UNITED PARCEL SERVICE, Inc.

UNITED PARCEL SERVICE, Inc.

BACKGROUND INFORMATION

In 1907, 19-year-old James E. Casey established the American Messenger Company in Seattle, Washington, which would be known six years later as the United Parcel Service (UPS). Despite stiff competition and a timeframe of hundred years, this “messenger” company transformed from a business located in a basement with deliveries made by bicycle to the world’s largest package delivery company, delivering today to 6.1 million customers in 200 countries by air, sea and land.

With such a large cliental and major domestic competitors like USPS and FedEx, UPS has had the opportunity to reinvent itself throughout the years and continues to lead the pack in logistics, supply chain management and e-commerce. However, reinventing continuously a 42.6 billion dollar corporation is obviously not an easy task and presents its share of problems…

PROBLEM IDENTIFICATION

UPS has been experiencing increasing fuel costs lately, as a result of energy prices that are escalating around the world. As a logistics provider, fuel costs account for a significant part of operating costs at UPS. Thus, an increase in fuel costs jeopardizes directly the organization’s profitability (see Exhibit 1).

MEASURE

From 2006 to 2007 UPS experienced an increase in fuel costs of 12.0% on top of the 20.2% increase from 2005 to 2006. Indeed, according to the 2007 Annual Report, fuel costs went up to $3 billion last year (see Exhibit 2). These increases in operating costs would have been even higher, 27.3% from 2005 to 2006, had UPS not experienced gains from hedging this commodity.

ANALYZE

There are many possible strategies that UPS could utilize to cope with the escalating fuel costs. Given the size of UPS, the worldwide freight industry, and utter significance of not proactively addressing this issue (which is always an option), it seems that UPS has three prominent methods for combating this increase in operating costs.

The first alternative is to use less fuel. One way to achieve this goal is to use vehicles powered by alternative fuels or hybrid technology. While this would require substantial investment in the short-term, the effect would be a long-term fuel savings that is very likely to supersede the initial investment. In May 2007, UPS acquired 50 hybrid electric vehicles (HEVs) to operate in Atlanta, Dallas, Houston and Phoenix. The new trucks joined roughly 20,000 low-emission and alternative-fuel vehicles already in use. "We're excited to be among the first to deploy the latest in HEV technology because it promises a 45% increase in fuel economy in addition to a dramatic decrease in vehicle emissions," said Robert Hall, director of UPS Ground Fleet Engineering.