Pricing and adjusting networks to meet expected volume gains are key for the duopoly.
By Jeff Berman
August 02, 2017
On its recent second quarter earnings call, freight transportation and logistics bellwether UPS touched upon many topics related to its different business lines, including pricing, shipping patterns, and how those things impact many macroeconomic trends of its business.
Second quarter earnings calls, not just for UPS but many other companies in the freight transportation and logistics space tend to take a look at the definitive i.e. what has happened so far, as well as the future i.e. what may happen.
And when it comes to the latter, especially in UPS’s case, that has to do with assessing Peak Season prospects.
One of the things made very clear by UPS leadership on the call, as it relates to Peak Season, is for the company to ensure it is being properly compensated for its services for this period, given it is typically the most hectic time of the year.
“Last month, we announced peak-season surcharges and we are addressing the impact with customers as we develop peak shipping forecasts for later this year,” UPS CEO David Abney said in late July on the earnings call. “These surcharges are necessary to ensure UPS continues to provide customers with the best-in-class value and highly reliable service they've come to expect.”
UPS Chief Commercial Officer Alan Gershenhorn added on the call that the Peak Season surcharge is really designed to compensate for the additional cost that UPS incurs during peak with volume increases and the temporary capacity enhancements needed to meet service levels.
“And while these rate increases, even for a short time, are rarely welcome, our customers really understand and appreciate the value of our network, what we do to provide the service and the capacity for them at peak and year around as well as the cost of doubling of the network,” he said. “The peak surcharge…is designed to hit the most impacted weeks where we surge in both residential and large packages. And so, for Ground, it's three weeks of the five weeks of peak and for Air, it's only one week, the last week, and then for large package it's five. And our expectations are to have high compliance with the peak season surcharge.”
As for UPS’s biggest competitor, FedEx, preparation is underway for the 2017 peak holiday shipping season,” said Raj Subramaniam, Executive Vice President, Global Strategy, Marketing and Communications, on the company’s late June fiscal year 2017 fourth quarter earnings call.
“The expectation is for another record peak season with multiple days that'll set records for package pickup and delivery,” he said. “We continue to work directly with relatively small number of large customers that drive the majority of the surge and demand to ensure that we have appropriate pricing related to volume expectations and capacity needs.”
When assessing Peak Season from a planning and preparation perspective, there are several considerations, according to Jerry Hempstead, president of parcel consultancy Hempstead Consulting.
“First and foremost is the interaction between the carriers and the handful of sippers that represent the majority of shipment surge,” he explained. “The audience is very defined now and key is the dialogue where the shippers attempt to prognosticate anticipated volumes, and from there the carriers can plan for equipment and staff.
As an example, he said UPS will add more than 100,000 seasonal employees, while its chief competitor, FedEx, will bring on more than 50,000 of their own, with the recruiting process kicking in right after Labor Day in order to find and vet employees, getting them scheduled to be trained and scheduled and placed.
The next step, he said, is focusing on network throughput capacity.
“Both carriers have invested an extraordinary amount of capital in order to insure that there is enough elasticity in the system to prevent package bottlenecks and consequent backups,” he noted. “The network is ready. You will not hear the post holiday ‘kevtching’ from the shippers about service (save for weather impacting large swaths as we saw a few years back).“
From a seasonal, or peak, pricing perspective, Hempstead said that at this point UPS and FedEx are addressing the additional costs in different ways.
The FedEx approach is more “surgical” and aimed at the few shippers that present the greatest challenge to serve, he said, while UPS has decided to just impose pain based on service selected, date shipped and the residential attribute.
“The UPS approach has the potential of harming non-seasonal residential shippers like Express Scripts and CVS and other prescription benefit management firms, as well as firms like Dell that ship laptops year round to residences. Like everything in the world of parcel, accessorial prices and rates are negotiable. Not everyone is going to be paying rack rates this Holiday.”
About the author
Jeff Berman is Group News Editor for Logistics Management
, Modern Materials Handling
, and Supply Chain Management Review
. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman