UPS President of U.S. Operations Myron Gray spoke at the 2017 Investors Conference, explaining how change will drive the logistics network of the future.
Thanks to all of you for joining us today.
The world is changing rapidly and, at UPS, we are embracing the opportunities of that change in our U.S. operations.
The biggest change has come from the e-commerce revolution, which started as a consumer phenomenon, but is changing the needs and behaviors of all our customers. Without a doubt, this is the biggest growth opportunity in the logistics business and it comes with its own dynamics:
- E-commerce requires UPS to scale and flex for volume swings on a day-to-day basis.
- It conditions consumers to expect faster deliveries.
- And it creates more single-package delivery stops.
If challenges are opportunities, then demand is a great opportunity to have.
Of course, all of this requires us to think differently about the capabilities and value of our network. Market leadership in the future will require a smart logistics network with full integration across, well, everything we touch.
It’ll require integration, starting with order intake at the customer to the multi-modal shipment transfers through our hubs, freight warehouses and package centers – and all the way to the final mile, whether that’s a loading dock or a doorstep.
Our plan is to implement a fully interconnected smart logistics network with higher levels of automation and integration than ever before. We’ve taken steps toward this vision in the past with ORION, our existing hub modernization projects, and the new facilities we’re building. But these are just the first steps in what will be a sweeping transformation of the UPS network.
I’ll begin with an update on the future of ORION, our powerful route optimization system. I will then talk about our plans for upgrading our existing operations while we simultaneously build new capacity.
I also plan to cover our “synthetic density” initiatives and then provide an update on the other capacity expansions that will further position UPS for success. Together, these actions describe a comprehensive plan, creating a UPS network ecosystem that will create new efficiency and growth opportunities.
Let’s start with the backbone of our network integration plans, ORION, because it demonstrates the powerful impact of extending innovation within our network.
We finished Phase One of ORION last year. So far, we’ve reduced the number of miles we need to run our routes by more than 210 million, which helped us increase the average stops per mile by 9 percent.
We also promised that ORION would help us save 6 to 8 miles per driver a day, and we’ve already met that estimate. ORION will become an even more important tool in the future. We’re generating more than $400 million in annual cost savings and avoidance.
We are now deep into development of a dynamic, real-time version of ORION that we’ll roll out with complete coverage in 2019. This next phase of ORION will serve as a springboard for significant gains in integration, system efficiencies, and the capability to implement profitable premium customer services.
The new version of ORION will mark the biggest leap yet in functionality, with dynamic updates, better navigation and dispatch decisions. And since we have experience at deploying ORION, we will implement this real-time version quicker and cheaper than the first phase of ORION. Once the additional phases are in place, we expect to realize a cumulative $150 million to 200 million in additional annual savings when fully implemented.
Now let’s turn to facility automation. Our automation initiative is dramatically improving the efficiency and connectedness of our hubs, package centers and transportation network.
When we met in 2014, our hub automation initiative had just been kicked off, and we were planning to retrofit our largest ground facilities. Retrofitting a hub does improve direct labor efficiency by 20 to 25 percent, and we have learned there are additional benefits beyond direct labor savings as we complete these retrofits and create a more integrated network.
But given the ongoing market shifts and changes in our own needs, we realized that retrofits wouldn’t be enough to handle our future efficiency and growth plans. So we are expanding in two additional ways.
In addition to upgrading a hub within its footprint, we are also expanding existing facilities where possible. Building a new wing creates less disruption and complexity, and creates the incremental capacity our business needs.
We’re also building new facilities to augment the network using operations technologies that enable us to achieve the most-efficient results possible. The all-new facilities enable us to boost our productivity savings even higher, since new buildings generate about 10 percent higher productivity than retrofits. These will employ the very latest in automated sortation and other technologies.
As we move through the next several years of our build out, we will increase the number of packages processed through our new automated facilities and bring the resulting savings to the bottom line. The cost, relative size and certainty of payback on automation has moved into a sweet spot for UPS, and we are confident that now is the time to accelerate spending.
In fact, we’re already investing: Last November, we revealed plans to invest $400 million to build a new regional sorting hub on the west side of Atlanta. We’ll soon break ground on a major new hub in Salt Lake City that will add another 840,000 square feet of capacity.
In total, we will have about 70 new package and hub projects around the world to be completed in the next three to five years, which will add capacity – and at a lower cost than today.
All these facilities will enable us to make the world’s most-integrated and most-efficient network even more efficient, by increasing network flexibility and capacity and reducing costly touch points. That’s important because – after operating expense investments – we know that for every five percentage points of volume that’s processed by UPS’s highly automated facilities, we generate around $30 million in annual savings and cost avoidance when fully implemented.
When we put all our automation initiatives together, we are targeting between $300 million and $400 million in annual cost savings and avoidance when fully built. These productivity savings also help offset the headwinds from B-to-C (business-to-consumer) shipments.
The power of having a fully integrated network means that as we add more automation to handle this tremendous growth opportunity, we create capabilities that benefit every one of our B-to-C and B-to-B (business-to-business) customers.
In addition to investing to optimize our facilities, we are also driving innovation in our data-management processes to produce the trifecta of the shipping world: improving our customer service; bettering our operating efficiency; and, by harmonizing deliveries on a single day, improving the consignee’s delivery experience.
With our Synchronized Delivery Solutions – or SDS, for short – we’re using enhanced data analytics to create more “synthetic” package density across multiple product categories. We initially introduced lower-cost delivery options and improved margins through SurePost, and then SurePost Redirect.
And in 2017, we will roll out our new SurePost “Hold and Redirect” two-day option, which adds more opportunity for a match – not just to a single address but to surrounding areas, as well our broad customer base. This gives us a big advantage as we match up more packages with different delivery commitments from different geographies.
With ORION-like algorithms, we can determine in real time whether we can optimize delivery locations and service commitments. Combining these “synthetic density” initiatives with advance delivery notifications using UPS My Choice and Follow My Delivery, plus alternative delivery locations with Access Points, will make the delivery experience even more satisfying for consignees.
Building our capabilities and improving the customer experience are ways we leverage the core of our integrated network. As announced earlier, we’re taking another logical step forward by investing to expand our Saturday operations. Adding Saturday ground will also enable us to broaden the service we provide our B-to-B and B-to-C customers.
By leveraging our assets this way, we’re able to open more capacity in our network throughout the week. We will have six delivery days, six sort days and six pickup days for both business and residential customers. That means we will have the fastest and widest service on Mondays.
We’ll be able to pick up on Saturdays and deliver on Mondays. We’ll expand Saturday ground service on a rolling basis, reaching more than 50 percent of the U.S. population by the end of 2017. And we’ll add more in 2018.
At the outset of my comments, I mentioned that I would also talk about some other capacity enhancements. Later this year, we’ll take delivery of the first three of 14 Boeing 747-8 freighters. Working with Boeing, we advanced one additional aircraft by year end rather than early 2018, which, of course, gives us more capacity for Peak.
This additional air capacity will help us address our growing International and U.S. domestic business, as businesses and consumers shop and source from everywhere via the Internet. Adding these freighters to what’s already the youngest fleet in the industry will progressively increase our ability to optimize the air network, opening up more capacity in a global cascade of equipment reassignments.
So to summarize our initiatives, we’re:
- Rolling out the next phase of Orion
- Building new facilities and retrofitting existing ones to promote greater growth and efficiency
- Re-engineering our processes to create greater synthetic density
- Adding the most efficient air network assets
We know that if we invest, we will accelerate our growth and deliver the returns you count on.
In closing, I want to emphasize that in my career at UPS, I’ve never been more optimistic about our future, or more excited about the investments that will take us there.
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