UPS – Page 2 – The OM Blog by Heizer, Render, & Munson

OM in the News: UPS and the Golf Cart Controversy

UPS already uses golf carts in Florida, as seen with the author and his local driver

“United Parcel Service uses jumbo jets, hybrid electric vans and, sometimes, drones to deliver nearly 5 billion packages each year,” writes The Wall Street Journal (June 30, 2017). But a push into a less glamorous transportation method—golf carts—has touched a nerve with drivers in one of its home bases. UPS can now use golf carts to deliver packages in Kentucky– thanks to a new state law allowing delivery drivers to use the vehicles on public roads. The company is using retrofitted golf carts to complement its fleet of brown delivery trucks primarily during the winter holidays, when daily volumes can rise 2/3 from normal levels.

But union leaders argue that having the vehicles share the road with cars and trucks puts workers at risk. They also object because at UPS golf cart drivers earn less than traditional truck drivers.

The golf carts, which are modified with a flatbed or pull a trailer containing the packages, are driven by part-time workers. The carts generally don’t go faster than 15 mph and are only allowed to operate in residential areas and on public roadways with a posted speed limit of 35 mph or less.

Controlling costs is a major issue at both UPS and FedEx, which have taken steps to optimize driver routes through routing systems, automate more sorting facilities and deliver more packages to drop-off points like stores. UPS has a number of unique delivery methods to accommodate local quirks, including horse-drawn carriages on Michigan’s Mackinac Island and gondolas in Venice, Italy.

Classroom discussion questions:

What are the advantages of this new logistics tool?
Disadvantages?

Good OM Reading: Supply Chains and Data Analytics

The OM field will soon face a major change in the way we make decisions. Big data, data analytics, and business intelligence are all skill sets our OM students will need. The Gartner Group has just issued an interesting report on these concepts. Gartner identifies 4 core skill sets to support the successful adoption of analytics: Data engineers who make the appropriate data accessible and available for data scientists. Supply chain expert analysts who understand supply chain requirements and priorities to ensure the right tools are used. Data scientists who create predictive and prescriptive models. Citizen data scientists who are lighter versions of a data scientist who can build or choose models, but within a platform.

There is, of course, a shortage of data scientists. This is compounded for supply chain, which might not be viewed as attractive as finance, sales and marketing. But analytical platforms can alleviate this shortage. This is because within the platform environment, “citizen data scientists” can build new apps and solutions.

As the line between the physical and digital world blurs in business, the algorithmic supply chain affords companies the ability to leverage massive data from increasing connections among people, businesses and things. This allows them to respond quickly and profitably to changes in market demand. In an algorithmic supply chain, decision-making relies on the company’s intellectual property (IP) that captures data and encapsulates it into reusable, unique and optimized information assets. Embedding this IP in supply chain processes, the company can solve large-scale, dynamic problems and create competitive advantage.

UPS provides a powerful example of using analytical platforms to build On the Road Integrated Optimization and Navigation (ORION) to support its core business processes. ORION generates daily routing manifests to 55,000 UPS drivers. The platform incorporates optimization, heuristics, predictive analytics and custom mapping. It generates $300-$400 million in annual benefits, based on reducing fuel consumption by 10 million gallons, carbon emissions by 100,000 metric tons and driven miles by 100 million, annually.

Video Tip: Watching UPS’s Drones Deliver

A drone-equipped UPS van, seen from above — A drone-equipped UPS van

“Both the drone industry and federal regulators are years away from actual legal drone deliveries in the U.S.,” writes USA Today (Feb. 21, 2017). But that’s not stopping UPS from testing possibilities, both to get the visual of a drone with their logo out in front of the public and to see what works. The firm this week ran a test of a truck-launched drone delivery system for rural areas in Lithia, Fla. The drone-equipped vans would only be used on rural routes, says UPS.

Imagine a triangular delivery route where the stops are miles apart by road. The van-top drone would allow a UPS driver to make one delivery at the lower-left of the triangle, after launching a drone that would autonomously fly and deliver to the top of the triangle. While the drone is making its delivery, the driver would continue to the next stop, make another delivery by hand, and the drone would then rendezvous and recharge on top of the UPS truck.

UPS’ aim isn’t to replace drivers but to make them more efficient by allowing one driver to more quickly and efficiently deliver to several homes near one and other. The drone is fully autonomous. It doesn’t require a pilot. So the delivery driver is free to make other deliveries while the drone is away.

UPS estimates that reducing the distance its truck drive by just one mile per driver per day over one year could save the company up to $50 million. Rural delivery routes are the most expensive to serve, due to the time and vehicle expenses required to complete each delivery.

Here is a very short video your class will enjoy!

OM in the News: Pratt & Whitney’s Supply Chain Falls Short

Pratt & Whitney, the giant jet engine maker, just warned it will miss its 2016 goal for deliveries of a new “geared turbofan” jet engine by 25%–likely shipping 150, down from a target of 200. Pratt has staked a decade and $10 billion in R&D on the new family of engines, writes The Wall Street Journal (Sept. 17-18, 2016). “Suffice it to say the airlines aren’t happy they’re not getting the engines,” CEO Greg Hayes said. “We’re not happy we’re not delivering.”

Pratt previously warned the introduction of the new engine will put pressure on its supply chain, but still hopes to deliver 400 of the new engines in 2017. The company says it will churn out more than 1,000 of the engines by 2020, part of an effort to attack a backlog that now includes some 8,200 engine orders.

But problems have bedeviled the ramp-up. A new logistics center run by United Parcel Service, under contract with Pratt to organize the delivery of the more than 800 parts that make up an engine, has developed some kinks. Pratt also angered some customers when the first geared turbofans it delivered had a flaw that required airlines to use longer-than-expected cool down times between flights to avoid engine damage.

“There are five parts that are causing us pain this year,” stated Hayes, “because suppliers haven’t been able to deliver them in sufficient numbers and quality to keep pace with engine assembly. A particular problem has been the newly designed aluminum-titanium fan blades. We’ve just struggled because of the technology involved in these blades.” He added that he had just visited the shop where blades are produced. “Today it takes us about 60 days to build the blades through the shop and that needs to get to 30 days.”

Classroom discussion questions:
1. Is this an unusual production problem in the aircraft industry? Why?

2. Discuss the UPS arrangement with Pratt. Advantages? Disadvantages?

OM in the News: Amazon Revamps its Logistics Chain

“Amazon,” writes The Wall Street Journal (March 10, 2016), “is taking to the air with a fleet of planes, part of a broader effort to reduce its inflated shipping costs.” The Seattle retailer plans to shuttle merchandise around the U.S. using 20 Boeing 767 aircraft. Amazon has also taken steps to reduce its reliance on carriers such as UPS and FedEx by building out a ground network of couriers and new warehouses near urban centers for faster and cheaper delivery. The new logistics chain would give Amazon control over roughly 15% of the packages it ships annually.

“Amazon clearly wants to grow, and they need capacity to do so,” said an industry expert. “UPS and FedEx are hesitant to build it out solely for one customer.” The firm has been planning an in-house logistics network for years, but the project took on added urgency when customers received gift orders late after the Christmas holiday in 2013. Amazon blamed the carriers for the embarrassing episode.

Amazon feels UPS’s traditional hub-and-spoke system is growing obsolete and is a particular liability during the crucial holiday selling season. The effort is already visible. White delivery vans with Amazon’s logo are an increasingly common sight, and customers say they are receiving more packages directly from uniformed Amazon deliverymen. The online retailer has added thousands of semitrailer trucks for delivery between warehouses and is experimenting with citizens making deliveries. Over time, Amazon is likely to turn its delivery network into a business in its own right, charging other shippers to ferry packages and drop off merchandise.

Classroom discussion questions:

Evaluate Amazon’s new strategy.
What are the advantages of third-party logistics (3PL)?

OM in the News: Amazon’s Relations With UPS Are Showing Strain

As the clock counts down to Christmas, workers at United Parcel Service are busy hustling packages along loading docks and conveyor belts at its Louisville, Ky., hub—part of a costly, intricate system built in part to cater to Amazon.com, its biggest customer. “But the symbiotic relationship between the two giants has come under increasing strain,” writes The Wall Street Journal (Dec. 23, 2015). Rising package volumes and costs have Amazon seeking alternative delivery routes—shifting the online retailer’s role from key ally to a potentially disruptive competitor.

Amazon has held talks with air-cargo companies to lease airplanes and build its own onfreight operation. The company is already using its own trucks, drivers and a fleet of couriers for the final and most-expensive leg of an order’s trip. It has been making its own deliveries in certain high-density regions and relying more heavily on the U.S. Postal Service. Eventually, it hopes to get drones to drop packages into backyards. “Amazon’s interest is not in doing what may be good for UPS,” said an industry expert. “Their interest is in getting control over logistics.” This year, Amazon spent over $1 billion with UPS, a 5-fold increase in the past decade. The average cost to handle a parcel was about $8 last year, up from $6.50 in 2000.

Amazon was a factor in UPS’s last two back-to-back Xmas snafus—each of which cost UPS an unexpected $200 million. Two years ago, Amazon overwhelmed UPS with hundreds of trailers of last-minute Xmas orders– and then pushed UPS to help underwrite millions in customer refunds. At Amazon, plans to handle more of its own parcels have recently accelerated, as it fears that UPS’s hub-and-spoke system is growing obsolete. Amazon has poached more than 40 UPS supervisors, managers and executives in the last 3 years.

Classroom discussion questions:

What are the advantages of Amazon building its own logistics system?
The disadvantages?

OM in the News: UPS’s Holiday Capacity Struggles

UPS's "white glove" delivery market is one of the fastest growing areas of e-commerce, in which drivers are required not only to deliver but unpack and install bulky items in customers' homes. — UPS’s “white glove” delivery market is one of the fastest growing areas of e-commerce, in which drivers are required not only to deliver but unpack and install bulky items in customers’ homes.

Capacity decisions, our main topic in Supplement 7, have quality, human resource, and maintenance implications which are evident at shipping companies this holiday season. On-time delivery rates for UPS ground packages last week fell to 91%, from UPS’s usual 97% average, reports The Wall Street Journal (Dec. 11, 2015). The giant firm has been slammed with unexpectedly high volumes, extra pickups and not enough staff and equipment to handle all of the packages. UPS this week assigned managers from corporate headquarters in Atlanta and elsewhere to work at delivery centers to handle the additional packages.

The reason: Online sales surged more than expected over the Thanksgiving holiday weekend and into last week. Consumers spent an estimated $4.45 billion online on Thanksgiving and Black Friday, with Black Friday sales rising 14% from a year ago. UPS and FedEx are trying to a avoid a repeat of 2013, when their systems were so overloaded at the last minute that they couldn’t deliver everything on time. But they also are wary of overdoing it like UPS did last year when it overspent and over-hired commensurate to the volume.

Both years, UPS ran over cost estimates by $200 million. This year it has increased capacity by 6% by modernizing its hubs among other things, and it has planned to keep seasonal hiring to the same levels as last year and bring on extra workers as needed.

Classroom discussion questions:

What tactics are available to help match capacity to demand (see page 302)?
What has UPS done to tackle the problem?

OM in the News: The Last Mile at UPS is by Golf Cart

Walking down the street today here in Winter Park, FL (temperature 83 degrees), I chatted with my local UPS driver. But, as you see in the photo, it is not a big brown truck he is driving–rather a golf cart. A large storage pod, next to my gym and about a mile away, is his supply depot and he makes several runs a day to replenish his cart and small trailer. It turns out that UPS uses pods throughout the state of Florida where it makes the most sense for golf cart deliveries.

Here are some of the advantages:

(1) Part-time employees are hired to help with this effort, creating jobs. (2) The environmental benefit to the community includes reduced noise. (3) Customers and employees like the approach. (4) UPS reduces energy usage, fuel consumption and emissions while providing an economical way to conduct business. (5) Golf cart helpers provide earlier delivery times. The majority of golf cart deliveries are made prior to 4 p.m. During the holidays, residential deliveries made using a UPS package truck driver are generally made in the late evening due to the additional volume spikes. (5) Golf carts pose an environmentally friendly method of delivering packages–the average golf cart gets 20+ miles per gallon.

A local UPS manager said: “It’s a lot more effective. We can keep the big, noisy trucks away at night by making holiday deliveries during the day. Safety is the main reason why we do it. And with blended in savings of fuel costs, we figured why not?”

Classroom discussion questions:

From an OM perspective, what are the advantages and disadvantages of the golf cart approach?
Should they be used all year round–or just seasonally?

OM in the News: UPS Tries On 3-D Printing

At its hub in Louisville, Ky., UPS just rolled out 100 industrial-grade 3-D printers to make everything from iPhone gizmos to airplane parts. UPS wants to find out if 3-D printing centers could shorten supply chains and cut into its $58 billion-a-year transportation business—or give it a leg up in a potentially emerging market for local production and delivery. The difference could be existential. It doesn’t want 3-D printing to disrupt its business the way the Internet pulled the rug out from overnight document deliveries more than a decade ago. The company, writes The Wall Street Journal (Sept. 19-20, 2015), plans to expand next year with another 900 printers, and is looking at opening “print factories” outside the U.S. (Sales in the 3-D printing industry have risen 34% annually for the past 3 years).

UPS isn’t the only delivery company exploring the printing business. FedEx is examining the field, while Amazon.com has filed a patent for a 3-D printing truck, aimed at creating an on-demand system printing goods from inside delivery vehicles. UPS expects more companies will migrate some production to 3-D printing from traditional manufacturing on an aggressive growth curve.

In Louisville, UPS has used its own service. The company needed to develop a replacement floor beam support bracket for its fleet of Airbus A300 aircraft, which are out-of-production. 3-D printers made the part within hours and workers walked it across the runway for testing in a UPS plane.

Classroom discussion questions:

Why is UPS so interested in 3-D printing?
What are the shortfalls of 3-D printers?

OM in the News: At UPS, the Algorithm is the Truck Driver

“Here’s a math problem for you,” writes The Wall Street Journal (Feb.17, 2015). Each United Parcel Service driver makes an average of 120 stops per day. There are 6,689 times 10 to the 195th power alternatives for ordering those stops! Which option is the most efficient, after considering variables such as special delivery times, road regulations, and the existence of roads that don’t appear on a map?

Even if an optimal answer exists, the human mind will never figure it out. And while experts at UPS have been giving the problem their best shot for more than a century, the company is shifting that work over to a computer platform, with 1,000 pages of coding, called Orion, which is 10 years in the making. Considered the largest operations research project in history, the $200-300 million algorithm was written by a team of 50 UPS engineers.

Orion consists of many components, including a “traveling salesman” algorithm, a tool that calculates the most efficient path between a variety of points, and geographic mapping. None of the solutions that Orion spews out are big or dramatic. It is all about saving $1-2 here and there. But in a network with 55,000 routes in the U.S. alone, that adds up. E-commerce has shifted more and more of UPS’s delivery stops to residences, and those packages are expected to make up 1/2 of all deliveries. It is a radical routing change from 15 years ago, when drivers would drop off several packages at a retailer.

Orion is expected to save the company $300-$400 million a year once it is fully implemented in 2017. (UPS saves $50 million a year by reducing by 1 mile the average daily travel of its drivers.) But reaction to Orion is mixed. For example, some drivers don’t understand why it makes sense to deliver a package in one neighborhood in the morning, and come back to the same area later in the day for another delivery. But Orion often can see a payoff, measured in small amounts of time and money that the average person might not see.

Classroom discussion questions:
1. Why is Orion so important to UPS?

2. Why is the software so complex?

OM in the News: Gearing Up Capacity at FedEx and UPS

Facing an even bigger mountain of packages this holiday season, FedEx and UPS are hiring more workers to avoid the delays that frustrated shoppers and gift-recipients a year ago. Last December, the delivery giants were caught off-guard by bad weather and a surge in last-minute online shopping, writes Supply & Demand Chain Executive (Oct. 24, 2014). An estimated 2 million packages were late at Christmas. FedEx expects deliveries between Thanksgiving and Christmas Eve to rise 8.8% over last year, to 290 million shipments. Volume is expected to surge in December, with FedEx predicting a peak of 22.6 million shipments on Monday, Dec. 15.

The delivery companies are benefiting from a strengthening economy and optimism about consumer spending. At the same time, they’re dealing with consumers who increasingly enjoy the ease of shopping on computers and mobile devices but expect the goods to show up almost as quickly as if they had shopped at a store. “Every single year the percentage of retailers offering free shipping goes up,” said an industry expert. “The consumer expects it. The retailer may or may not be able to afford it.” Target has started offering free holiday shipping for any item on its website, a first for the retailer as it tries to compete better against online rivals such as Amazon.com.

FedEx plans to hire 50,000 seasonal workers, up from 40,000 last year. UPS will add 95,000 people, up from 85,000. Last year, both companies wound up scrambling to hire more seasonal employees than they had planned, which increased costs and cut into profits. FedEx also expects to invest $1.2 billion in its ground-shipping network this fiscal year, with most of that going to increase capacity and automation. The improvements have sped up ground delivery by a day or more in 2/3 of the U.S. UPS has also invested to boost shipping capacity during the holidays, and has improved its forecasting and package tracking.

Classroom discussion questions:

1. Which techniques (see Supplement 7) for managing capacity and demand do FedEx and UPS employ?

2. How will the shippers be able to improve over last year’s backlog?

OM in the News: UPS Tries to Increase its E-Commerce Efficiency

In 1998, as much as 85% of e-commerce purchases were shipped between businesses. But along came Amazon, which helped convince a generation of Americans to buy even humdrum household items like diapers and toiler paper online rather than at the store. UPS drivers who used to drop off a bunch of heavy packages each day at one retailer, now make several stops scattered across a neighborhood, delivering one lightweight package per household. The shift required more fuel and more time, increasing the cost to deliver each package.

Last Christmas season, nearly 60% of all U.S. deliveries by UPS were e-commerce packages to consumers, compared with about 40% for all of 2012. Today, UPS’s haul includes much of Amazon’s 2-day-delivery Prime business. On residential routes, as much as 1/3 of trucks are filled each day with Amazon packages. And last Christmas, when UPS was overwhelmed by a pileup of online shipments at its massive Louisville facility, there were hundreds of trailers stacked up filled with Amazon orders.

UPS’s responses, reports The Wall Street Journal (Sept. 12, 2014): (1) Increase spending on new technology and extra manpower by 21% to $2.5 billion in 2014; (2) A pricing change that will encourage UPS customers to use boxes that fit the items being shipped, freeing up space in trucks for additional deliveries, or else pay extra; (3) Major savings from its route-optimization system, Orion. (Orion analyzes millions of pieces of data to predict the most efficient way to deliver and pick up packages along each driver’s route. Every mile cut saves the company $50 million a year, with half of UPS’s delivery routes in the U.S. using Orion by 2015.); and (4) My Choice, a service that alerts customers the day before a home delivery is set to arrive, provides an estimated delivery time and lets customers tell the driver where to leave the package. (Already 10 million customers have signed up for the $40/year service).

Classroom discussion questions:

1. How has OM helped UPS’s efficiency?

2. What new threats does UPS face in its shipping business?

OM in the News: Sustainability and Natural-Gas Truck Sales

A factor limiting natural-gas-powered truck sales is the arrival of new, more fuel efficient diesel engines

“In the midst of the strongest market for commercial trucks in 8 years, sales of natural-gas-powered haulers are just crawling along,” writes The Wall Street Journal (Aug.26, 2014). Higher purchase prices compared with diesel trucks, improved diesel fuel economy and continued scarcity of fueling stations are damping natural-gas-powered truck demand. Forecasters had expected sales to about double to 16,000 vehicles this year amid the trucking industry’s enthusiasm for natural gas a year ago, but only a 20% increase took place.

What happened? A big roadblock remains the premium for a heavy-duty gas truck—$50,000 more than the about $150,000 for a new diesel-powered truck. In theory, the payback for that higher price is recovered from fuel savings of $1.60-$1.70 for the gas equivalent of a gallon of diesel. Paybacks can average 4 years considering the average truck travels 125,000 miles a year. But fleet operators typically replace their vehicles every 3-4 years, leaving little time for them to benefit from the lower fuel costs of natural-gas-powered trucks. And the limited number of natural-gas refueling stations limits the switch to gas. Only about 750 natural-gas fueling stations are available in the U.S., and not all of these can accommodate large trucks.

The good news: UPS this year has ordered about 300 gas-powered heavy-duty trucks and bought 700 gas tractors last year. The trucks operate mostly in corridors in the West and South that have plenty of natural-gas stations, some of which UPS helped to finance. By the end of the year, about 2% of UPS’s 100,000 vehicles world-wide will be powered by natural gas. In addition, Wal-Mart, Office Depot, Lowe’s and P&G are among the companies requesting their trucking suppliers use natural-gas vehicles to comply with corporate policies to reduce carbon dioxide emissions and pollution caused by burning diesel fuel.

This article nicely complements our treatment of Life Cycle Ownership and Break-Even Analysis on p.195 in Supplement 5.

Classroom discussion questions:

1. What are the advantages and disadvantages of natural -gas-powered trucks?

2. Why have sales stalled?

OM in the News: Shipping Bottleneck Hit UPS on Xmas Eve

In the earliest hours of Dec. 24, packages poured into UPS’s main hub, called Worldport, in Louisville, Ky. And they were piling up. Employees responsible for sorting packages—already deep into a 100-hour week—were furiously getting them ready to be sent on to their destinations. But dozens of other workers responsible for loading those packages into planes to be shipped out were left standing around idle, because the unexpected glut of packages from last-minute shoppers had swamped the company’s air fleet.

The dearth of planes stranded a large volume of packages in Louisville that day. Many of those that did make it out were shipped too late to make delivery trucks’ pickup schedules and were left sitting in warehouses not far from their destinations. By sundown, UPS was forced to tell many Americans that the gifts they had ordered wouldn’t arrive before Christmas as promised.

“The bottleneck was largely in UPS’s air business,” writes The Wall Street Journal (Dec.27, 2013), “which retailers leaned on heavily in the past week as they scrambled to fill down-to-the-wire orders.” UPS originally expected to ship about 3.5 million packages at Worldport. The facility handles on average 1.6 million packages a day. Likely double that many packages arrived during the last-minute crush. On Christmas Eve UPS admitted that the volume of air packages in its system had exceeded its capacity.

UPS carefully plans how it will handle the holiday peak. Extra resources such as additional cargo planes had been lined up as “hot spares”— aircraft that could be fired up quickly in case of a logistics emergency. But it ran into a confluence of factors. Retailers have been encouraging online sales, and they likely contributed to the logjam by offering some of their best discounts late in the season in a final push for sales.

Classroom discussion questions:

1. How has e-commerce impacted shippers such as UPS?

2. How can operations managers avoid such bottlenecks?

OM in the News: UPS’s Peak Week

UPS UPS expects to ship more than 132 million parcels this week before Christmas. But it must keep a lid on costs. Maintaining profitability is especially difficult during peak season when delivery expenses rise. This year, UPS is adding 55,000 part-time holiday workers, leasing 23 extra planes, and effectively building a second trucking fleet to handle the seasonal package flow. None of this is cheap.

UPS’s delivery personnel, who can be someone’s hero—or scapegoat– makes all the difference. To get a sense of what peak season is like on the front lines, Businessweek (Dec.19, 2013) joined driver Kim Gardenier on her rounds. A 19-year UPS veteran, Kim set out on her journey in Wayne, N.J., on Nov. 25, the first official day of the season, at 8:35 a.m. About 7 ½ hours later, Kim had delivered 347 packages, including two flat-screen TVs, ice skates, a box of instant coffee, a guitar, and paper towels.

Kim could probably have unloaded another truckful of stuff. A lithe 44-year-old with moussed platinum hair, she spent the day gliding in and out of the mailrooms of suburban office buildings, the loading docks of strip mall stores, and apartment complexes. She maintained a consistently swift pace throughout the day, exchanging short bursts of small talk with her customers.

UPS is famous for requiring its drivers to follow 340 delivery and pickup methods, which include a directive to “politely inquire” about any shipments customers are making with competitors.

Classroom Discussion questions:

1. How does UPS optimize employee time?

2. Why is OM such an important part of the company?