A Value Chain Management Study at UPS
UPS is the world’s largest express carrier and largest package delivery company with over $30 Billion in revenue (2001). Its primary service is small package delivery, which has increasingly become a low margin business, and one with growing competitive pressure. Due to these low margins, efficiency and productivity in operations are paramount to overall financial success. Although UPS has a strong history of being a well run company, there remains significant opportunity to improve the value chain in this service organization.
At a high level, the value chain at UPS can be described as a series of package ...view middle of the document...
With little practice and experience, workers often make mistakes. These mistakes at a minimum require re-sorting (assuming the error is caught before leaving the hub). Worse yet, late delivery is even more costly -- not just direct labor costs, but in lost customers and a potentially tarnished image and brand erosion in the marketplace. For the purposes of our analysis, UPS has quantified the cost of a mis-loaded package at $4.05. Monthly, the largest 27 UPS hubs experience approximately 175,000 mis-loaded packages. At the projected rate, this results in a loss of $700,000 -- monthly, and only looking at the largest 27 hubs (on an annualized basis, and firm-wide, the numbers are even larger).
After studying the problem and its impact on the organization, our group came to the conclusion that a more automated approach, similar to other steps in the value chain be explored and adopted. From discussions with Tim Mohler, a group member and UPS worker, we found that UPS has already internally studied the problem and is preparing to deploy a solution very similar to our recommendations. It involves the use of hand-held scanners and “smart labels”, eliminating the heavy knowledge requirement of the average worker performing the pre-load task.
According to UPS, the cost to implement such a system, including the customized technology required, is approximately $600,000 for the Toledo hub. Therefore, before taking into account the increase in productivity, the reduction in errors alone should result in a payback of investment in 3.5 years. When strategic (but less quantifiable) factors such as competitive threats and the potential for brand erosion are considered, the payback is considerably faster.
Clearly, there is a solid business case for making the investment required to improve the value chain at UPS.
United Parcel Service was founded by brothers Jim and George Casey in 1907 as the American Messenger Company in Seattle Washington, focusing on private messenger and delivery services as few homes had telephones. The company soon began to offer package delivery for retail stores, and in 1913 merged with a competitor to form Merchants Parcel Delivery, serving the three largest department stores in Seattle. During this time, the company pioneered the concept of consolidated delivery – combining packages addressed to a certain neighborhood onto one delivery vehicle.
In the 1920s and 1930s, the company expanded operations to Oakland and Los Angeles California, and opened United Air Express, offering package delivery via airplane to major west coast cities. By the end of the 1930s, the firm provided service to all major west coast cities, and began its foothold in the East through consolidated delivery services for New York city.
In 1953, UPS expanded air services, offering two-day service to the major cities on the East and West coasts. With the growing demand for faster service, UPS entered the overnight air...