UPS: Logistical Management of Distribution Networks

Author: Dr. Jean-Paul Rodrigue

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1. The Company

Intermodal transport can be described as the transport of merchandise by at least two transport modes with a minimum of one stage being made by train, by truck, or by maritime modes. In other words, it is a cargo unit that is transferred from a transport mode to a another. The optimal combination of modes allows transporters to achieve what is known as economies of scope. In a majority of cases, the first and/or last steps of the cargo itinerary consist in truck transportation and are to be minimized. More than ever, delivery firms' activities are based on intermodal transport to optimize delivery times and, in turn, their overall efficiency.

United Parcel Service (UPS) is an enterprise specializing in the collection and the routing of parcels throughout the world. It represents an excellent example of a corporation actively involved in freight distribution and the application of logistics. In 2007, UPS generated incomes around 50 billion dollars and employed 425,000 people, 358,000 of them in the United States. Its service area covers 200 nations and handles 4.0 billion parcels per year; around 15.8 million per day, of which 2 million are carried by air transport, most of them in the United States. UPS handles about 61% of all parcels ground deliveries in the United States while this share drops to 34% for the overnight air freight market. It is estimated that UPS delivers more than 6% of the American Gross Domestic Product and 2% of global GDP each and every day.

The infrastructures of UPS are extensive and include 2,400 distribution centers, 93,000 vehicles and 268 airplanes going to 391 airports in the USA and 219 abroad. Besides, UPS makes call to about 311 planes on a contractual basis according to variations in demand, making it the 2nd largest freight airline in the world and the 9th largest airline in terms of revenue. UPS has also an extensive information system specifically adapted to the needs of parcel collection (DIAD: Delivery Information Acquisition Device; introduced in 1989 and reached fourth generation in 2004). Each parcel handled requires numerous data elements that are transmitted over a optic cable network supported by satellite and wireless communication. This network is named UPSnet. The storage is necessary for the management of the very complex logistics of the several millions of parcels sent each week having different origins, destinations and recipients.

2. The History

UPS was established in 1907, in Seattle under the name American Messenger Co., to support the need for private messenger and delivery services. Since, phones and vehicles were not as common as they are today, messages couriers were quite useful for an urban population mainly walking or using crowded public transit. The company started as an enterprise specializing in the routing of parcels from department stores. One of the main factors that explain the success of the enterprise is the early adoption of a logistic based on the consolidation of freight. It implies the combining of packages addressed to a certain neighborhood onto one delivery vehicle to optimize transport costs.

By the 1930s, the company expended to Oakland and then California and took the name it is known as today. It inaugurated United Air Express, offering package air delivery throughout the West Coast. The consolidation system was still the key infrastructure for efficient delivery. This service was also expanded to New York City area, as UPS's service was still mainly intra-urban. From the 1940's to the 1960's, many elements favored the growth of the company; the shortage of fuel and rubber, caused by WWII, considerably reduced the usage of personal cars. The post-WWII expansion of suburbs in many metropolitan areas, where people needed extra delivery services especially where large shopping malls opened, also provided for growth. Simultaneously, the consolidation of the service economy expanded the demand for parcel services.

A major change for the company occurred in the 1950s when UPS became a common carrier, receiving the right to deliver packages between any civic address within the territory this right was granted. However, it was not until 1975 that UPS was granted the right to be a common carrier for the 48 contiguous states and was able to offer second day deliveries throughout the United States. Shortly after, UPS expended from coast-to-coast and began to consolidate and expand its international services, initially in Canada and then Western Europe (Germany). By 1987, UPS was servicing almost every address in North America, Western Europe and Japan. This was done mainly be the establishment of high throughput distribution centers forming major air hubs. Since 1988, UPS operates its own airline; UPS Airline. From the hub, UPS delivers to more than 391 national airports and over 219 international ones. By 2001, UPS was offering direct air freight services to China. This totals about 1,000 flights per day.

The 1990s also represented an important stage in the logistics industry, namely through the growing number of transactions occurring online. The growth of Amazon-type commercial activities have been accompanied with a surge of parcels being shipped. Further, customers are able to track the location of their parcels throughout the distribution system.

3. The System

The UPS system is mostly aimed at servicing businesses since 80% of the traffic handled is business to business. To be effective, UPS relied on the efficiency of its distribution system. Reliability and efficiency are key issues in the establishment and management of freight distribution systems leaning on parcels. Optimal locations for the hubs are sought, as well as the possible delivery routes to avoid unnecessary movements, congestion and assure timely deliveries. Every single parcel has to go through the UPS network regardless of its destination. It could be bound for the other side of the planet or addressed to the neighbor; the parcel will have to go through the distribution system, which has an hub-and-spoke structure. This distribution system involves three major functions:

• Consolidation.  The first step obviously involves the collection of parcels by trucks assigned to specific routes. To optimize the driver's effectiveness, traffic trends and road conditions are continuously monitored to insure that the optimal path is taken. From his/her truck, the driver has access to an hand-held computer device (DIAD) that enables to capture information about each packages and delivery. This is essential to track a parcel or be alerted in any road change or unplanned situation. The parcels are then assembled at the closest distribution center.
• Distribution. The distribution function works on a hub to hub basis, depending on the distance involved, the mode used between hubs will either be trucking or air. Commonly, trucks are used for distances less than 400 miles (600 km). The main air hub is Louisville, Kentucky, which handles over 100 flights a day. In 2002, a new distribution center of 4 million square foot, called UPS Worldport, opened at the Louisville International Airport. The main land hub is Willow Springs in Chicago, which is the largest distribution center in the United States.
• Fragmentation. This step is the inverse of consolidation as parcels have to be delivered to each individual destination. Commonly, fragmentation is combined with consolidation as a delivery truck route can be integrated with a pickup route. This can be achieved only with a high level of control on the logistical chain.

Furthermore, UPS is investing massively in transport technology research. Innovations such as alternative fuels and electric vehicles are among being tested, reduction in fuel consumption being the main concern. Engineers and geographers study optimal roads and driving speeds to enhance efficiency and reduce costs. In that regard, UPS is also working on computer software to simplify shipping red tape, optimize routing strategies and facilitate package tracking. The system also enables customers to locate and track their parcel directly from the Internet.

UPS is a textbook example of intensive research in transport geography. Optimal routing systems are essential to assure efficient delivery in only 24 hours throughout the world. Rigorous planning can also save considerable amounts in transport costs such as fuel, wages, vehicle maintenance, etc... Strategies such as the consolidation principle and the hub network strategy are very important and useful in transport geography analysis.

4. Logistical Development and Integration

In recent years, UPS has shifted its attention at providing new distribution services and Internet-based activities. The UPS web site, which went online in 1995, is one of the most visited commercial site on the Internet and received on average 18.5 million tracking requests per day in 2007. The emergence of e-commerce is a significant growth segment of the company, as it handled more than 9 million parcels a day from online transactions using UPS as a freight forwarder. For instance, since 1995, the creation of UPS Logistics aims a closer integration of the supply chain of clients, an activity expanded by online parcel management where clients can use the Internet to call for pickup and keep track of deliveries, for which UPS is an acknowledged leader. Theoretically, UPS could ship parcels anywhere around the world in 24 to 48 hours, the only impediment being the custom procedures of the destination country.

The logistical expertise developed by UPS over the years thus represents a major growth segment of its services. These services cover a wide array of logistical activities including quick air or inexpensive ground delivery, global trade financing, Web retailing and call centers, warehousing and supply-chain management. All the major international transportation modes, namely containerized maritime shipping, have been integrated within UPS' distribution strategies. For instance, UPS also became the world's leading Non-Vessel Operating Common Carrier, implying that it books large volumes of slots on containerships, which can then be used to provide for the mobility needs of its clients along the world's major trade routes. It has become a good example of a third-party logistics provider using its existing infrastructures and management capabilities to expand in new business opportunities.

The company developed strategic alliances with major manufacturers and distributors where UPS takes over the management of the supply chain. Even large multinational corporations have difficulties managing their complex supply chains, since globalization has tremendously expanded their length and complexity. Examples of the involvement of UPS in the lines of business abound. In early 2000, UPS Logistics undertook a strategic alliance with Ford, under which it will manage the distribution of all Ford's vehicles produced in North America from factories to dealers. The goal is to reduce by 40% the time required for such deliveries, mainly through an optimization of rail and road carriers and thus reduce transportation, distribution and inventory costs. Similar agreements were reached with Hewlett Packard, Nike and Nokia, where UPS Logistics will manage parts of, if not their whole supply chain.