As the small package industry progresses further into the future, it continues to change. UPS and FedEx have adapted and responded to the ever-evolving environment of e-commerce. Long considered bellwether stocks, UPS and FedEx recognize and adapt to the conditions of the US and world economies. As the Great Recession occurred in 2007–2009, shippers sought cheaper options for delivery for online purchases. Postal last-mile services like SmartPost and SurePost grew at a quickened pace, making FedEx’s 2004 purchase of Parcel Direct, rebranded as SmartPost, ready to serve as an answer for less expensive shipping.
Fast forward 10 years, and the economic conditions have changed. A change catalyst has entered the picture: Amazon. One word, three syllables, sounds like mover-shaker-disruptor. Amazon’s success, sustained YOY growth of 20-30%, and its effects on resetting customer values and expectations, will play out in changes to UPS and FedEx in 2020 and the years to come.
Shippers are now asking, “What’s the price of committing to faster (one- to three-day) delivery?” Fulfillment speed is taking a pole position in the delivery strategy race. Based on the buzz-worthy announcements of both FedEx and UPS, we expect both carriers to be delivering seven days a week. Additionally, significant changes are expected in FedEx’s SmartPost service. By the end of 2020, FedEx will be delivering all SmartPost packages via Ground delivery drivers. FedEx also burned bridges with Amazon, first announcing the end its Express agreement with Amazon, then Ground. Just how these changes affect the landscape will play out in the next few months, as these major carriers announce their 2020 rates and changes this fall.
Three areas are going to play particular roles in 2020: faster delivery expectations, the expansion of network and operations, and postal last-mile service changes.
Transit Time Implications
As shippers compete with large scale e-commerce like Amazon and Walmart, they must tighten their delivery commitments to compete with these two companies that are e-commerce standard-bearers.
It all starts with Ground services. To minimize cost, it’s wise to ship as many packages as possible with a Ground Residential service, then supplement with one- to three-day Express services where necessary. The footprints of one- to three-day transit with Ground vary due to operational and network differences between UPS and FedEx. There are slight differences in the services offered to hit these commitments, including availability of overnight with afternoon delivery (FedEx Standard Overnight or UPS Next Day Air Saver). Additionally, UPS 2nd Day Air includes Puerto Rico, whereas FedEx 2 Day does not (Puerto Rico is an international destination on FedEx).
In June 2019, news sources erroneously reported that FedEx would “slash prices to fill planes” for air services since its breakup with Amazon. This was immediately refuted by FedEx in a quarterly briefing. FedEx has also reported a declining margin for Express services. What we can expect is that FedEx will strategically look to gain business, especially for small to mid-size companies where their margin would be far better than those of Amazon.
Network Expansion and Seven-Day Operations
Perhaps one of the biggest indicators of FedEx and UPS expectations for the future is their significant capital investments and operational changes to increase capacity.
Both companies have made huge investments in their networks, with FedEx recently announcing the Memphis Express hub to get an additional $450M in improvements. Added to the previous March 2018 announcement figure of $1.1B, they will spend $1.5B in improvements through 2025. Previously, UPS laid out a plan to expand several facilities to “super hubs,” including Atlanta, Dallas/Ft. Worth, Phoenix, Salt Lake City, and Indianapolis. Indianapolis officially began operating at full capacity in June of this year.
In addition to the increased facility capacity, both FedEx and UPS are further increasing capacity by operating seven days a week. It has been common for decades to operate additional sorts during peak months, but UPS and FedEx now plan to make it official for year-round service starting in January of 2020. This will also have effects on total days for delivery and total transit times. Just how transit standards change has yet to be defined. Previously, a Ground two-day standard lane would not count the weekend days in the standard. It will certainly be interesting to see this play out, and to get more detail as this change is made.
Postal Last Mile Services: SurePost and SmartPost
With USPS price increases and the increased pressure on transit times, the Postal last-mile services of SurePost and SmartPost will be changing in 2020. What we’ve already seen in the pricing market is UPS removing or reducing SurePost DIM thresholds as a result of the USPS changing their DIM policy in June. Simultaneously, FedEx announced that all SmartPost packages will be delivered by Ground delivery drivers by the end of 2020. This is where the carriers’ strategies vary significantly for 2020. As UPS announced its seven-day delivery, its Chief Marketing Officer was quoted as saying “Building on an expanded relationship with the Postal Service to help deliver seven-day service to our customers makes good business sense.” That’s in sharp contrast to FedEx, with its announcement stating that it would integrate all of SmartPost deliveries into the Ground to improve delivery density. This integration will have a profound effect on the SmartPost reliability and transit time, as the USPS operations have always caused additional variability.
Practical Application: “What Should I Do About This?” (Web Exclusive)
Several steps in the management of your operations and contracts will empower you to stay current or ahead of the curve.
Data, Data, and More Data
To be poised for change going forward, vigilance in collection and interpretation of your operational and invoicing data is going to be paramount. Specifically, develop independence from your carrier by collecting the following:
-- Invoicing data: collect and store package level detail for every invoice, for every package by tracking id. The carriers do not retain accessible invoicing data indefinitely. Typically, it’s only available for 6 months – 2 years.
-- Dimensional data: collect data on every box size used for every package, tied to tracking id. UPS and FedEx do not share dimensions for every package; they only share the dimensions of packages on which they’ve assessed a dim weight. When changes in dimensional policies occur, if you rely on the carrier, you will not have complete information to assess costs of new policies or charges.
-- Transit data: capture data on ship date & time and delivery date & time. Transit time from the carriers typically excludes service failures for weather and other causes at the discretion of the carrier.
Do not accept any limiting clauses like Early Termination, Minimum Commitments, or Rebate paybacks in your carrier agreements. The rate of change in the industry will make it crucial to have the ability to come back to the table at any time. Secondly, make sure to arm yourself with the data to assess impacts before negotiating.
Develop a Community with other Shippers
Reach out to other shippers via conferences, social media, and industry events
Build out your Operational and Organizational Capabilities
Your flexibility to use other carriers begins on your dock. If you’re only using one carrier currently, develop a relationship with other carriers, establish an agreement with them, and periodically test shipping. Also, keep in mind using a new carrier not only involves change management of your dock operations, but all their supporting processes of accounting, marketing, and other internal groups.
Develop a Partnership with Subject Matter Experts
Even the most seasoned transportation and procurement professionals in your organization can use an additional set (or a dozen sets) of eyes. Ask your SMEs about the ROI on their services, and partner with those you can trust.
Mark Taylor is Transportation Consulting Manager, enVista. With 20 years of experience in transportation — most of which have been in the parcel industry — he works with clients to guide them through contract analysis and negotiation processes. Join him for his PARCEL Forum session, FedEx & UPS: Convergence & Divergence of Carrier Pricing Schema, at 10 AM on Tuesday, October 29 to hear him speak more on this topic.
This article originally appeared in the September/October, 2019 issue of PARCEL.