Photo: UPS
Can UPS get retailers to share in delivery costs?
United Parcel Service (UPS) wants retailers to get their shipping acts together and to pay more when they don’t, according to a Wall Street Journal report.
The delivery company allocates human resources and space, particularly during the Christmas selling season, based on shipping forecasts provided by its retailer customers. When these companies fall short of the projected volume, it costs UPS money.
Dave Abney, CEO of UPS, told the Journal that the idea of retailers paying for unused resources is not intended to be punitive but a part of negotiations it has with its customers.
The company has faced criticism from analysts for not raising prices to compensate for lost profits due to more e-commerce deliveries. Mr. Abney has resisted calls to raise the company’s fees.
“I’m convinced we have the right balance,” he told the Journal in an interview for a separate article. “We’re going to focus on growing the business and increasing the yield.”
While UPS has benefited from increased shipments due to e-commerce activity, the company has also been challenged by the higher costs of making smaller deliveries to private homes compared to multiple-package drops at business accounts. UPS has turned to route-optimization software and is working with its retail customers to keep a lid on costs that eat into its top and bottom lines.
As a Journal article points out, UPS began placing additional charges for shipments on retailers who exceeded their shipping forecasts. The latest proposal is intended to protect the delivery company when the opposite situation occurs.
Earlier this month, UPS announced the addition of package delivery and pickup on Saturdays. Last month, the carrier expanded a three city pilot to 15 major metropolitan areas around the country. It plans to have Saturday service available across the country by the end of next year. UPS expects to create more than 6,000 new jobs by adding Saturday deliveries, without the need to invest in additional trucks or buildings to make the service work.
Discussion Questions
DISCUSSION QUESTIONS: What is the state of sales and shipping forecast tech in the retail industry today? How would you rate retailers’ track record when it comes to forecasting sales and e-commerce delivery demands? Will retailers be willing to pay added fees when they fall short of delivery forecasts?
Poll
BrainTrust
Chris Petersen, PhD.
President, Integrated Marketing Solutions
Steve Montgomery
President, b2b Solutions, LLC
E-commerce works off of tight margins just as brick-and-mortar does. The costs of customer acquisition continue to rise. One of the motivators for shopping online is free shipping. 88 percent of consumers say free shipping is a motivator, while 68 percent say free returns are a motivator. So e-commerce merchants who offer free shipping or free returns are already subsidizing the shipping costs through lower margins.
E-commerce merchants generally have good systems in place to forecast their demand. Brick-and-mortar retailers probably do not, as most of their systems are focused on stores. I have been in e-commerce and omnichannel retailing for more than 16 years and I don’t see the forecasts as the issue. I see old UPS technology trying to integrate with modern e-commerce technology.
What UPS really is seeking are companies to subsidize their inefficiencies. That is why companies like Amazon, are trying to build out their own fulfillment capabilities.
I believe retailers should pay the added fees if and when their forecasts don’t meet the agreed upon terms of their contracts. Why should UPS subsidize the retailer’s bottom line? Retail is a consignment business and as such new technologies and processes make it possible for brands to take complete control of their at-shelf inventories and product set. This workflow would make it possible for UPS to deliver the products directly to the shelf — a valuable service for the brand, the retailer and the customer! UPS, FedEx and other delivery services should be thinking about extending their service beyond loading docks. By delivering directly to the shelf, the 3 percent retailers add to the cost of goods could be split between the delivery service and the shopper.
The future battle of retail will be largely fought on the logistics front. And the last mile of delivery is the most expensive, for UPS and the retailer. If there ever was a case for Big Data and AI algorithms to improve forecasting demand, this would be it.
UPS can only do so much with their shipping algorithms to optimize delivery. Retailers now have to “own” part of the solution in terms of accurately forecasting demand. IF retailers can’t or won’t accurately forecast their delivery demand, then third-party shippers will be forced to evolve to tiered fees based upon under- and over-utilization of home deliveries, at least during peak periods.
If UPS penalizes retailers for not making their projections, you can count on getting low projections from retailers. Improving route optimization software (which hopefully has improved from the days when I’d see a UPS truck on my street at three different times on the same day) or partnering with USPS seem like better options to me.
As retailers continue to move towards a fully seamless omnichannel model, optimizing their supply chain and logistics has never been more critical. UPS is simply highlighting the urgency for retailers to better understand their order management processes. With the right analytics capabilities, retailers should be able to satisfy what UPS wants. Granted, this feels like UPS trying to force retailers to pay for their own internal inefficiencies, but it’s not like retailers are the paragon of efficiency either. Both sides have legacy systems that are trying to cope with modern omnichannel sales, and no one wins if this turns into a battle over costs. Sharing the load, so to speak, will only benefit both sides. It’s true that larger retailers will have more negotiating power in this case, but UPS can also use this as an incentive for smaller retailers to send them more business than other carriers.
UPS wants payments for under or over volume estimates from its customers. Will it in turn rebate them money if the shipments don’t meet the committed times? No, I didn’t think so.
This move will likely make more retailers consider alternatives. Once upon a time there was only FedEx and UPS, but the world has gotten more complicated. Retailers now have at least more choice – BOPIS. They can offer their customers a discount for picking up in the store and relieve the burden of too much or to too little business for UPS.
I didn’t read it that the payments were for over or under their projection, only under. The article stated that when they fall short of the projected number it costs UPS money. If they do indeed only charge retailers for falling short of their projection, then the natural consequence is that retailers will project low to avoid charges.
The full article on Saturday stated “In 2015, UPS started imposing additional charges on shipments when retailers blew through their shipping estimates, driving up costs. But now, UPS is looking for protection on the downside too.”
Question: if one retailer exceeds their forecast, and another falls short (by the same amount) then should they both be penalized … even though the overall impact was zero? Anyway, whatever the rationalizations, this is a pricing issue just like any other: UPS will try to charge for everything it can, and their ability to do so will be limited by the other options shippers have.
I can tell you that forecasts for even eCommerce companies are hard. In a recent analysis, we found that less than 10% of retailers and brands got to within 10% of their forecast most of the time. While there should be better visibility and accuracy based on demand-gen activities performed by retailers, knowing how to split inventory between stores and online and anticipating events over which you have no control (weather, celebrity, scandal) is proving difficult.
Certainly UPS, with high variable costs, needs to hold retailers and brands accountable to better numbers so they can plan for labor and capacity which ultimately makes the entire ecosystem more efficient and should drive down costs for all.
UPS doesn’t get a say in the forecast, so they shouldn’t eat the costs of mistakes. In the past UPS was subsidizing the costs of over-forecasting, but it was always a cost for retailers and not shipping companies to bear. This is not a new move, but the resolution of an old problem.
Most retailers are looking at providing in house free delivery with cost effective range and order size limits. Delivery services are beginning to see their demise just as the USPS did. I have also seen the use of omission for items that are price prohibitive to be included with or for free shipping with any size order. I’m sure there are more gotchas — I mean exceptions — on the horizon.