UPS CEO Carol Tome Delivers in an Uncertain World

Explanation

Carol Thom spent 19 years as the chief financial officer of Home Depot Inc. before taking the helm at 115-year-old courier United Parcel Service Inc. in June 2020. It was in the middle of the Covid-19 pandemic. , which increased the packet size and broke the operation. Although this was his first job as CEO, Tom had a clear idea of ​​where he wanted to take the company after serving on UPS’s board of directors since 2003. Results: operating income increased to 13.8% compared to the last 12 months. In 2019, it was 11%. Tom discussed some of his initiatives in the interview. Here is a lightly edited transcript of our discussion:

Thomas Black: UPS said domestic package volume fell 1.5% in the third quarter from a year ago, and that decline will continue in the fourth quarter. Given this situation, how will the peak season shape up and will it be dampened by a weak customer?

Carol Thome: If you look at the volume trends in the third quarter, they were better than the first half of the year. One of the things we started doing a couple of years ago was to focus on the parts of the market that really value our network, which means we’ve focused on segments like small and medium business and healthcare. and certain enterprise accounts and alienate others who don’t really value our end-to-end network. This has allowed us to really improve revenue quality across the business and improve the overall customer experience.

For one of our biggest customers and a few of them, we’ve come to an agreement on what packages we deliver for them and what packages they deliver for themselves. This frees up volume on the networks for the rest of the companies to take care of. Looking at the guidance for the fourth quarter, that volume is down year-over-year, not because of poor consumer health, but because of contractual arrangements. We expect a very strong peak. To put that into perspective, our online volume is up about 25% from the third quarter to the fourth quarter.

TB: Looking ahead to next year, how do you see package demand and how will that affect contract renewals with major shippers?

CT: I’m really excited about our winning business this year. In fact, we are winning more business now than in any year prior to 2019. This is because of the service we offer. I am sure of it. Our service levels are better than other players, especially during peak times. Thus, we are winning new accounts because of the service we provide. By 2023, I think the environment is very fragile right now. It’s so uncertain, isn’t it? There is economic uncertainty, there is political uncertainty. So we’re planning conservatively, openly, but we know we’re winning. We’re sharing. TB: Can you give me some numbers behind that?

CT: For example, when I look at over 28% of our SMB volume in the US, we’re gaining share in both average daily volume and revenue.

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TB: Before the pandemic ruined everything, UPS had an extensive service warranty. When do you reset your home service warranty?

CT: No service warranty required when delivering at 98% efficiency.

TB: UPS announced a 6.9% overall rate increase next year. How can UPS maintain this pricing power when shipping demand weakens?

CT: We are winning new accounts with high revenue quality because of the service we provide. Service is really important. With the rise of e-commerce sales, our retailers strive to make sure their customers receive their packages on time, and we’re doing just that. All faced inflation. Our published GRI next year is a function of inflation. But shippers are willing to pay for the service.

TB: You always drop news on your conference calls. This time it was logistics as a service. How does this logistics work as a service?

CT: There are five pillars of logistics as a service. All this is done with the help of technology. The first is to ensure end-to-end visibility. So, from the manufacturer to the last-mile delivery point, shippers are looking for this visibility. The second pillar is return and replacement. Today we have a great return for Amazon. You can bring your Amazon purchase to one of our UPS stores—and we have over 5,000 of them in the United States—and we’ll just pack it up and ship it back to you. We want to build this.

Then there is the improvement in density in supply. We know we unlock value when we can deliver more packages per stop. We tried to do this using the solutions below. We are now moving upwards to store orders in the cart, so we can drive density in the cart, which then translates into density in the delivery. The fourth is financial decisions. We offer a great insurance product today through UPS Capital. And then there’s what I call advanced logistics. It uses technology to help small and medium-sized businesses plan, stock, and fulfill demand. So, we really use the technology platform with our physical network to give our customers the right and best solution.

TB: Describe how you do this in terms of density, which is the holy grail of delivery efficiency? If you hold onto these packages a bit longer, will it slow UPS down to match?

CT: We’re working with a company called CommerceHub, which is an e-commerce ordering system for most retailers in the world. They hold the order in the cart to match it with another order, but all within the seller’s service level agreement. If we do not find a match, we will release the order. But if we find a match, then we have density. We tested this with one customer and went live with them in the third quarter and we’re seeing very good results.

TB: What are the numbers behind this?

CT: For every 10th improvement in delivery density, that unlocks $300 million in value for us. The math suggests that if we can get a 5% match on the cart, we can get to that 10.

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TB: How quickly do you see this becoming more widespread?

CT: We’re adding more customers as we speak. It’s going to take some time to translate into reality, but I’m excited because for the first time we’re starting to see some movement in density.

TB: You have an initiative with RIFD labels, which you are currently packaging in 101 forms. How much do these labels cost and what do they do for UPS?

CT: We’ve brought the cost of the labels down to the point where we can do that. This is transformative for our company. Each package is manually scanned into the package car today. You can estimate the labor involved in manually scanning the package. Then sometimes the packages are loaded incorrectly so they end up in the wrong car. In fact, one out of every 400 packages in our company is loaded incorrectly. This means that the package is on its way to delivery and cannot be delivered because it is in the wrong vehicle. He comes back to the center, gets treated and leaves again. Where we put the technology in, the package is being scanned and we know it’s going into the right vehicle. Incorrect downloads dropped from 1 in 400 to 1 in 800 and changed to 1 in 1000. We avoid wrong loads and reduce manual labor. Our frontloaders, who are loading these packages onto package cars, use wearable devices to scan the package. On the way, the car scans the roll, so the labor is reallocated to something else.

TB: Discuss the overall service plan and how automation plays a role in this.

CT: The general maintenance plan is to operate the network in the way it was designed to operate. This really means paying attention to arriving and leaving on time. We have seen some improvement in this area in the third quarter alone. On-time arrivals and departures for our feeder trucks improved by 6.5%.

TB: What do you see in this overall service plan in a year, say two years?

CT: If we take 10 minutes from the network or add 10 minutes to the network, that’s a loss of $257 million. If we can get the network running the way it needs to be run, there’s real value to be unlocked. We saw that in the third quarter. Our expenses have grown more slowly than our income in the US.

Another area we’ve looked at is what we call the bench. Our bench looks exactly like a basketball bench where you have players waiting to be called. We have UPS employees waiting to be called when someone goes on vacation or sick leave. We don’t pay them until they’re called up for a game, but even if they sit on the bench, we count all the benefits. A year ago our seat was around 29%. Today, our seat is about 20%.

TB: UPS’s five-year contract with the Teamsters expires at the end of July. Union leadership began to eliminate hybrid drivers, known as 22.4 in the contract. The Teamsters want to turn them all into regular package motorists. Will you give it at this point?

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CT: We’ll leave the terms on the negotiating table, but our approach to this contract renewal is win, win, win. One thing I can say is how grateful we are to our teams because they are amazing employees. I am proud that they have served as important workers to an unprecedented extent over the past two and a half years.

Another thing to talk about next year’s contract extension is great jobs. If you drive for us, you’ll earn $93,000 a year, plus $50,000 in benefits, and pay nothing for health care.

TB: Amazon is UPS’s largest customer, but as a percentage of UPS’s total revenue, sales from Amazon have declined. Why this and will this continue?

CT: So we have a good relationship with Amazon. We have agreed on the packets entering the network and the packets they are delivering. We’ve done it very carefully and selectively so it’s a win-win relationship. The result of this is that their income as a percentage of our total income decreases. This frees up space in our network for business areas we want to grow, such as SMEs and healthcare.

TB: You were the CEO of a very large company right in the middle of the pandemic. How was that trip?

CT: What can I say? Pandemic, social unrest, political unrest, war in Eastern Europe, very difficult economic conditions in some parts of the world. It was just something else. Whatever happens to us, our people can answer. Consider this. In the third quarter, 40 cities in China were closed for at least five days. Our team was not a victim of this. They gathered. In some cases we had people sleeping on the floor of our hubs to make sure we could continue trading. In some cases, we canceled flights and rerouted them to Europe, and by the way, we grew our export business in the third quarter. Our people are resilient.

TB: What will happen to China? Are you worried there?

CT: What we are seeing and hearing from our customers is that there is a shift in the supply chain where customers are shifting their resources from China to other parts of the world. From my point of view, we follow our customers. If our customer goes to Vietnam, Malaysia or Mexico, we will follow them to provide them with excellent service.

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This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered US industrial and transportation companies and Mexico’s industry, economy and government.

Other similar stories are available at bloomberg.com/opinion

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