UPS – How 3PLs are Confronting Climate Change
UPS' battle with climate change.
Climate change will undoubtedly affect the U.S. third party logistics industry. I have decided to discuss how regulatory changes targeting emissions reductions will impact United Parcel Service (NYSE: “UPS”).
To understand the scope of its daily fuel usage, a quick look at UPS’ 2015 annual report demonstrates the magnitude of its shipping operation. UPS performs 1,955 flights daily and contains 110,000 vehicles in its shipping fleet [1]. The Company is so levered towards fluctuations in fuel prices that it has implemented fuel surcharges. The company passes on fuel cost increases to its customers when the national U.S. average on-highway spot diesel price increases based on a designated pricing grid published to all customers [2]. This is done to insulate the Company’s bottom line from the price of this volatile commodity.
Due to the extreme fuel usage inherent in this business model, third party logistics will be massively affected by impending EPA emissions requirements. As discussed in the Commercial Carrier Journal, President Obama’s Climate Action Plan created a minimum standard for greenhouse gas (“GHG”) emissions for heavy duty trucks by 2018. Specifically, by mandating certain vehicle weights and fuel efficiency standards, trucks introduced in the post 2018 period will have 25% lower CO2 emissions and fuel consumption than an equivalent tractor introduced prior to 2018 [3, 4]. Legislation also targets idle trucking hours, which according to Mechanical Engineering, burns more than 800 million gallons of fuel a year in the long-haul trucking category alone [5].
UPS has made significant strides to combat these regulatory hurdles, primarily by innovating its current fleet to meet new environmental standards. Per the Company’s investor presentation, of its current fleet of 110,000 vehicles, the company now has 7,270 vehicles which employ alternative fuel sources [6]. This includes inputs such as CNG, LNG, Propane, Hybrid Electric and Ethanol powered vehicles. Furthermore, in 2015, UPS was one of the initial 13 leading companies to take the American Business Act on Climate Pledge. In doing so, the Company committed to decreasing it GHG intensity by 20% by 2020 [1]. Interestingly, UPS’ 10K illustrates just how effective conversions to alternative fuel sources can be for reducing GHG emissions and meeting this 20% reduction goal. Through the fleet conversions UPS has already made (based on abovementioned statistics, that is ~7% of the current fleet), UPS has already decreased its status quo fuel consumption by 6% [1].
UPS has also introduced truck technology specifically designed to target the tremendously wasteful idling issue. By the end of 2015, telematics were installed on close to 83,000 UPS vehicles [1]. This hardware allows UPS to understand specific truck performance in areas such as speed, RPM, oil pressure, seat belt use, number of times the vehicle is placed in reverse and, most importantly, idling time. Using this data, UPS implemented driver coaching to help reduce fuel consumption and emissions (all the while decreasing maintenance costs and increasing driver safety).
Although UPS has taken significant steps to address climate change’s impact on its business model, I believe there are additional operational initiatives the company can take to reduce its GHG emissions. First, pricing schematics should be far more punitive for users who choose an energy inefficient strategy to move products. For instance, customers that provide only LTL shipments vs. TL shipments should be charged a penalty payment as they have now caused underutilization at the trailer. In addition, the Company should continue to further explore conversion of its fleet to alternative fuel sources, particularly natural gas. As UPS is largely a U.S. domestic shipper, it should take advantage of the North American shale gas revolution, which has rendered an abundance of natural gas here in the U.S. as a cheap and clean energy source. In fact, the U.S. Energy Information Administration (EIA) estimates that the U.S., as of Jaunuary 1, 2013, had 2,276 trillion cubic feet (Tcf) of technically recoverable natural gas, enough gas to last 80+ years at forecasted consumption rates [7].
I would lastly compensate drivers not only for hours worked but also for increasing their route density (e.g. ability to fill the trailer with as many packages as possible in a single run), decreasing idle time and using the appropriate technology to execute on the most fuel-efficient driving route. We have studied again and again at HBS how financial incentives drive human decision making (e.g. in the beer simulation game how the excessive cost of backlog vs. inventory holding drove people to over-order; in the Nordstrom case how individuals manipulated their SPH figures to increase financial bonuses). Proper financial incentives around fuel efficient driving will help reduce UPS’ carbon footprint and fulfill their broader corporate goal of a 20% reduction in GHG by 2020. [792 words]
[1] UPS 2015 Annual Report (SEC Filing 10K). http://nasdaqomx.mobular.net/nasdaqomx/7/3491/4988/.
[2] http://www.wsj.com/articles/fuel-prices-fall-but-fedex-and-ups-boost-surcharges-1444088938.
[3] Commercial Carrier Journal. Aug2013, Vol. 170 Issue 8, p15-15. 2/3p.
[4] https://www.epa.gov/newsreleases/heavydutyaug162016.
[5] Mechanical Engineering. Jan2005, Vol. 127 Issue 1, p32-34. 3p. 2 Color Photographs.
[6] UPS Corporate Presentation. Updated August 8, 2016. http://phx.corporate-ir.net/phoenix.zhtml?c=62900&p=irol-investorpres.
[7] “How much natural gas does the United States Have? And how long will it last?” U.S. Energy Information Administration. http://www.eia.gov/tools/faqs/faq.cfm?id=58&t=8.
Very interesting post! At UPS’s massive scale, even seemingly minor changes could make a huge difference. I remember reading that back in 2007 UPS had changed their truck GPS systems to only allow right turns which saves gas due left turns having longer idle times. UPS ended up saving 29 million miles driven and over three million gallons of fuel as a result of that change. It’s good to see that more recently, UPS has continued to think proactively about sustainability as they have been testing electric vehicles and drone technology for last mile delivery. Many competitors such as Amazon are looking at similar technologies, and I think that the player that can demonstrate the most environmental and cost innovation longer term is going to be most well positioned to win in this logistics industry.
Clearly a well-researched and thoughtfully conceived post. Has UPS seriously considered electric drones in package delivery? This could be a real game-changer in their sustainability efforts. I think they are a more natural player than Amazon to explore this technology, given their infrastructure and greater understanding of package logistics. However, a counterpoint is that UPS does not have the same innovative technology DNA as Amazon.
Thanks for this post! As an avid online shopper, I was really interested to read about how climate change is affecting UPS and its efforts to curb the effects. You mentioned that UPS passes on price increases in oil to its consumers – does a government service like USPS do the same? If not, I wonder if UPS’ business suffers when oil prices are high, as consumers choose USPS for the price savings.
Also, you suggested UPS charge consumers for underutilization of the trailer – although this would be profitable for UPS, this may have negative ramifications for the rest of the environment. Essentially, this may incentivize consumers to consume more than they need, further contributing to waste and climate change. UPS should holistically consider the impact of its decisions when pursuing sustainability efforts.