Industry & Firm Analysis

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Industry & Firm Analysis

  1. 1. Industry & Firm AnalysisSeptember 262011The following paper provides a brief and high level analysis of the Air Delivery & Freight Services industry, also known as the parcel industry, with emphasis on U.S. operations. A closer look is taken at United Parcel Service, Inc. or UPS, a leading competitor in the industry. Of particular interest is the impact of information technology on the industry and leading firm, UPS.Air Delivery & Freight Services<br />Industry Overview - Introduction<br />The air delivery and freight services industry (or parcel industry) is essential to our domestic and global economy. We all tend to take it for granted that we can purchase goods from anywhere in the world and expect the package to arrive on our doorstep within a week. The parcel industry’s main focus is the transport of goods by truck, train, plane, or ship. The delivery of one particular package may involve transport by ground, air, water or a combination of the three. The delivery can be between two businesses, two individuals, or between businesses and consumers. <br />The global parcel industry is primarily composed of a small group of competitors, most of which are household names: the United Parcel Service, Inc. (UPS), the FedEx Corporation, DHL Express, and the United States Postal Service (USPS). Each of these companies seeks to serve a niche of the industry. For example, the USPS is the primary deliverer of mail and parcel packages less than two pounds domestically. FedEx specializes in overnight delivery. UPS focus on standard ground shipping of parcels weighing between two and 150 pounds. And lastly, DHL Express, headquartered in Germany, operates primarily in the international market. DHL has a partnership with the USPS which allows them to send small packages through the USPS network. DHL is also the sole provider for transferring USPS mail in and out of Iraq and Afghanistan. Similarly, since they are not a domestic company, they are not affected by U.S. embargos or sanctions and therefore, are involved in shipping for countries like Cuba, Iran, and North Korea.<br />Financial Information<br />The table below shows the annual revenue (in millions) for 2010 and 2009 for the top four carriers in the industry. The figures in the tables have been taken from the individual annual reports of the carriers. As shown, the United States Postal Service has the highest annual revenue in 2009 though it is actually on the decline (from $74.9 million in 2008¹). The struggles of the USPS have been prominent in the news and political discussions of the past few years as the U.S. government has been weighing decisions to cut hours of operation and/or services due to the fact that annual expenses have exceeded revenue for the past few years. In fact, the USPS has operated at a loss since 2006.5<br />Revenue ($ in Millions)<br />Carrier20102009USPS¹$67,052$68,090DHL²,6$68,187$61,193UPS³$49,545$45,297FedEx⁴$34,734$35,497Total$219,518$210,077<br />Data taken from 2010 Annual Reports – see footnotes for web addresses.<br />6 Note: Annual revenue for DHL was provided in Euros. Amounts shown above have been converted using an annual USD-Euro exchange rate of 0.755. Original Euro values for 2010 and 2009 are 51,481€ and 46,201€ respectively. Exchange rate derived from irs.gov website – see footnotes for full web address.<br />Size and Structure<br />The parcel industry employs a large number of people. Given the nature of the work and the necessity of a distributed and decentralized structure, there are employees of these organizations in almost every major city and many small towns. Specifically, as we all know, the USPS has a presence in just about every community in the United States. The table below displays the total number of employees at each carrier as of the release of their 2010 annual report.<br />Number of Employees (as of 2010 Annual Reports)<br />CarrierNumber of EmployeesUSPS583,908DHL421,274UPS400,600FedEx245,109Total1,650,891<br />Data taken from 2010 Annual Reports – see footnotes for web addresses.<br />As the table shows, more than 1.6 million people rely on the top four parcel carriers for employment. Despite worries about USPS cuts, it is unlikely that this number will go down given the growth of the industry. Also, given its distributed nature and the necessity of exchanging physical goods, those employees involved directly in the delivery process need not worry that their jobs will be eliminated through automation (at least not anytime soon).<br />The parcel industry is unique in that the services it provides directly contribute to the health and growth of the whole economy. Nearly every business entity in the country relies on the parcel industry to ship its products, supplies, and correspondence. The value of goods shipped via parcel carriers compared to the Gross Domestic Product was 2.1% in 1977 and rose to 10.6% by 1997.7<br />General Factors Affecting the Industry<br />Like most industries, the success of the parcel industry is directly tied to the health of the economy. A recession like that which began in 2008, means less people are purchasing goods from internet sites or catalogs, more people are phoning loved ones on birthdays and holidays than mailing presents, and businesses on tighter budgets are engaged in a lower amount of business-to-business commerce.<br />Globalization has had a big influence on the parcel industry as well. In the past, parcel companies were much more focused on their domestic operation and U.S. imports and exports were primarily handled by the shipping and cargo companies. But in today’s age where we view Germany and Japan as mere puddle jumps, it has become necessary for domestic parcel companies like UPS and FedEx to expand globally. Many American companies have business partners or subsidiaries operating internationally and the volume of packages being shipped has increased exponentially over time.<br />The parcel industry must closely follow population shifts both inside and outside the country. Many urban areas are expanding and there is a trend of citizens moving from the Northern and Eastern parts of the United States to the South and the West. More people in a given place mean more packages to be delivered to that area. Therefore, parcel companies must follow these trends and staff more employees or open new locations in areas of expanding population to make sure they can meet the demands of the growing population. This same principle is relevant internationally as well.<br />Regulation also plays a role in how the parcel industry operates – particularly regarding labor regulations. Parcel companies employ a mixture of union and non-union employees. Union negotiations can at times create relatively high expenses, particularly for the U.S. Postal Service. FedEx’s employee base is not unionized, with the exception of the FedEx pilots.⁴ More than 50% of UPS workforce is unionized.³ Additionally, parcel companies operating in the United States must operate in accordance with Department of Transportation (DOT) regulations regarding both ground and air transport. Also for air transport, the following regulatory bodies have authority: the Federated Aviation Administration (FAA) and the U.S. Department of Homeland Security, through the Transportation Security Administration (TSA). Other regulation includes international customs laws and federal, state and local environmental protection laws.<br />The parcel industry has also been heavily impacted by the advances in information technology over the last few decades. The next section will focus on these issues.<br />Impact of Information Technology<br />IT advances have influenced both the growth of the parcel industry and the operation of it. With the rise of e-commerce, more and more people are making purchases via the internet which translates into more packages being shipped across the world. This impact is partially offset by the reductions seen in catalog ordering. E-commerce and the parcel industry have a symbiotic relationship because the faster and more efficient the parcel industry is the more popular e-commerce becomes. One of the reasons people have been reluctant in the past to purchase items online is the issue of instant gratification. When you buy something in the store, you get it immediately. When you order it online, you have to wait for it to be shipped. But with advances in the parcel industry, shipping takes much less time and standard delivery within the United States rarely takes more than three to five days. Overnight shipping is also commonly available. <br />Technology has also advanced the field of logistics. Delivery trucks are now equipped with GPS making it easier for drivers to find their destinations without missing turns, via the shortest route. Handheld devices and scanners help delivery personnel track each package as it makes its way to its destination. And now, thanks to the internet, consumers can track their packages online and see the last time it was scanned at a processing center. Up-to-date expected delivery times are reported which are, from this writer’s observations, very precise and accurate. <br />Not all advances in the field of technology have been good for the parcel industry. Advances in e-communications, though utilized by the carriers, have actually cut down on the amount of correspondence sent through the mail. What used to require a letter to explain can now be handled with a quick email and the recipient can read it right away rather than waiting until the letter is delivered. This adverse effect on the parcel industry hits the USPS the hardest as UPS, FedEx, and DHL primarily deal with packages which must still be physically delivered to their destination.<br />Firm Analysis – United Parcel Service, Inc. (UPS)<br />UPS is a leading carrier in the domestic and global parcel delivery industry. The firm operates in over 220 countries and territories around the world and is well established in the United States as the leading deliverer of packages by ground transportation. UPS utilizes all forms of transport however; from trucks to railroads and planes. UPS was actually founded as the American Messenger Company in Seattle, Washington in 1907. At the time, 19-year old founder James E. (“Jim”) Casey and his partner Claude Ryan, along with a handful of teenage friends, made most deliveries on foot and, when covering longer distances, by bicycle. The company has come a long way since then to be one of the most recognized companies in the world.<br />UPS’s main competitors domestically are FedEx and the U.S. Postal Service (USPS). With the future of the USPS in question, UPS and FedEx are considered the primary players. FedEx specializes in overnight deliveries and as a result is more expensive than UPS. UPS is the most commonly used carrier for non-urgent packages being sent domestically. <br />Financial Information<br />The illustration below is taken directly from the UPS 2010 Annual Report.<br />³ UPS 2010 Annual Report http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODUzODd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1<br />As shown in the data taken from the annual report, UPS has seen revenue, expenses and net income increase from 2009 to 2010. From the “Operating Highlights” section, UPS has industry-leading operating margins in all segments of the company. A high volume of packages delivered and a wide global network has contributed to their success.<br />UPS is a decentralized company as necessitated by its wide global presence. The senior operations management of the company is divided into nine regions, each of which is headed by a regional president. The Chief Executive Officer (CEO) of UPS is D. Scott Davis, who has been in the position since 2007. The company has its headquarters in Sandy Springs, Georgia.<br />Recent Accomplishments and Potential Future Risks<br />In recent years, UPS has rapidly expanded their international reach. They have opened new facilities and expanded their aircraft and truck fleets. From recent press releases, UPS has had success in their efforts to “go green”. On September 23, 2011, the company released a press release noting that they had achieved the highest score on the Carbon Disclosure Index – one of only four companies worldwide to do so. The Index highlights the companies within the Global 500 “that have displayed the most professional approach to corporate governance regarding climate chance information disclosure practices”.8 On June 24, 2011, UPS announced that they had received the highest score on the American Customer Satisfaction Index (ACSI) among companies in the Express Delivery industry.9 Clearly, UPS has seen success in the last year with public perception of the company. <br />In addition to the successes mentioned above, UPS has received much praise for their work on UPS Worldport – their worldwide air hub located in Louisville, Kentucky. Expansion efforts have been in process on the facility throughout most of the last decade with the last project recently coming to a close. A current press release from UPS details a visit by the current Treasury Secretary of the United States, Timothy Geithner who credited the facility with creating jobs and investing in infrastructure that makes our country more competitive.10 <br />Potential risks for UPS include increased security requirements and the threat of a security breach; the effect of climate change or more specifically, climate change regulation that could drive up costs; strikes, work-stoppages, and slowdowns by unionized employees (which comprise more than half of UPS’s workforce); employee health and retiree health and pension costs which are a significant expense to the company; changes in fuel prices or interruptions in the supply of fuel; any major breakdown of their IT systems could result in serious disruption of service and intense customer dissatisfaction; and the potential for an adverse outcome in any one of the pending litigations against the company.<br />The Role of IS at UPS<br />UPS considers IS to be the backbone of the company. Their IT systems give them and their customers the ability to track the shipment of packages across the world. Any significant problems with their system could result in major losses, both in terms of financial loss and customer loss. Since 2008, UPS has been deploying a new technology called telematics, which combines information from drivers’ handheld devices with GPS and automotive sensors that helps them better manage their ground fleet. This technology provides benefits in the following areas: vehicle maintenance, safety, service, and reductions in vehicle expense, fuel consumption and carbon emissions.³<br />The company’s Chief Information Officer (CIO) is David A. Barnes, who worked from the ground up after joining the firm in 1977. Barnes was the lead business manager on the development of the International Shipments Processing System (ISPS), a Smithsonian award-winning software application developed internally at UPS. The UPS Information Technology Governance Committee is responsible for directing the company investments and undertakings in the IT world.11<br />The Future of the Parcel Industry<br />A lot remains uncertain regarding the future of the parcel industry – primarily, what will become of the United States Postal Service. Whatever the U.S. government decides on that issue will have a significant impact on the strategic direction taken by the other firms in the industry (FedEx, UPS, DHL, etc.). Firms’ penetration into different markets could also be a driver of change within the industry. FedEx and UPS are trying to expand their international presence while DHL, who has significant international presence, is trying to find ways to break into the U.S. market despite government restrictions preventing the firm from doing so. Government regulations, specifically Homeland Security regulations, if changed, could have a significant impact on the industry’s operations. The large firms in this industry seem poised to handle the changes ahead and have had plenty of time to develop strategies for every potential scenario regarding the future of the USPS. Barring the rapid perfection of teleportation technology, it seems safe to say the parcel industry will be around for quite a while longer. The current industry leaders must be aware of new entrant competition and acquisition opportunities if they want to maintain or improve their current positions in the industry.<br />Sources Cited<br />¹ USPS 2010 Annual Report http://about.usps.com/who-we-are/financials/annual-reports/fy2010.pdf<br />² DHL 2010 Annual Report http://www.dp-dhl.com/content/dam/Investors/Publications/DPDHL_Annual_Report_2010.pdf<br />³ UPS 2010 Annual Report http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODUzODd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1<br />⁴ FedEx 2010 Annual Report http://media.corporate-ir.net/media_files/irol/73/73289/onlineAR/downloads/2010-ar-full.pdf<br />5 U.S. Postal Service: Financial Challenges Continue, with Relatively Limited Results from Recent Revenue-Generation Efforts. U.S. Government Accountability Office. 5 Nov 2009. http://www.gao.gov/htext/d10191t.html<br />6 Yearly Average Currency Exchange Rates. Internal Revenue Service. 18 Feb 2011. http://www.irs.gov/businesses/small/international/article/0,,id=206089,00.html<br />7 The Parcel Service Industry in the U.S.: Its Size and Role in Commerce. Morlok, Nitzberg, Balasubramaniam, and Sand. 1 Aug 2000. http://www.mautc.psu.edu/docs/MA-III-0007.pdf<br />8 UPS Achieves Highest Score on Carbon Disclosure Index. United Parcel Services, Inc. 23 Sept 2011. http://www.pressroom.ups.com/<br />9 UPS Tops Industry Ranking. United Parcel Services, Inc. 24 June 2011. http://www.pressroom.ups.com/Press+Releases/Archive/2011/Q2 <br />10 Secretary Geithner Visits UPS Worldport in Kentucky, Highlighting Importance of Investments in Infrastructure. United Parcel Services, Inc. 26 Sept 2011. http://www.pressroom.ups.com/Press+Releases<br />11 Management Committee. United Parcel Service, Inc. 26 Sept 2011. http://www.ups.com/pressroom/us/bios/bios_index<br />

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