their surcharges despite the dramatic decline in the price of the commodity. I get what appear to be cogent responses, but they are just not sinking in.

 

I am guilty of looking at this in a symmetrical way. That is, fuel costs and expenses should even out, albeit with a time lag that should be appropriately priced in by the shipping and investment community. Yet I am reminded that such thinking is off base. I’m told through analysts’ comments that the decline in oil prices is a negative for some of the largest consumers of fuel in the country. I read that some LTL carriers historically over-recover fuel expenses, and that when prices decline they have to give back some of that recovered revenue.

 

Fuel surcharges were created in the early 1970s after the first Arab oil embargo. They were designed to help carriers recoup the volatile—and in those days unprecedented—moves in oil prices without resorting to the difficult practice of hedging. Surcharges disappeared for about 20 years before returning as a permanent fixture in 1996. At that time, diesel prices had risen to about $1.19 a gallon, a high price in those days. A group of retail outlets was formed to report diesel prices to the Department of Energy. DOE compiled the data into a weekly index of chart of average prices on a national and regional scale. The DOE index would allow carriers to keep fuel charges separate from the line-haul rate, thus ensuring transparency on the impact of fluctuating fuel prices.

 

Over the years, surcharges have taken on different forms. For example, one approach has been to calculate daily fuel prices along a specific route and to set surcharges based on the prevailing daily changes. Whatever the case, a mechanism originally meant to be a pass-through to help carriers cope with fuel price volatility has turned into its own revenue stream. Today, somewhat perversely, it is better for carriers when fuel prices are higher so they can impose higher fuel surcharges in the hope that the surcharges run ahead of their costs. And conversely, in an environment like today’s, where in theory lower oil and fuel prices should benefit those who consume lots of the product, it’s actually a bad thing.

 

 I think I’m getting it…

Now is not the time to stop fuel-saving innovations

By David Maloney | January 19, 2015 | 8:15 PM | Categories: Transportation

As of today, the average gallon of gasoline in the United States is $2.06. It is even much less in some regions of the country. In New Jersey, drivers are spending only $1.69 a gallon. That is the lowest cost to fuel a car since 2009.

 

Diesel prices have also seen a drop with the average at $3.09 a gallon, down 83 cents from the same week a year ago.

 

Americans are saving millions of dollars each week on fuel costs. But if history tells us anything, we should not expect it to last. Fuel prices are highly volatile.  Companies would be wise not to make important decisions based on their current low fuel bills. That is especially true of firms that have programs designed to reduce their energy spend. Now is not the time to change course.

 

I recently visited Burris Logistics, a company that has made it a mission to reduce its fuel consumption significantly. Working with Ryder, Burris has redesigned its trucks, including modifications in engine design, gear ratios, and automatic transmissions to reduce fuel usage. They have also changed the body designs of the cabs and trailers to make them more aerodynamic and able to slice through the wind. They have added low resistance tires and mud flaps that allow air, but not road spray to pass through them. All of these innovations have increased the miles per gallon on Burris trucks by 50 percent since the campaign began.

 

My hope is that companies such as Burris do not stop innovating, even though diesel prices have dropped. The fuel nirvana we are now experiencing will not last. Innovations will still provide a reasonable return on investment, now and in the future.

Bill Logue’s Legacy

By DC Velocity | January 06, 2015 | 9:47 AM

William J. Logue walked into the fire when he was named to run FedEx Freight, FedEx Corp.’s LTL unit, in 2010. The LTL sector was flat on its back, hammered by freight and economic recessions, and by ill-conceived rate-cutting moves designed to defend market share and to try—unsuccessfully as it turned out—to force YRC Freight, the then-market leader, out of business.

 But Fred Smith, FedEx’s founder, didn’t build a $44 billion colossus by getting the big personnel decisions wrong. Smith knew that Logue, who ran air and ground operations at the parent’s main “FedEx Express” unit, was a master operator who grasped the trucking industry and how to apply processes long used in the express business to improve LTL’s value proposition. In addition, with more than two decades at FedEx, Logue had the corporate savvy to maneuver through the cultural maze to get things done.

Last Wednesday, Logue retired, leaving behind a healthier and profitable FedEx Freight for his successor, Michael Ducker, who, not coincidentally, comes to the job from the same role that Logue had when he was tapped. More significantly, Logue leaves having positioned FedEx Freight to be the type of operation Smith wants as he leads a vastly revamped FedEx into the balance of the century’s second decade.

One of Logue’s first tasks was to undo the disastrous scorched-earth rate strategy that was implemented before he got to FedEx Freight by people at higher levels than him. Then he engineered the most important step in the unit’s history: A dual-use network design to support a "priority" service for shipments that required delivery within two days, and an "economy" option for deliveries of three days or more.

Logue reasoned that LTL shippers accustomed to paying for services based on miles driven would gravitate to a model that offered choices based on transit times. He had to fight consultants who doubted that shippers would pay for slower times for shipments moving less than 600 miles. In the end, though, the customers got it, even if the consultants didn’t.

The service’s success depended on flawless execution utilizing the same type of tracking technology that made FedEx famous. It also depended on an increasing use of rail intermodal to keep the service economical. Today about 18 percent of all shipments—and about one-quarter of traffic moving over the “economy” network—travels via intermodal, according to a source close to FedEx. So far, the model has worked, with the “economy” service generating an especially strong following.

Logue (who was not available to be interviewed prior to his retirement) leaves with an industry that has become quite profitable, and is poised to become even more so. But he also leaves with one objective undone: Migrating FedEx Freight away from "classification" pricing, where rates are determined by the characteristics of commodity classes, to a structure based on shipment dimensions and density.

The approach, long used by FedEx's parcel customers, would be a "game-changer" for LTL if adopted, Logue said in early 2012. Logue departs as LTL is on the cusp of such a profound change. Though he won’t be around to see it, he was around to get FedEx Freight to the point where it appears to be set for years to come. For that, the company owes him a huge debt of gratitude


—Mark Solomon
Senior Editor

It's the most volume-filled time of the year

By David Maloney | December 15, 2014 | 1:35 PM

Sometime this week, UPS, FedEx and the United States Postal Service will likely reach an all-time high for the most packages shipped in one day. FedEx is predicting that 16 million packages will ship today alone (it is Monday, December 12 as I write this).

In an interview with CNN, Chuck Vookies, a senior station manager at the FedEx facility in Marietta, Ga. said that today’s volumes is higher than last year and about 30 percent more than a normal day’s volume. He attributed the increase to more online shopping.

During the last holiday season, higher volumes led to many packages shipped by the three services not reaching their destinations in the time promised. This led them to take steps to assure that their systems can now handle added capacities. Few employees are allowed vacation time between now and Christmas. More trucks were added to their networks and extra workers brought in to sorting centers as well.

We will see yet if these steps fix the volume crunch. All three services are confident they will shine this year.

Another step that both FedEx and UPS have taken to address their capacities is a plan to begin dimensional-weight pricing on small parcels. That won’t affect this year’s volume, but it is still essential to understand if you are a shipper. I wrote an extensive explanation of dim-weight pricing in a story in DC Velocity that appears in this month’s issue:

http://www.dcvelocity.com/articles/20141117-how-to-avoid-a-dim-future/

The article explains how you might be able to keep from seeing huge boosts in small package shipment costs that will now fall under dim weight pricing.

The reason for the change is that a lot of the volume that UPS and FedEx ships is air – packages that are much too big for their contents. These packages, which contain a lot of empty space, have until now taken a lot of the cube capacity from airplanes and trucks. Starting in January, customers will now pay a premium for not right-sizing their shipments with the correct amount of packaging.

By the way, if you are doing some last minute shipping and still want your packages to arrive by Christmas Eve, FedEx recommends you ship ground packages by this Friday, December 17. The company will accept next day packages by December 23 and still get them there by December 24. At least that is the plan.

I wish you all a very happy holiday season.

Truck Driver Shortage: 100+ Years War

By Mitch Mac Donald | December 08, 2014 | 12:34 PM | Categories: Transportation

The driver shortage has been a topic of seemingly endless discussion and debate in the logistics industry for at least 100 years, as evidence by the citation below.

The question, then: Should we stop talking about solving it and recognize the reality of its ever-presence and instead focus on how to best cope with it?

Consider this: "Practically all truck manufacturers and nearly all employers complain of the great difficulty of securing driver who are competent and who will work handling freight."   -- Source: Traffic World, December 12, 1914

AWOL on Infrastructure

By Mark Solomon | December 01, 2014 | 11:15 AM

A couple of Sundays ago, the “60 Minutes” news program devoted its lead segment to the problems confronting the nation’s transportation infrastructure. For those in the field, the segment didn’t break much new ground (no pun intended). But it was interesting that not only was there no on-air interview of Transport Secretary Anthony Foxx, but the reporter, Steve Kroft, didn’t even mention if Foxx was asked to comment.

Perhaps it was a good thing for the Obama Administration that no current official spoke on the subject. It’s unlikely they would have much to boast about. Nearly six years into its tenure, the Administration deserves a solid “F” for the way it has led (or not led) in the effort to fund improvements to the nation’s transportation infrastructure. The failing grade is amplified by the amount of rhetoric President Obama has spilled in touting infrastructure spending as a vehicle for job creation and for boosting the nation’s economic competitiveness.

Congress, of course, has played an important role in this mess. Yet transport funding is traditionally one area both parties can agree upon, especially when so much has been at stake since the Great Recession. It takes Presidential leadership to manage the process. However, it has not been delivered. The $787 billion stimulus bill signed in 2009 allocated a mere $48 billion to transport funding. For the next five years, the Administration effectively sat on its hands as Congress enacted stopgap bill after stopgap bill to keep road projects alive. In early 2012, efforts by Rep. John Mica (R-Fla.) to craft a long-term spending measure were criticized by then-Transport Secretary Ray LaHood as the worst bill he’d ever seen in all his years in public life. Yet the White House failed to come up with legislation of its own. When Congress, against all odds, sent a multi-year bill to President Obama’s desk in July, it was legislation fashioned with no executive branch input.

Finally in early 2014, the White House proposed funding legislation. It has, to this point, gone nowhere. This fall, the can was kicked down the road again, this time until May when the current short-term funding law expires. It what might mark a new low in legislative legerdemain, the stopgap funding was financed in part by the financial “smoothing” of corporate pension contributions, allowing companies to forego pension contributions on the front end so more taxable revenue would be available to capture and funnel into the Highway Trust Fund.

The Administration wrings its hands about how to pay for transport projects. The answer is in front of its face: Raising the federal fuel tax for the first time since 1993. Shippers and truckers support it. Big and small businesses support it. Road builders support it. Even the AFL-CIO supports it. But Congress is too scared to act, and the Administration shows no courage to lead because it is just as scared.

The clock will inexorably tick towards May. Facing no more election cycles, President Obama should put the hammer down and persuade Congress to pass at a minimum a four-year spending bill that includes a sizable increase in the federal fuels tax that has been a long time in coming. With a Presidential election cycle set to start in earnest in late 2015, the spring and summer may be as far as the window will remain open.

If the President needs inspiration, he should harken back to 1956. Then, President Dwight D. Eisenhower, in the face of predictions that in a Presidential election year a Democratic Congress would never approve a plan sought by a GOP president to create an interstate highway system, continued to urge approval and worked with Congress to reach compromises that made it work. The President signed the “Federal-Aid Highway Act of 1956” into law on June 29.

If President Obama can follow in Ike’s footsteps, then the sorry neglect of the previous six years will largely be forgotten.

The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

Thoughts from our editors.



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