Supply Chain Efficiency Helps UPS 2015 Q2 Profit Surge

Efficiency was the underlying theme in UPS’s July 28 shareholder announcement, during which the world’s largest shipping company said that second quarter 2015 diluted earnings per share were $1.35, a 12% increase over adjusted results for the same period in 2014.

All segments improved profitability and expanded margins, according to UPS, much to the delight of shareholders, evidenced by the 7 percent jump in the share price as of noon Wednesday.

“Pricing initiatives continue to drive base rates higher,” according to a news release posted to the UPS website. Also contained in that release was UPS’s selected financial data from its Form 10-K and other filings with the Securities and Exchange Commission, which highlighted several suggestive factors that could attribute to the carrier’s strong performance.

For the quarter, operating expenses dropped 10 percent, while operating profit soared 162 percent. Net income rose 171 percent and UPS reported 8.7 percent net income as a percentage of revenue, up 172 percent from a year prior.

These numbers point to the fact that UPS’s efforts to become more efficient are working, and working very well. The numbers contained within the report point to revenue decline in premium air services and increases in deferred air and ground services, two segments that saw the steeper price increases when the 2015 general rate increase was announced last year, substantiated by steep volume growth in domestic deferred air services.

The evidence seems to point to the fact that UPS’s efforts to more heavily increase prices of services they know their customers will use most are lining their pockets. And as both major global carriers begin to hone in on the holiday season – which has pestered them both in each of the last two years – the true cost of carrier profitability still appears to fall down to their customers.

With changes promised to oversize package surcharges and the advent of peak season surcharges for certain shippers, both carriers are poised to prevent, or at least limit, the recurrence of issues that have led to each carrier’s disappointing fourth quarters in each of the last two years.

Contrarily, however, FedEx and UPS customers will face an increasingly tough road ahead as they struggle to remain competitive in the face of increasing costs for necessary services.

UPS is considering assessing peak season surcharges on a customer-by-customer basis. Customers that experience 10- to 20-percent surges in volume are targets, as are other customers UPS deems are disruptive to their supply chain. Oversize package surcharges are also in play for companies that ship large products that slow down the carrier’s operation. These charges could be implemented only during peak season or permanently in certain, yet-to-be-determined instances.

Of course, no shippers will be immune to the general rate increases that are announced annually, usually in late-October or early-November. With seemingly so many other moving parts in play this year, the effects of those hikes could feel more compounded than usual, especially for customers subject to the pricing changes outlined above.

With so much at stake, it is no wonder that efficiency and optimization have taken the business world by storm. Companies everywhere are looking for the upper hand, and the good ones are finding answers right under their noses, by effectively utilizing their own data to understand their respective businesses in granular detail. While it obviously is a great time to be a UPS or FedEx shareholder, the same can be said for being an analyst. There is no shortage of solutions clamoring to be found; no shortage of work, in other words. The challenge, though, is a company’s ability to combine analytical skill with market knowledge sufficient enough to build a strong foundation for lower costs through statistical analysis. While many have one or the other, possessing an in-house expert (much less an entire team of them) capable of marrying data and market pricing knowledge is a luxury typically afforded only to larger companies, and you would be surprised how many of those do not possess the knowledge they think they do.

A study of 500 high-volume parcel shippers with net annual parcel spends between $200,000 and $30 million found that about 85 percent are missing significant savings opportunities by failing to better optimize the discounts contained within their carrier agreements, regardless of size.

Fortunately, shippers without these resources do have options.

First, savvy companies can leverage their carrier relationships to make ends meet. UPS, in particular, has begun telling customers that the carrier will not make them go it alone when the pricing changes shake out. By leveraging a carrier relationship, high-volume shippers can request that their carrier help shoulder the load. With an army of analysts and engineers (most or all of whom specialize in this sort of thing), the carrier should have all the necessary data to make as good a prediction as any with regard to how a specific company should prepare for the road ahead. Depending on the nature of that relationship, however, that advice could come with a price tag. Even if the carrier is willing to provide insight at no cost to the customer, there is still an unsettling element of letting the fox guard the hen house, in a manner of speaking. Shippers should understand that FedEx and UPS have their own margins to protect, and that their sales reps are only empowered with a limited amount of knowledge. (UPS arguably is more profitable than ever, after all.) Simply put, it would be good practice to vet any advice they provide to prevent unforeseen issues down the road.

Second, options for third-party input abound, many of which are capable of providing the insights needed to make sound business decisions on a quick turnaround, as dictated by an ever changing market. With large customer sets from which to extract data for comparison to your account, a properly vetted third party is uniquely qualified to perform powerful data analysis from a customer perspective. Good ones can determine whether your rates are competitive and provide a wealth of actionable intelligence across many different departments. Great ones will even highlight optimization opportunities you are currently ignoring, or unaware of, many of which could greatly improve the overall health and efficiency of your supply chain. While those services, too, will come at a cost, the decision then boils down to the net benefit to your organization. The latter, should result in more net costs savings and efficiency enhancements that benefit you, the customer.

Of course, which road is best for your company is a case-by-case scenario. The only universal truth is that changes are coming that could have significant impacts to the bottom lines of companies that are ill prepared.

The carriers are pacing the field in terms of efficiency, showing us all how profitable that can be. If you are investor, the numbers suggest that you should take notice. If you are a shipper, likewise, you should take action.

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