‘Keep on Trucking’ : UPS and the digital supply chain
Autonomous trucks are likely to hit the road sooner rather than later. Who will win the logistics battle – the incumbents (UPS, FedEx, DHL, etc.) or the tech giants (Amazon, Uber, etc.) ?
The race to digitize logistics supply chain just became more real.
On October 24, 2017, the American Trucking Association (ATA) released the first-ever policy guidelines on the development of automated trucks. The document explores eight key areas e.g., safety, infrastructure, connectivity, maintainability, etc. This policy guide will likely form the foundation of more comprehensive frameworks that support the implementation and operations of autonomous trucking [1].
UPS, a provider of logistics infrastructure is facing increasing pressure to digitize its supply chain service. In 2016, UPS generated $51 billion of revenue from its package operations by delivering 4.9 billion packages globally. This operation was supported by 108,000 vehicles in its delivery fleet [2]. The longer-term adoption of autonomous trucking will be a game changer for UPS in coordinating and deploying resources efficiently.
Higher efficiencies are crucial as UPS should expect to face increasing demand from its customers in terms of delivery volume as well as service levels. Volume will be driven by the burgeoning e-commerce sector. In the U.S., e-commerce is expected to grow 8-12% per annum to a $632 billion industry by 2020 [3]. To better serve customers, online businesses are demanding efficiency, reliability and transparency from logistics service providers. Marc Lore, president and CEO of Walmart U.S. eCommerce, says “two-day shipping is just table stakes [4].”
In addition to direct competitors of UPS (i.e., FedEx and DHL), tech giants such as Amazon and Uber are seizing the opportunity to play in this space. Amazon, who captured approximately half of e-commerce sales in 2016 [4], is looking to decrease its reliance on ‘middle-men’ logistics providers by exploring driverless technology and drone deliveries [5]. Last year, Uber acquired Otto, a self-driving truck company and successfully executed a shipment delivery in Colorado [6]. These moves threaten UPS’s leadership in logistics.
Staying ahead of the pack.
In the short-term, UPS has been upgrading technology platforms across the value chain. At its busiest hubs, fully autonomous systems are being implemented. UPS also continuously improves on its high-tech fleet management system, ORION. For customer-facing services, UPS released a chatbot that leverages artificial intelligence to deliver a convenient customer experience. This allows users to locate UPS stores, estimate shipping rates and track packages through everyday apps such as Facebook [7].
In the medium to longer-term, UPS is playing an active role as a thought leader in the changing logistics landscape. One example is a five-part white paper series entitled ‘Routes to the Future’. The UPS team discusses transformative trends and key issues in this space that include themes such as driverless cars, analytics in logistics, applicability of modular vehicles, etc. [8]
At the operational level, UPS has been experimenting with autonomous truck technology and last mile drone deliveries. Earlier this year, UPS tested a truck-mounted drone with the capability of flying for 30-minutes whilst carrying 10 pounds of package weight. This approach will reduce the distance of each truck route leading to an estimated savings of $50 million per year for every mile reduction [9]. This combined with autonomous trucking systems can lead to substantial time efficiencies and cost savings.
Opportunities to be seized
In order to solidify its position, UPS should consider forming partnerships. There are 3 main stakeholders the UPS can have a mutually beneficial relationship with –
- Government / regulatory authorities
UPS has one of the most advanced data-driven logistics system with a global presence. The wealth of data collected from their systems can provide authorities with information that shape regulations to govern autonomous trucking. By being an active contributor and thought leader, UPS can also play a part in establishing a sustainable ecosystem for autonomous trucking.
- Cybersecurity firms
As systems across UPS platforms become more integrated, there will be an increased vulnerability to cyber attacks that could have dire consequences. In order to be in the forefront of cybersecurity, UPS should form close partnerships with firms who are leaders in creating cutting-edge technological solutions to such threats.
- Tech giants
Instead of competing head-to-head with tech giants for a slice of the logistics pie, UPS can form partnerships to carve out a space in the value chain that leverages the positioning of these companies. For example, UPS can form a partnership with Uber to execute last mile deliveries across different geographies.
Questions that yet remain
As we move closer towards adopting autonomous trucks, UPS will continue to face several uncertainties:
- How should UPS manage the regulatory uncertainty around autonomous trucking?
- What are the big technological investment bets for UPS to make and when should these be done?
- How will UPS resize its truck driver workforce who are “the face of the company”?[10]
- What type of insurance policies will provide sufficient coverage for the risks of autonomous trucking?
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Sources:
- Seth Clevenger, “ATA Adopts Automated Truck Policy”, TTNews, October 26, 2017, [URL], accessed November 2017
- UPS Fact Sheet (PDF file), downloaded from UPS website, [URL], accessed November 2017
- Business Insider, “National Retail Federation estimates 8-12% US e-commerce growth in 2017”, February 10, 2017, [URL], accessed November 2017
- Krystina Gustafson, “Amazon captured more than half of all online sales growth last year, new data shows”, CNBC, February 1, 2017, [URL], accessed November 2017
- Danielle Muoio, “Amazon is quietly exploring ways to use self-driving vehicles to deliver packages”, Business Insider, April 24, 2017, [URL], accessed November 2017
- Davey Alba, “Amazon’s Real Future Isn’t Drones. It’s Self-Driving Trucks”, Wired, December 20, 2016, [URL], accessed November 2017
- Sara Castellanos, “New UPS CIO Envisions ‘Autonomous Everything’”, WSJ Blog, Novermber 29, 2016, [URL], accessed November 2017
- Routes to the Future Volume 1: How we’ll get around (PDF file), downloaded from UPS website, [URL], accessed November 2017
- Benjamin Zhang, “UPS wants to turn its delivery trucks into motherships for autonomous drones”, Business Insider, February 21, 2017, [URL], accessed November 2017
- UPS Pressroom, “UPS Tests Residential Delivery Via Drone Launched From Atop Package Car”, 21 February, 2017, [URL], accessed November 2017
Well researched article Anusha! On the self-driving truck side, could UPS approach companies that are not currently directly part of the delivery supply chain. Indeed, dealing with Uber or Amazon, who both have direct incentives in capturing value down (Amazon) or up (Uber) the delivery chain, might be trickier than partnering with a Google or a Tesla, who both have less to no role in the delivering industry. Doing so, they might be able to better secure their current role in the supply chain.
As far as UPS’s drivers are concerned, I wonder if the company could start investing in trainings to prepare them for future roles. I’m sure that the introduction of drones and driverless cars in UPS’s supply chain will require a new type of qualified workforce. To a certain extent, current drivers, if trained in advance, could help fill that gap.
Very interesting topic, Anusha. I agree with Eric’s point above and I’ll even push his thinking further – do you think a company like Uber has any incentives to partner with UPS? From what I know, current outrageous valuations for Uber are based on the premise that Uber will become a transportation company and use its fleet of cars and drivers to “deliver” not only passengers and meals but also packages and cargos. I think you are absolutely correct in that UPS should think about long-term strategic partnerships, but to Eric’s point, they might want to consider partnering with companies that offer complementary services like Amazon or other prominent e-commerce firms. I would also urge UPS to stay ahead of the competition in terms of driverless cars and trucks – if UPS falls behind in adopting the new technologies (for the sake of saving face with their employees) they may risk losing their competitive advantage and market leadership.
Compelling analysis, Anusha! You effectively highlight what is clearly a major issue for UPS and make some compelling recommendations. Some additional considerations you prompted me to think about were how UPS can affect subsequent government regulatory efforts/decisions, and whether this move to autonomous trucking offers an opportunity for UPS to further differentiate itself from competitors, or if this development makes UPS more vulnerable to competitors threatening it’s business. I’d be curious about your perspective on that question, as well as your thoughts on the question Eric presented regarding the companies UPS might partner with. One other concern I’d have is whether other tech companies (Amazon, Tesla) might also seek out UPS’ competitors for partnerships to then challenge UPS directly.
Really interesting topic, Anusha! I think Eric and Faraz bring up great points. This article cultivated related thoughts for me. I see autonomous trucks as an exciting prospect for UPS, but primarily in hub to hub, long distance transport. In these situations, transportation and travel time is limited by regulations around how long truck drivers can be on the road. Driverless trucks would enable faster transport, as the truck could drive long distances without stopping (it would be even more exciting if trucks did not need to stop for gas!).
For delivery from hubs to end-recipients, I think it will be much more challenging for UPS to move to driverless vehicles. While the trucks are used at this point to transport from hub to recipient address, they are even more important in the delivery from truck to door. If UPS removes drivers from trucks at this point in the delivery process, who takes the packages from the trucks and delivers to the door? I can’t imagine a recipient going to the driverless truck to retrieve their package (and staying home all day to wait for the truck to arrive). However, I do think autonomous vehicles will so significantly change the way we operate that there might be a behavior change that will naturally occur. I also think the work UPS is doing with drone delivery is just as intriguing as driverless trucks, and could be the exact innovation to bridge the truck/hub to end recipient gap.
Love the article Anusha! Responding to your question regarding insuring against autonomous trucking risks, I agree with all of your recommendations above and would add a couple of eggs into UPS’ diversification basket. While UPS should continue investing in automated trucking technologies, the future remains amorphous as to when/how widespread autonomous trucking will take off, and the regulatory hurdles will likely be tackled country by country.
In the meantime, UPS can also focus on geographic expansion, particularly in emerging markets where delivery infrastructure exists (roads, address database) but lags that of more modern countries. These countries may have more infrastructure advancements to make before autonomous trucks could be a reality. These countries are more likely to have different cultural customs that may make large swaths of populations hesitant to adopt autonomous trucking over the medium- or in some cases even long-term even if their infrastructure can accommodate autonomous driving. Delivery services in many emerging markets are not yet widely established so there is room for UPS to enter these markets from a competitive standpoint.
While I agree that UPS should remain in the autonomous driving fight, I think a substantial opportunity exists to enter new markets and gain market share before autonomous trucking becomes a widespread reality.
The biggest concern I have after reading this (very well written!) article is around your first/second questions. I’m curious as to what UPS is doing internally to make sure they are staying ahead of the curve regarding the autonomous trucking trend. It is a delicate balance to strike — how do you pour a ton of capital into researching a project when regulations are constantly changing? Even though you know it might be the right thing in theory / in the very long-term, does it make short-term economic sense?
More importantly, UPS doesn’t strike me as a technology company at its core. I don’t think it should waste time / energy / resources developing autonomous driving technology like it is currently starting to do; however, to Faraz’s point, UPS risks losing their market leadership if they DON’T have these technologies ready to go when regulation allows. That brings us back to our chicken and egg scenario. I think UPS can solve that problem by partnering not with delivery focused firms like Uber, but with technology firms that are working on autonomous driving technology like Apple or Google or Tesla. If UPS partners/contracts with these kinds of companies, they gain first access to the autonomous driving technology; they don’t have to focus on developing that technology themselves, but can still provide input on how the technology needs to be created to work for the delivery world. I’m curious to know what you think about this approach as opposed to the internal research approach UPS is taking now.
Interesting article Anusha! I think this is a very interesting problem for UPS as it puts its physical network and logistical power to the test against the advanced technology that firms like Amazon and Uber can leverage in delivering products to consumers.
When it comes to autonomous trucks, I think it will be very challenging for UPS to utilize this technology as it will require heavy investment into this new technology as well as into its existing facilities (to accommodate an entirely new kind of vehicle). Furthermore, as SRS513 mentions above, I think there will only be select parts of the supply chain where UPS could incorporate this technology, so it would be interesting if UPS could incorporate autonomous trucks into just the long-haul portions of the supply chain and keep their current trucks as the actual delivery vehicles. Also, I wonder how necessary it is for UPS to compete with Amazon/Uber on this front versus focusing on its more direct competitors. While Amazon is currently a huge UPS customer and I think UPS should stay ahead of the technological curve, I worry that focusing too much on autonomous technology might distract UPS from its core competencies and direct competitors. I guess time will tell!
Great article and topic Anusha. UPS is certainly facing critical times given the advancement of technology and new big-pocket players in the market – such as Amazon and Uber.
On your first question on how UPS can do to manage the regulatory uncertainty, I think this actually raises a big opportunity for the company. All things being equal – equally investing in the technology -, there is a fair chance that the company who manages better the political relationships on the topic could get a bigger gain in the regulatory outcome – even knowing how unpopular Uber is on the regulatory field for instance. I am thinking on scenarios like regulations that could require human supervision for a period of time or regulations that would allow the system in certain areas / routes in which the use of these vehicles could only make sense with volumes and frequencies like those of UPS.
Finally, on the question of resizing of the workforce, I believe there is sufficient time – and expected business growth in this time – until the technology is operational, so the company can easily plan capacity accordingly and not have to reduce the number of employees. Employment in the industry will probably not grow though, but this is sort of the expected outcome – and one of the major gains – of autonomous trucks.