A Test for UPS: One Day, 34 Million Packages

As reported by the Wall Street Journal: 
United Parcel Service Inc. all year has been focused on one day above the rest: Monday Dec. 22, when it will deliver 34 million packages, more than any other in its history.
It is a big test for the delivery giant after last year’s embarrassing and costly holiday debacle in which millions of packages didn’t arrive in time for Christmas. To avoid a recurrence, UPS has spent about $500 million preparing for the holidays with projects including automated sorting systems to rapidly identify ZIP Codes and swiftly reroute packages in the event of bad weather.
That automated system—known as its “Next Generation Sort Aisle”—is now operating at three hubs around the country. The new technology scans packages and quickly flashes instructions to workers so they can process 15% more packages a day, or as many as 47,000 parcels an hour, as measured at one of the hubs.
Rosemary Etheredge, who has worked at a UPS facility in Atlanta for 10 years, used to have to memorize more than 120 ZIP Codes to determine how to route a package among a complex system of chutes and belts.
Now Ms. Etheredge moves a parcel under a bar-code scanner, after which there is a loud beep and the name of a color-coded chute where the package needs to go is projected on a metal beam overhead. “For new employees, it is much better,” Ms. Etheredge said. “That’s a lot of ZIP Codes to remember.”
Home delivery from online shopping has been a drag on UPS profitability in the U.S. And with e-commerce soon to account for half of all U.S. packages, the company is trying to automate and digitize its operations to boost profitability and improve productivity of its more than 400,000 global employees, while reducing the over $500 million it spends a year training those workers by simplifying their tasks.The sorting system has transformed hundreds of skilled UPS jobs at sorting facilities to unskilled ones. UPS says it doesn’t change wages, but allows the same number of workers to handle more volume.
UPS hopes to lower its cost per package, the main lever it can control as the proliferation of free shipping for online shopping from giant customers like Amazon.com Inc. puts pressure on the rates UPS charges.
“All they can really hope to do is just slow down the growth in cost per package, not reduce the cost per package,” said Jack Atkins, a transportation analyst with Stephens Inc.
Operating margins at the UPS’s U.S. business have been flat in recent years, and earnings per share have grown about 5% in the past two years. In the most recent quarter, total income rose 11% to $1.21 billion.
Rival FedEx Corp. has taken a different approach to e-commerce. After losing a major customer—identified by analysts as Amazon—at its no-frills Smartpost business this year, FedEx Chief Executive Fred Smith said the company is targeting “the right kind of growth within the e-commerce market.” FedEx has said it has spent extensively to prepare for the holiday season.
The U.S. Postal Service, meanwhile, has rolled out seven-day delivery in major metropolitan markets, and sends out letter carriers more than once a day to handle the surge of packages.
The boom in online shopping has fundamentally changed UPS’s operations. The company started out primarily as a business-to-business delivery service, sending multiple packages to single locations. Now, it delivers single packages to millions of homes across the country every day, making each package more expensive for the company.
UPS has invested about $2.5 billion this year on everything from a faster rollout of a proprietary mapping and routing system that shaves miles and minutes off deliveries, to a new network of lockers and retail pickup points for packages to ensure delivery on the first attempt.
One of UPS’s biggest initiatives is a continuing modernization of its older hubs. The Next Generation Sorting Aisle is central to that goal.
At the Atlanta hub, the new technology means UPS can get away with hiring about the same number of temporary workers—1,000—as it did for the 2013 holiday season, to supplement 2,000 permanent workers, even though they will be processing more packages.
UPS had already rolled out a similar small-package sorting technology to a number of locations in the U.S., something that has helped improve small-package processing efficiency by about 25%, UPS says.
The automated sorting system “allows anyone with minimal training to go up, scan the package, and it will direct the person to where that package should be sorted,” said Randy Stashick, global vice president of engineering.
That is especially important over this holiday season, in which UPS hires as many as 95,000 temporary workers to help with the deluge of packages that come especially in the final days before Christmas. UPS expects to handle 585 million packages in December, 11% more than last year. Its busiest day ever will be double its average package delivery volume of 17 million.
New employees can be trained on the automated system in two to three days, down from a two-week program when employees memorized more than 100 ZIP Codes and went through computer training to practice deciding the correct chute for each package based on the ZIP Code. Employees’ ZIP Code recall was tested for monthly certifications.
The new system takes very little training. A Wall Street Journal reporter, with only a short introduction, attained a 100% success rate over the course of about 15 minutes of sorting.
There have been kinks. One employee complained that sometimes the cameras that project the proper chute fail, and occasionally employees have to scan a package more than once to get the system to work. Some sorters, the employee says, used to be faster when they did it by memory.
But the new system enables UPS to automatically reroute packages at a moment’s notice in the event of bad weather. Previously, a supervisor would have to walk the aisle and tell each of the approximately 50 workers in Atlanta separately—and hope they would remember.
Now workers have only to heed the instructions the Next Generation Sorting Aisle flashes above them. Ms. Etheredge, despite being fluent in the region’s 120-plus ZIP Codes, recently slid a package wrapped in Amazon tape through the system. “GREEN-B” flashed on an overhead shelf, and she moved the package to the corresponding color-coded bottom green chute, which sent it whirring down a series of chutes and belts out for local delivery.
“One of the things we like to joke is that we make a very simple business extremely complex and high tech,” Chief Financial Officer Kurt Kuehn said in an interview earlier this year. “But, you know, it’s just keeping up with the times.”
Ken Wood is the founder of LJM Consultants. LJM helps clients negotiate “Best in Class” UPS/FedEx agreements. LJM was recently named the “best parcel auditing company in America” and was also inducted into Inc. Magazine’s Top 500/5000 fastest growing companies in America for 2013. To learn how LJM Consultants can help your company get the parcel contract you deserve, call 631-844-9500 or email kenwood@myLJM.com.