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CASE STUDYOptimizing Operations at UPS

United Parcel Service (UPS) is theworld’s largest air and ground pack-age-distribution company, withannual sales of about $34 billion. It isalso a leading provider of specializedtransportation and logistics services.Following its nearly 100-year promiseof the “best service and lowest rates,”this company currently delivers over13.6 million parcels and documentsevery business day within the UnitedStates and in over 200 other countriesand territories.

UPS’s primary business is time-definite delivery of packages anddocuments worldwide. It has estab-lished a global transportation infra-structure and comprehensive set ofguaranteed delivery services, includ-ing integrated supply chain solutionsfor major companies. UPS is theindustry leader in the delivery ofgoods purchased over the Internet.

UPS operates a ground fleet ofmore than 88,000 vehicles, includingits famous brown delivery trucks andlarge tractors and trailers. In theUnited States, UPS manages 27 largepackage operating facilities as well asover 1,000 additional smaller packageoperating facilities. The smaller facili-ties have vehicles and drivers sta-tioned for the pickup of packages andfor the sorting, transfer, and deliveryof packages. UPS owns or leasesnearly 600 facilities to support itsinternational package operations andover 750 facilities that support non-package operations.

This vast ground delivery systemis integrated with express air ser-vices that use 600 airplanes. UPSoperates the ninth largest airline inNorth America and the eleventhlargest in the world. UPS aircraftoperate in a hub and spokes patternin the United States with a primaryair hub in Louisville, Kentucky, andsix other regional air hubs in variouscities throughout the United States.These hubs house facilities for thesorting, transfer, and delivery ofpackages. UPS estimates that this

integrated door-to-door delivery sys-tem carries goods worth more than2 percent of the world’s grossdomestic product (GDP).

The company faces relentless com-petition from such other organizationsas FedEx, DHL Worldwide Express, theUnited States Postal Service, DeutschePost, and TNT Post Group. AlthoughUPS is the overall leader, the com-pany is not number one in every way.For example, FedEx, with about $34billion in annual sales, leads the mar-ket in overnight deliveries, whereasDHL is the leader in cross-border(international) express deliveries.

To meet competitors head on, UPSlong ago started investing heavily inadvanced information systems. Tech-nology powers virtually every servicethe company offers and every opera-tion it performs. UPS offers manychoices: overnight air versus low-costground delivery, simple shipping or apanoply of supply chain and ware-housing services. Customers canchoose the delivery option or servicethat is most cost-effective and appro-priate for their requirements.

UPS has been using its auto-mated package-tracking system tomonitor all packages throughout thedelivery process, collecting electronicdata on 93 percent of the packagesthat move through U.S. systemseach day. Its customers can tracktheir own parcels and letters usingthe UPS Web site, and many cus-tomers can also track their items ontheir own computers using a UPSsystem that the customers embedinto their own Web sites.

However, UPS’s competition nowuses much of this same trackingtechnology and is moving into areaswhere UPS has been dominant.FedEx, for instance, is trying tobecome a player in ground pal-letized-freight and internationalshipping. It wants to funnel packagedata from all of its operations into asingle transparent system. Fiercecompetition has stimulated UPS to

find even more innovative ways ofservicing customers while alsoreducing its own costs.

UPS management believes thecompany is still a leader in reliablepackage delivery and that itsunmatched integrated air andground network provide it with alevel of service quality andeconomies of scale that differenti-ate it from competitors. The com-pany’s strategy emphasizesincreasing core domestic revenuesby cross-selling its existing andnew services to a large and diversecustomer base. It hopes to grow itspackage business by offering ser-vices for synchronized commerce,helping customers manage theflow of goods, information, andfunds throughout their supplychains. For example, UPS devel-oped Web-based software forDaimlerChrysler AG to managecentrally all parts moving to andfrom more than 4,500 dealerships.While expanding these services,UPS hopes to limit the rate atwhich expenses are growing. It iscounting on information tech-nology–driven efficiencies toincrease its operating profit.

In 2003, UPS announced plans toinvest $600 million to simplify andoptimize its package-sorting anddelivery systems. Managementbelieves that this systems investmentwill produce significant gains in effi-ciency, reliability, and flexibility. Oncefully deployed in 2007 in over 1,000UPS package-sorting facilities, thesesystems are expected to reduceoperating costs by approximately$600 million each year. In 2003, UPSdomestic operating profit declined$304 million, caused by both slowgrowth in revenue coupled withhigher operating expenses. Highercosts for fuel and higher rents bothplayed major roles in expenseincreases. More efficient dispatchingand loading of delivery trucks couldreduce the distance covered by UPS

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drivers by about 100 million miles,saving as much as 14 million gallonsof fuel per year.

The project began when, in themid-1990s, the company recognizedit needed a new software program tomap its core operations in the UnitedStates, including its pickups and deliv-eries, its sorting facilities, and its deliv-ery centers. In the past, distributioncenter delivery truck loaders had toremember which trucks were headedwhere, then take the package off theconveyor belt, see the street on theshipping label of the package, andplace it on the correct truck. “It wasvery chaotic,” said Bob Sylsbury, aMount Olive loader.

Originally, to map every pickupand delivery option to select thebest was thought to be impossibleby Jack Levis, portfolio manager inthe UPS industrial engineering divi-sion. There would be more than15.5 trillion options for calculatingevery possible route using just 25 points. At that time (about 1995)UPS estimated that computing thiswould require 500,000 years withthe fastest computers in existence.So, the project turned to developingoptimization software to assess themost-feasible options for selectingthe least-expensive and shortestdelivery routes.

Meanwhile, during those yearshardware and software also be-came more powerful, the neces-sary computing time fell from yearsto months, then to days, and thento hours, and it is still droppingtoday. UPS now has optimizationsoftware for both its ground andair delivery services. Systems usethe real-time information producedby UPS’s package-tracking system,including bar-code labels with allthe data the company needs todeliver packages on time. Logisticssoftware aggregates ZIP codeinformation and uses the datasupplied by the bar codes to mapout how packages should beloaded onto trucks for the mostefficient deliveries.

Lou Rivieccio, a UPS divisionmanager, says the new system isimproving delivery from its Mount

Olive, New Jersey, delivery center,enabling drivers to increase theirdaily deliveries from 130 stops to145 stops while reducing their aver-age route by eight miles. Whereas inthe past loaders could load only2.5 trucks, with the new system eachloader can load between 3 and4 trucks. Moreover, the past confu-sion during loading resulted in anannual loader turnover rate of45 percent. That has now beenreduced to 8 percent at the 95 dis-tribution centers where the newsystem is already operating.

The client/server system for opti-mizing hub operations and deliveryfleets of the UPS ground network iscalled Hub and Feeder NetworkOptimization. Five full-time plannersset up problems using data onpackage origination, destination,and volume; data on sorting facilitylocation, capacity, and time and dis-tance between sites; and data froma flow file that defines paths pack-ages take between different sort-ings. Once the problem is set up, itis transmitted to a Unix server,which runs the computations andtransmits the results in the form ofreports back to the PCs.

Calculations for UPS hub andfeeder network optimizations are per-formed only several times each year.The information they provide helpsanswer long-range questions such aswhen UPS will run out of capacitywith its current network, where itshould expand, or the impact ofchanging the service level for itsground operations.

By 2006, UPS wants to use soft-ware on wireless handhelds so that itsdrivers, each averaging more than 100stops per day, can optimize their ownroutes. Early versions of the system arebeing tested on leading-edge customhandhelds with local and wide areawireless connectivity and the ability tocommunicate with peripheral devices,PCs, or global positioning satellites.The software on the handhelds will besynchronized with the dispatch plan-ning optimization systems deployed atUPS delivery centers.

The system for optimizing UPS airoperations at the UPS Worldport

hub in Louisville is called Volcano(standing for Volume, Location, andAircraft Network System). The sys-tem takes into account all UPS air-craft delivery routes to optimize fleetassignments, routes, and packageallocations within days or hours.Company executives expect the sys-tem to save more than $200 millionover the next 10 years by improvingthe planning and scheduling of airdeliveries. The company also usesthe system to help schedule thepilots and to help determine if UPSshould lease or purchase more air-craft, particularly in high-volumeperiods such as in the Christmasseason when required flights canjump by 45 percent. Preventing thecompany from leasing just one air-craft can save the company $3 mil-lion in costs.

UPS ran 1,500 optimizations tohelp determine where and how itshould build sites as it expands itsEuropean operations. So, for exam-ple, it selected the site for a newsorting facility in Germany and italso calculated how large the facilityshould be. It actually had selectedthe Louisville, Kentucky, site for itsWorldport air hub in 1999 and pro-jected the price tag to be $1 billion.The software selected the Louisvillesite over many other possible sitesbecause expanding that site ratherthan building a new one would beboth quicker and less costly thanother possibilities. In 1986, whenUPS was considering a new facilityin the Chicago area, it took four peo-ple three months to run a singleoptimization calculation. “Today youcan make a much more fine-tuneddecision with fewer people,” Levispoints out.

Optimization software has alsohelped so much in improving cus-tomer service, according to UPS, thatthe company has been able to cut atleast a day from the guaranteeddelivery time for certain shipments.For example, the company now canguarantee that shipment timebetween New York and Los Angeleswill be no more than four businessdays rather than the five days it usedto be.

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Chapter 13 Enhancing Decision Making for the Digital Firm 491

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 competitiveforces and value chain models.

2. What is UPS’s business strategy?How do information systems sup-port that strategy?

3. Why was a DSS to optimize deliv-ery routes so important for UPS?What decisions did it support?

4. How successful are these DSS forhelping UPS achieve a competitiveadvantage? Explain your answer.

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