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CASE STU DY
Optimizing Operations at UPS
United Parcel Service (UPS) is the worlds largest air and ground package-distribution company, with annual sales of about $34 billion. It is also a leading provider of specialized transportation and logistics services. Following its nearly 100-year promise of the best service and lowest rates, this company currently delivers over 13.6 million parcels and documents every business day within the United States and in over 200 other countries and territories. UPSs primary business is timedefinite delivery of packages and documents worldwide. It has established a global transportation infrastructure and comprehensive set of guaranteed delivery services, including integrated supply chain solutions for major companies. UPS is the industry leader in the delivery of goods purchased over the Internet. UPS operates a ground fleet of more than 88,000 vehicles, including its famous brown delivery trucks and large tractors and trailers. In the United States, UPS manages 27 large package operating facilities as well as over 1,000 additional smaller package operating facilities. The smaller facilities have vehicles and drivers stationed for the pickup of packages and for the sorting, transfer, and delivery of packages. UPS owns or leases nearly 600 facilities to support its international package operations and over 750 facilities that support nonpackage operations. This vast ground delivery system is integrated with express air services that use 600 airplanes. UPS operates the ninth largest airline in North America and the eleventh largest in the world. UPS aircraft operate in a hub and spokes pattern in the United States with a primary air hub in Louisville, Kentucky, and six other regional air hubs in various cities throughout the United States. These hubs house facilities for the sorting, transfer, and delivery of packages. UPS estimates that this integrated door-to-door delivery system carries goods worth more than 2 percent of the worlds gross domestic product (GDP). The company faces relentless competition from such other organizations as FedEx, DHL Worldwide Express, the United States Postal Service, Deutsche Post, and TNT Post Group. Although UPS is the overall leader, the company is not number one in every way. For example, FedEx, with about $34 billion in annual sales, leads the market in overnight deliveries, whereas DHL is the leader in cross-border (international) express deliveries. To meet competitors head on, UPS long ago started investing heavily in advanced information systems. Technology powers virtually every service the company offers and every operation it performs. UPS offers many choices: overnight air versus low-cost ground delivery, simple shipping or a panoply of supply chain and warehousing services. Customers can choose the delivery option or service that is most cost-effective and appropriate for their requirements. UPS has been using its automated package-tracking system to monitor all packages throughout the delivery process, collecting electronic data on 93 percent of the packages that move through U.S. systems each day. Its customers can track their own parcels and letters using the UPS Web site, and many customers can also track their items on their own computers using a UPS system that the customers embed into their own Web sites. However, UPSs competition now uses much of this same tracking technology and is moving into areas where UPS has been dominant. FedEx, for instance, is trying to become a player in ground palletized-freight and international shipping. It wants to funnel package data from all of its operations into a single transparent system. Fierce competition has stimulated UPS to find even more innovative ways of servicing customers while also reducing its own costs. UPS management believes the company is still a leader in reliable package delivery and that its unmatched integrated air and ground network provide it with a level of service quality and economies of scale that differentiate it from competitors. The companys strategy emphasizes increasing core domestic revenues by cross-selling its existing and new services to a large and diverse customer base. It hopes to grow its package business by offering services for synchronized commerce, helping customers manage the flow of goods, information, and funds throughout their supply chains. For example, UPS developed Web-based software for DaimlerChrysler AG to manage centrally all parts moving to and from more than 4,500 dealerships. While expanding these services, UPS hopes to limit the rate at which expenses are growing. It is counting on information technologydriven efficiencies to increase its operating profit. In 2003, UPS announced plans to invest $600 million to simplify and optimize its package-sorting and delivery systems. Management believes that this systems investment will produce significant gains in efficiency, reliability, and flexibility. Once fully deployed in 2007 in over 1,000 UPS package-sorting facilities, these systems are expected to reduce operating costs by approximately $600 million each year. In 2003, UPS domestic operating profit declined $304 million, caused by both slow growth in revenue coupled with higher operating expenses. Higher costs for fuel and higher rents both played major roles in expense increases. More efficient dispatching and loading of delivery trucks could reduce the distance covered by UPS

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drivers by about 100 million miles, saving as much as 14 million gallons of fuel per year. The project began when, in the mid-1990s, the company recognized it needed a new software program to map its core operations in the United States, including its pickups and deliveries, its sorting facilities, and its delivery centers. In the past, distribution center delivery truck loaders had to remember which trucks were headed where, then take the package off the conveyor belt, see the street on the shipping label of the package, and place it on the correct truck. It was very chaotic, said Bob Sylsbury, a Mount Olive loader. Originally, to map every pickup and delivery option to select the best was thought to be impossible by Jack Levis, portfolio manager in the UPS industrial engineering division. There would be more than 15.5 trillion options for calculating every possible route using just 25 points. At that time (about 1995) UPS estimated that computing this would require 500,000 years with the fastest computers in existence. So, the project turned to developing optimization software to assess the most-feasible options for selecting the least-expensive and shortest delivery routes. Meanwhile, during those years hardware and software also became more powerful, the necessary computing time fell from years to months, then to days, and then to hours, and it is still dropping today. UPS now has optimization software for both its ground and air delivery services. Systems use the real-time information produced by UPSs package-tracking system, including bar-code labels with all the data the company needs to deliver packages on time. Logistics software aggregates ZIP code information and uses the data supplied by the bar codes to map out how packages should be loaded onto trucks for the most efficient deliveries. Lou Rivieccio, a UPS division manager, says the new system is improving delivery from its Mount Olive, New Jersey, delivery center, enabling drivers to increase their daily deliveries from 130 stops to 145 stops while reducing their average route by eight miles. Whereas in the past loaders could load only 2.5 trucks, with the new system each loader can load between 3 and 4 trucks. Moreover, the past confusion during loading resulted in an annual loader turnover rate of 45 percent. That has now been reduced to 8 percent at the 95 distribution centers where the new system is already operating. The client/server system for optimizing hub operations and delivery fleets of the UPS ground network is called Hub and Feeder Network Optimization. Five full-time planners set up problems using data on package origination, destination, and volume; data on sorting facility location, capacity, and time and distance between sites; and data from a flow file that defines paths packages take between different sortings. Once the problem is set up, it is transmitted to a Unix server, which runs the computations and transmits the results in the form of reports back to the PCs. Calculations for UPS hub and feeder network optimizations are performed only several times each year. The information they provide helps answer long-range questions such as when UPS will run out of capacity with its current network, where it should expand, or the impact of changing the service level for its ground operations. By 2006, UPS wants to use software on wireless handhelds so that its drivers, each averaging more than 100 stops per day, can optimize their own routes. Early versions of the system are being tested on leading-edge custom handhelds with local and wide area wireless connectivity and the ability to communicate with peripheral devices, PCs, or global positioning satellites. The software on the handhelds will be synchronized with the dispatch planning optimization systems deployed at UPS delivery centers. The system for optimizing UPS air operations at the UPS Worldport hub in Louisville is called Volcano (standing for Volume, Location, and Aircraft Network System). The system takes into account all UPS aircraft delivery routes to optimize fleet assignments, routes, and package allocations within days or hours. Company executives expect the system to save more than $200 million over the next 10 years by improving the planning and scheduling of air deliveries. The company also uses the system to help schedule the pilots and to help determine if UPS should lease or purchase more aircraft, particularly in high-volume periods such as in the Christmas season when required flights can jump by 45 percent. Preventing the company from leasing just one aircraft can save the company $3 million in costs. UPS ran 1,500 optimizations to help determine where and how it should build sites as it expands its European operations. So, for example, it selected the site for a new sorting facility in Germany and it also calculated how large the facility should be. It actually had selected the Louisville, Kentucky, site for its Worldport air hub in 1999 and projected the price tag to be $1 billion. The software selected the Louisville site over many other possible sites because expanding that site rather than building a new one would be both quicker and less costly than other possibilities. In 1986, when UPS was considering a new facility in the Chicago area, it took four people three months to run a single optimization calculation. Today you can make a much more fine-tuned decision with fewer people, Levis points out. Optimization software has also helped so much in improving customer service, according to UPS, that the company has been able to cut at least a day from the guaranteed delivery time for certain shipments. For example, the company now can guarantee that shipment time between New York and Los Angeles will be no more than four business days rather than the five days it used to be.

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Sources: Beth Bacheldor, Breakthrough, Information Week, February 9, 2004; Anna Maria Virzi, United Parcel Service: Sticky Fix, Baseline Magazine, February 5, 2004; United Parcel Service, Annual Report for Fiscal Year Ending December 31, 2003, Form 10-K, U.S. Securities and Exchange Commission; Steve Berez and Chris Zook, UPS Links to Customers, Optimize Magazine, February 2004; and Paul McDougall, Load Em Up, Information Week, September 29, 2003.

CASE STUDY QUESTIONS

1. Analyze UPS using the competitive forces and value chain models. 2. What is UPSs business strategy? How do information systems support that strategy?

3. Why was a DSS to optimize delivery routes so important for UPS? What decisions did it support? 4. How successful are these DSS for helping UPS achieve a competitive advantage? Explain your answer.