Jean-Paul Rodrigue (2017), New York:
Routledge, 440 pages.
Third Party Logistics Services Providers (Under Construction)
Author: Dr. Jean-Paul Rodrigue
1. The Emergence of Third Party Logistics Services Providers
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
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 310 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. 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
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, messenger
couriers were quite useful for an urban population mainly walking or
using crowded public transit. The diffusion of the telephone rapidly
undermined this business model and incited the company to shift towards
the delivery of parcels from department stores. At that time, most urban
residents did not own an automobile and were thus unable to carry bulky
purchases through the transit system. 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.
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.
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:
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 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.
- 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 distribution
center of 5.2 million square foot, called UPS Worldport, opened at
the Louisville International Airport. This facility handles
about 1.6 million packages each day. The main land hub is the
Chicago Area Consolidation
Hub, which is the largest distribution center in the United
- 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. In
instances where there is not enough density to justify a
commitment of distribution assets, UPS will deliver to the local
post office, which will cover the last mile.