A man delivers a parcel to a woman

UPS Nearing a Strategic Dead-End

UPS is at risk of being caught in a strategic dead-end. Low-margin parcel business is on the rise, putting pressure on operating costs. Leaving aside fuel costs, reducing labor costs is the urgent priority. There are some obvious possibilities for reduction in labor costs, but these methods are already being led by competitors. Outsourced “independent contractor” labor is essential to FedEx, and being taken to the next level by “gig economy” companies like Uber. Automating manual tasks—both driving vehicles and handling packages—is a major focus for companies ranging from Uber to Amazon to Google.

UPS so far has done a creditable job keeping tabs on the developing drone technology. The approach of multiplying the productivity of a human in the loop is almost surely the right first commercial deployment. In the long run, though, it is difficult to imagine UPS sustaining an advantage in technology, against competitors like Amazon and Google (and others). If delivery is dominated by self-driving vehicles serving as a mothership for a swarm of last-yard delivery drones, which company is most likely to have proprietary, competitive technology?

Optimizing markets served might offer some respite. A delivery company may choose to serve residences only in densely-populated areas; or, contrarily, might build a competitive advantage out of maximizing every-door service. But here UPS is bracketed; the cherry picking the easy neighborhoods is the obvious starting point of every new delivery service, from boutique couriers to segment-jumping giants like Google and Amazon. And, like it or not, every-door delivery is the domain of the United States Postal Service. USPS could be less efficient or effective than UPS, but it is unlikely to go away; and it’s very hard to win a competition when your competitor cannot lose.

When considering the quandary facing UPS for an MBA course, I thought the way forward would be through adding additional on-site services to delivery: pet walking, dry cleaning pickup and drop off, etc. Whether voicing a generic management platitude or a genuine conviction, UPS Vice President of Engineering, John Dodero, hints at this strategic advantage: “UPS drivers are the face of the organization. Customers depend on them.” There’s a reasonable chance that people might trust the uniformed, institutionalized UPS crew more than the ad-hoc opportunistic crews employed by Uber and other crowd-sourced delivery upstarts. But Amazon took direct aim at this last remaining advantage with their Amazon Key service. Now, the first mover is not always the ultimate winner; UPS could leverage the concept better than Amazon. Ask Palm Pilot or Blackberry how that might work out. But it’s a bad sign for UPS that Amazon believes they don’t need UPS’ long history of knocking on doors to be trusted to enter them.

 

So what to do? Should the executive team at UPS declare the whole thing useless and sell the company before the music stops? Is UPS now approaching the peak point that Yahoo and AOL and so many other now-forgotten companies crossed over?

The possibility is terribly real. But it is not so certain that UPS should declare defeat without trying. In particular, UPS should not abandon the in-home services front without a fight. UPS has more ubiquity, more longevity of customer-end provider interaction, and more accountability than any other provider, except possibly the USPS. To avoid an unwinnable struggle against its own union and its Uber-like competitors, UPS should steer hard away from low-paid door-knockers, and instead immediately begin rolling out a higher paying job with additional duties. Call it ParcelPlus: Parcels plus pet-walker; parcels plus flowers; parcels plus dry cleaning. Adding duties to the drivers will only make UPS’s staffing logistics more complicated; but competency in tackling such logistics is arguably one of the few UPS can confidently claim as an advantage.

Look for the tasks that used to be done by house servants or house wives; look for the tasks that people want people to do and won’t trust to robots. We are headed, with Titanic certainty, toward a civilization with a higher ratio of elderly than ever before. At the same time families have fractured into smaller and smaller pieces, and those elderly are less likely than ever before to be living with mid-life adults. Notwithstanding a lifestyle unfathomable to generations past, working-age adults increasingly feel economically straitened and unable to pay for full-time care. This implies a market for on-demand part-time elder care, with services ranging from a simple check in (make sure Mom didn’t fall), to paid socialization, to very carefully tailored forms of first-tier medical care (“assisted self-medication”). Although borrowing elements from existing business models, it would ultimately be a hybrid with no existing competitors, for which the involvement of humans is psychologically (even if not technologically) necessary, and which further benefits from uniformed, long-term providers.

On the back end, turn parasites into symbiotes. UPS has a vast infrastructure of trucks and hubs and aircraft. But competitors like Amazon are in an enviable, “unfair” position of being able to use UPS for segments which suit them, and skip out for segments which do not. Amazon can replace UPS’ services piece by piece, if they choose, and there is no obvious way to stop them. But the common enemy here is empty miles: empty UPS trucks, empty FedEx trucks, empty trucks in the vast ecosystem of Less-Than-Load (LTL) and trailer-load local, regional, and national carriers. By offering complete transparency of their available capacity, routes and timing in their vast back-end infrastructure, UPS could pick up utilization and cost absorption.

This is a bit like Google’s investments into internet infrastructure: make everyone’s data transfer better, increasing the appetite for search. Autonomous vehicles have the highest economic payoff with the lowest functional risk making predictable hub-to-hub routes on well-defined highways; the ability to add differentiated value on these routes will rapidly shrivel away. But connecting these major arteries to every point of need will remain a challenge for some time to come. Temporary closure of a main street in Small Town USA can result in diversion onto poorly-marked detours over roads not meant for trucks. Smaller businesses are likely to have more variation in shipping processes, more often requiring human interaction to sort out the quirks in today’s shipments.

By emphasizing high-margin value-add on the front line and low-margin, high-throughput on the back end, UPS can position itself to benefit from competitors in the same market space. Those competitors who are ahead of UPS on low-margin residential delivery can still make use of UPS’ robust, transparent, freely available and competitively priced major transportation infrastructure; but where simply getting a box to a doorstep is not enough, UPS can offer additional services through a trusted and accountable network of familiar faces.

In the end, UPS may find its best path forward in the counter-intuitive direction of adding more people to its last-mile crew, as long as it also finds more value-add services to perform – services which by their nature most people would be unwilling to relinquish to robots.

The only question that matters for UPS is: in what ways can UPS continue to outperform its emerging and established rivals? If that means reinterpreting UPS to mean Universal Personal Services, there’s no reason to hold back. Start small. Start now.

Published by

Arlan

I like reasons.