UPS is being tossed by the ecommerce wave as much as any company. Mostly, it's good news, with soaring ecommerce package volumes.
But there is pressure on rates from free or low cost shipping – etailers can only afford to pay parcel carriers so much. Combined with high costs due to lower delivery density and much fewer parcels per stop in consumer neighborhoods versus its traditional B2B deliveries, and margins and profits are threatened even as network volumes grow.
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| UPS says about 80% of eligible ground volume will be processed in automated facilities of various types this year, up from about half in 2017. |
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That led Big Brown to announce a couple of years ago plans to spend $20 Billion (with a B) over three years to improve its technology and add more infrastructure capacity.
Given all the market changes, some significant level of technology investment would seem almost mandatory, but when first announced by CEO David Abney, Wall Street was not impressed. The news caused a sell-off, and the company's stock price is still 11% below its level before the announcement.
But according to an article this week in the ATA's Transport Topics magazine, UPS is confident the investments will soon payoff for shareholders - even as one analyst says shareholders may not be too patient.
"When this capital plan is largely done, investors are expecting to be paid back in terms of a significant increase in share buybacks and/or dividends," Loop Capital Markets analyst Rick Paterson told Transport Topics.
While the investments are going to several key areas, and also include the purchase of Boeing 747 and 767 freighters to add air cargo capacity in addition to the pure technology spend, the centerpiece for now are new UPS automated sortation hubs, such as one recently opened in Salt Lake City.
The facility makes extensive use of conveyors, sorters, high speed bar code scanning, in-line laser-based package dimensioners, and more.
UPS says the throughput at the new facility is pace is 10 times greater than a traditional mostly manual sorting facility.
Nate Branch, a UPS division manager for transportation, told Transport Topics that the new Salt Lake City hub is like "a shiny, new toy" that can be programmed in minutes to sort packages to any of its 100 outbound doors.
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The facility began operating in November and has capacity to process almost 70,000 pieces an hour. That helped alleviate network congestion during the busy holiday season in the western US, UPS says.
"It was the best peak I've been involved in 10-plus years," Branch said. "I've never seen a UPS facility run so clean and efficient during peak season."
 UPS says about 80% of eligible ground volume will be processed in automated facilities of various types this year, up from about half in 2017. The overall annual savings and cost avoidance from these investments is as much as $1 billion.
It will be interesting to see how quickly UPS builds another facility as automated as the one in Utah.
In addition to the sorting automation and new cargo planes, UPS is also enhancing its home grown routing software called Orion – which it says has already delivered $400 million in annual savings by reducing miles driven by 100 million after an upgrade a few years back.
UPS now says Orion is being further enhanced to make dynamic route changes as the day proceeds and to avoid traffic congstion.
And UPS is also investing heavily in its tools to forecast and route parcels across its vast network.
Not all analysts are confident the investments will pay off. For example, Morgan Stanley analyst Ravi Shanker says that the nature of ecommerce makes it tough for couriers because the promise of free shipping undercuts their ability to raise prices, as we noted above.
"We're not bullish in terms of hoping these guys can leverage the investments to grow their margins over time," Shanker said. "We think they need this essentially to stay afloat."
But Margaret Vitrano, a fund manager with ClearBridge Investments, is mroe bullish, saying that "Our confidence level is higher than it was a year ago after they put themselves on the path."
Says SCDigest: It's a massive investment indeed – but what choice does UPS really have, and the company has all the data it needs to analyze what the payback will be from technology.
Any reaction to UPS's invesment plans and automated sortation centers? Let us know you thoughts at the Feedback section below.
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