Thursday, January 30, 2014

UPS Reports Earnings and an Action Plan for a Better 2014 Peak Season

After a warning was sounded a couple of weeks ago, UPS reported fourth quarter and full year earnings for 2013. For fourth quarter, revenue increased 2.8% to almost $15 billion and for the year, revenue increased 2.4% to $55.4 billion. 

For the quarter, International Package revenue improved thanks to improvements in the European economy. Revenue for this division increased 5.3% to $3.4 billion and 8.8% growth on average daily volume. “Significant” growth in the Asia-to-Europe trade lane was cited in its press release along with an 8.2% increase in domestic volume in non-U.S. domestic volume - Poland, Italy and Canada leading the way.

The Supply Chain and Freight Division continued to be weak declining 5.8% to $2.3 billion, due to declines in the Freight Forwarding unit. International air freight was singled out as the main culprit thanks to continued declines in tonnage and revenue per kilo.  However, Ocean Freight reported growth in shipments and operating margin expansion. Meanwhile, in Distribution, mid-single-digit revenue growth resulted from improvements in healthcare, retail and UPS mail services. The shining star of this division continues to be UPS Freight, which reported a 2.3% increase in revenue as a result of increased LTL tonnage and pricing improvements.

Finally, the Domestic Package division, which took a PR spanking during the holiday season thanks to adverse weather conditions and last minute online shopping, witnessed revenue increase of 4.2% to $9.3 billion. Operating profit totaled only $1.2 billion as additional costs associated with a greater-than-expected surge in volume and weather led to a $178 million decline from the prior-year adjusted results.  

An interesting issue was noted during the holiday season in which UPS found it difficult to obtain necessary air cargo space to help with last minute shipments prior to Christmas Day. Was this a failing of its freight forwarding capabilities or simply just bad timing?

In either case, quarterly average daily package volumes increased 6% while December deliveries increased 20%. On December 23, the company delivered 31 million packages, the most ever. According to UPS, the highest delivery day occurred six days later than anticipated and was 7.5% greater than planned.

The company took “extraordinary measures” to deploy additional equipment and 85,000 temporary employees, 30,000 more than planned but still came up short in delivering packages on time.
In its earnings call, UPS noted four key areas it needs to address before 2014 peak season:

·        UPS volume forecasting methods were challenged in that “the paradigms for planning no longer apply due to the rapidly evolving marketplace”. As such, it plans to increase collaboration with “high impact” customers to develop predictive models incorporating consumer behavior and sales promotions.
·        Identify ways to enhance the throughput of its networks.
·        Improve visibility of shipments.
·        Improve communications with shippers and receivers.

It seems lessons were learned and the areas in which the company plan to focus on should help improve matters. However who knows what curve ball the 2014 holiday season will throw? The need for an agile supply chain is important in the continuous changing B2C space and UPS is indeed striving towards meeting this challenge.