UPS Holiday Season Fiasco: A Failure of Strategic Planning

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There were several stories about UPS's, and to a lesser extent FedEx's, widespread failures to deliver Christmas presents in the promised delivery windows. UPS spokeswoman Natalie Godwin said in a statement, 'The volume of air packages in our system exceeded the capacity in our network.'

Neither company has been overly specific about just what percentage of shipments were affected, or just what wrong. But from my perspective, this debacle reflects a failure of strategic planning. In contrast to manual warehouses, which can hire temp workers to handle a surge in holiday shipments, it is much more difficult to flex transportation assets and highly automated sort centers of the kind that UPS and FedEx run.

According to BloombergBusinessweek, UPS had planned to add 55,000 part-time workers, lease 23 extra planes, and build a second trucking fleet to handle the seasonal package flow. Obviously, they under forecast the demand and once they discovered that fact, it was too late to recover. You can't lease new planes quickly or easily. Similarly, a highly automated sort center has a certain set capacity. The expensive material handling sorting equipment needs to be bought and installed months in advance.

Buying expensive material handling equipment, or new planes and trucks, for a surge that occurs only in a small part of the year, clearly means that these assets are underutilized for most of the year. This is expensive and drives up costs. To maintain profitability, asset intensive companies need to have higher ongoing prices to amortize the added costs of maintaining extra capacity. Or they need to charge extra during the surge, which in some ways is fairer because the customers driving the extra costs pay the fees. Neither UPS or FedEx chose to do the latter, probably out of fear of losing market share to their competitor.

In contrast, in a manual warehouse, you can get new workers trained to do the simplest tasks in about two days, and give them progressively more difficult tasks over subsequent days. In short, if you begin to see that demand is greater than you expected, it is much easier to recover. However, less automation also means each time an associate touches a package, the costs will be higher in comparison to more automated facilities.

Clearly, strategic planning is critical. The key UPS and FedEx executives probably put their strategic plans together at the end of their last financial year, and then reviewed those plans on a quarterly basis. UPS and FedEx needed to balance the added costs of adding assets and people to handle surge capacity against the risk of adding too many new assets, and unduly driving up their costs up and making themselves less profitable and less competitive on an ongoing basis. However, if they added too few assets, they risk losing market share to their competitor. Because both UPS and FedEx failed, we will probably see retailers using more regional carriers next year.

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