UPS transformation relies on four strategic pillars
UPS’s transformation program, its CEO explained at a recent conference in New York, leverages scale and institutionalizes processes to ensure the company captures efficiency gains, and reinvests savings through realignment of talent and financial resources on priority growth areas outlined in its business strategy.
The company is focused on four strategic imperatives where it is well-positioned for profitable growth: continued expansion of high-growth international markets; profitable expansion from both B2B and B2C ecommerce; further penetration of the healthcare and life sciences logistics market; and enhancing services and value for small- and medium-sized businesses.
International markets is where the company connects domestic and export customers to its global network. US ecommerce package revenue is expected to grow by 40 percent from 2017 to 2022, and cross-border e-commerce volume is expected to grow by 28 percent over the next three years. Healthcare and life sciences logistics will expand, given the increasing shift toward home healthcare, where UPS’s residential delivery network will provide new value for healthcare companies and consumers. SMBs will benefit, the company reckons, from UPS’s repositioning of its commercial and service strategies to help this segment reduce logistics complexity and costs and take advantage of UPS-offered technology platforms.
“Transformation will lift our earnings, as we generate higher-quality revenue and use technology to increase operating efficiency and enhance customer service,” said David Abney, chairman and chief executive officer. “UPS is transforming from a position of strength. We are implementing an enterprise-wide transformation that will enable and accelerate our enhanced business strategy.”
UPS’s business strategy includes continued capital investment in its vast global network at previously announced levels. New and renovated facilities, aircraft and fleet assets are coming online at record levels during the next four years. In 2018, 2019 and 2020, UPS will add 350,000-400,000 pieces per hour of sortation capacity in the US each year, which is about seven times the additional sortation capacity added in 2017, alone.
“Today nearly 50 percent of our nearly 35 million sorted packages per day are processed using our new more-automated facilities. When we complete this phase of our Global Smart Logistics Network enhancement by 2022, 100 percent of eligible volume in the US will be sorted using these new more highly automated sites,” said Abney.
Seven new super-hub automated sortation facilities will be opened during the period, with 30-35 percent higher efficiency than comparable less-automated facilities. More than 70 expansion projects will be implemented during the period. UPS will have completed 17 projects in 2018, in time for the peak holiday shipping season.
The US domestic segment will receive approximately two-thirds of the benefits of the transformation program. Initiatives throughout the unit’s operations will enhance revenue quality and reduce operating costs to increase operating leverage.
The company has in the last two years significantly increased total International capacity, allocating much of the added volume to higher-margin export and premium services. Intercontinental air express capacity has risen more than 10 percent as new, higher capacity cargo jets are added to the fleet. The company has completed about two-thirds of its previously announced European network expansion and has recently opened new super hubs in Paris and London, and several other new sortation and delivery facilities throughout the region.
The Supply Chain and Freight unit has delivered strong performance in recent quarters from new revenue management initiatives, a stronger focus on mid-sized customer growth and continued, disciplined cost management.
One of the main elements of UPS’s company-wide drive for efficiency is using common processes and leveraging scale to reduce procurement and operating costs. The company is also using technology to streamline back-office activities, further outsourcing certain transactional activities and broadening spans of control within management for greater overall efficiency.
“Our transformation touches every part of the company,” Abney continued. “Most important, we are implementing changes that strengthen the ongoing core earnings power of the company. The savings we achieve will be reinvested in the company and its people, and will be used to reward shareowners. Our leadership team is collaborating to instill a continuous transformation culture and I am confident our plans will deliver higher levels of UPS profitability and shareowner returns.”