The relentless rise of online shopping is causing major changes in how companies like UPS get packages delivered to doorsteps.
More consumers are using smartphone apps to buy everyday goods from Amazon and other online sellers, causing massive disruption in retailing. The flood of packages and expectations of quick delivery, meanwhile, are also disrupting old business models in the shipping business.
For Sandy Springs-based UPS, the trend means restructuring operations and deploying new technology to adjust to the higher costs of home delivery.
The effort is visible in the middle of a UPS sorting facility in Roswell, where packages move swiftly down a conveyor belt while a machine spits out a shipping label onto each package.
The small-sort label applicator and weighing — or SSLAW — machine can label 3,000 packages an hour, each with a customized label that has sorting instructions, a route ID and an indication of precisely where on a truck it should be loaded.
“It allows it to read barcodes and shoot a label on a package at a much higher rate than manually,” said John Arthur, engineering on-road supervisor at the facility.
Speed is crucial as UPS scrambles to expand its ability to handle tens of millions more shipments ordered by online shoppers every year.
Credit: Bob Andres
Credit: Bob Andres
The SSLAW machine is one of myriad efforts by UPS to increase its capacity to handle small packages that make up the bulk of e-commerce shipments.
Historically, UPS specialized in business-to-business deliveries in which drivers delivered several packages at each stop. Now it is grappling with an explosion in business-to-consumer deliveries, which are expected to account for more than half of UPS’s volume by 2019, up from just over one-third in 2009.
The volume boost is welcome, but having drivers prowl suburbs and drop packages one at a time is far less efficient.
Credit: Bob Andres
Credit: Bob Andres
Technology can help employees work more quickly with fewer errors, such as new scanners workers use to verify with a beep that packages are going onto the correct trucks.
Other changes are more old-fashioned: More workers, expanded hours and bigger facilities. In metro Atlanta, for instance, UPS is building a massive hub near Fulton County's Charlie Brown airport.
“UPS historically under-invested in its facilities, and is playing catch-up to be able to handle the growth it is experiencing,” wrote Cowen analyst Helane Becker in a July note to investors.
Credit: Bob Andres
Credit: Bob Andres
The company is also establishing package pickup points in convenience stores to help restore some of the efficiency of multi-package deliveries.
Speedier shipments
A complicating challenge is that online retailing is highly seasonal. In 2013 UPS fell painfully behind during holidays. Many customers didn’t get gifts in time for Christmas, and the company’s reputation for reliability suffered.
UPS recovered over subsequent Christmases and is now trying to build the business to handle volume gyrations.
"E-commerce is continuing to grow double-digits… We see it as a huge opportunity," said Alan Gershenhorn, UPS's chief commercial officer. "We're doing a lot to make residential more efficient."
A key change was adding Saturday pickups and deliveries, because people tend to do a lot of online shopping over the weekend and the orders can pile up by Monday.
That change also better aligns UPS with shipping customers, whose warehouses “can’t afford to not work on the weekends,” Gershenhorn said. “You’re seeing more and more doing these six-day-a-week, seven-day-a-week operations. We’re speeding up their network.”
Credit: Bob Andres
Credit: Bob Andres
Tighter margins
UPS remains solidly profitable, with record revenue of nearly $61 billion last year and profit of $3.43 billion. But rising costs of servicing e-commerce caused concern among investors early this year, when disappointing financial results and tighter domestic margins caused a stock price drop. UPS pledged in January to invest in tackling the issue.
“If we were to just increase capacity but not simultaneously reduce costs, then it would ultimately impact our margins,” UPS spokesman Steve Gaut said.
In one move to combat rising costs, UPS is adding surcharges during peak holiday periods. In June, UPS announced surcharges adding 97 cents per package shipped via second-day air residential services for the period of Dec. 17-23, for example. Rival FedEx announced this month it will not levy peak-season surcharges for most holiday packages.
UPS also now charges extra for large packages through a system called dimensional weight pricing.
Large packages can be costlier to handle — they take up more room on trucks for example, allowing fewer boxes to fit in — and the dimensional weight pricing is also motivating retailers to rethink how they package their products, avoiding the notorious gigantic box with a tiny item inside.
Moving less air
“We’re moving less air today,” Gaut said.
While home delivery remains the favored mode of most online shoppers, UPS is also trying to nudge some to pick up packages at a nearby business. That allows drivers to handle more packages in less time and cuts down on fuel use and the need for repeat delivery attempts if no one’s home.
It has set up what it calls Access Point locations at local stores where nearby residents can pick up packages, either as a first choice or after a failed at-home delivery attempt.
UPS's My Choice app — another technology addition — allows the option of choosing a delivery location other than your residence. Eventually UPS hopes many e-tailers will allow the option at the point of order, possibly in exchange for a lower shipping cost.
The same concept is driving the growth of “ship to store” options by retailers.
Another effort to create synthetic density is going on behind the scenes: a system called “synchronized delivery” to consolidate shipments bound for a particular home or street into one delivery day, even if some of those packages don’t have to be delivered until later. By moving up the delivery of a package to the same time as others, UPS can save driver time and fuel and increase efficiency.
Working overtime
For workers, the rapid growth from e-commerce generates opportunities and challenges.
Credit: Bob Andres
Credit: Bob Andres
Increased automation reduces the number of employees needed to grow, but the company still has more than 434,000 workers and is adding about 6,000 jobs as it expands Saturday operations.
Those who are handling the ever increasing number of packages are putting in long hours.
“We’re working 13-hour days,” said Roswell sorting center worker Eric Massaro, a shop steward for the Teamsters union, which represents drivers, loaders and sorters. But he also said the addition of Saturday ground delivery has created more full-time jobs — “good-paying jobs with benefits.”
“They’re hiring like crazy” because of the growth in e-commerce, Massaro said. “I’ve never seen jobs get added at UPS like it has in the last year.”
Another issue: Returns.
UPS this month is launching a new online tool for retailers who don’t already have software for handling e-commerce returns. It allows consumers to print a return shipping label from UPS’s website or emails, or at a UPS store.
The idea is to help retailers cope with returns, whose processing costs can be 10 to 15 percent of the cost of goods, according to industry estimates. At the same time, competition usually requires making them easy.
“People aren’t going to shop with you if you don’t have a frictionless returns policy,” Gershenhorn said. Although UPS sees its customer as the retailer, “we’ve gone to the approach of, ‘What do our customers’ customers need?’”
BY THE NUMBERS: UPS and e-commerce
Online retail growth, 2016-2020 (compound annual rate):
U.S.: 12 percent
Global: 20 percent
Average number of UPS packages per stop:
Business address: 3
Residential address: 1.1
Business-to-consumer shipments, share of U.S. domestic packages
2009: 36 percent
2016: 48 percent
2019: 51 percent
Planned Atlanta hub near Fulton County airport
— 1.2 million square-feet
— Capable of handling 100,000 packages an hour
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