Consultant Insight: UPS focuses on efficiency investments as it achieves strong Q2 financial results

UPS reported another financially strong quarter July 26 and demonstrated that its strategy – “Better, not Bigger” – is proving successful. Meanwhile, the company is focusing efforts on operational efficiencies through technology investments as the global economy shifts into a slower mode. UPS reported total revenue for the second quarter of $15.5 billion, up 7.5% year over year, according to its earnings report. Total operating profit was up 16.7% to $1.8 billion. All services reported revenue increases, primarily driven by revenue management that included higher surcharges and, in particular, higher fuel surcharges . While the company enjoyed a strong financial quarter, once again, UPS reported declines in volumes in its U.S. domestic and international divisions . [caption id="attachment_69752" align="alignright" width="371"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] "In the second quarter, the macro environment remained dynamic. We expected volume levels to decline from last year, but they did more than we planned,” UPS Chief Executive Officer Carol Tome told analysts on the company's earnings call. “Despite the decline in volume, we continue to win in the most attractive parts of the market with strong gains and revenue quality.” As the global economy slows, how much longer UPS is able to reap the benefits of its strategy is debatable. So, to ensure it is operating as efficiently as possible, the company is investing in a number of operational improvements and "driving more productivity from the assets we own," according to Tome. Moving from digital literacy to digital fluency In turn, UPS is aiming to invest in its team and implementing training to equip them with new skills, Tome said. “The entire executive leadership team, including me, has completed this digital fluency training, and we are moving quickly to train our next two levels of leadership, which brings me to innovation-driven," Tome said. "This is about the future of UPS and driving more productivity from the assets we own. The changes we've already made have significantly increased the agility of our network and are driving productivity improvements.” As an example, Tome noted that during Q2 in the U.S., UPS was able to optimize trailer loads by eliminating 1,600 loads per day compared to Q2 2021. In addition, UPS launched Total Service Plan across its U.S. network on July 11, designed to create a more predictable operating environment. The initiative aims to minimize driver wait times, reduce idle times across the network, lower costs and provide greater predictability for customers and operators, according to Executive Vice President and Chief Financial Officer Brian Newman. Meanwhile Tome highlighted that a 10-minute improvement within UPS' integrated network is worth $257 million. UPS has also worked to improve delivery density. Focusing on SurePost Redirect to improve delivery density has not "moved the needle" despite Q2 density being the best since 2019, according to Tome. The company is piloting with a third-party technology company that powers order management for most retailers in the U.S. The company holds an order until it can match another order going to the same address, and then release both orders for delivery. “This virtual hold is only as long as the retailer's service level agreement allows,” Tome said. “We estimate the cost of the last mile for us is $5.50. That incremental package cost us $0.60.” Tome said UPS plans to go live in Q3 with one customer, and another nine customers are in talks to take advantage of the offering.” These investments, along with labeling and bagging automation, as well as deployment of its smart package smart facility to 100 buildings across the network, are expected to lower UPS' cost-per-piece growth rate in the second half of 2022. "The combination of our revenue and cost initiatives will enable us to grow revenue per piece faster than cost per piece," Newman told analysts.

Consultant Insight: UPS focuses on efficiency investments as it achieves strong Q2 financial results

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