United Parcel Service - Term Paper Example

?Introduction UPS or United Parcel Service is a global package delivery service and delivers packages to over 220 countries. Delivering over 15 million parcels every day to more than 6 million customers indicate that UPS has been one of the leading package delivery services across the whole world. (UPS, 2012) The primary services offered by UPS are the time definite delivery of parcels to its customers across the whole world. It not only offers domestic and international package delivery services but also offers supply chain services to companies all over the world. It is however, critical to note that the market trends may be more volatile in future to continue to offer unprecedented services. Changing consumer preferences, new technology etc can have a significant influence over the way business may perform in future. The very nature of the industry indicates that it is dominated by very few but large players which control much of the market however; smaller companies operate too to offer low cost solutions. Though the industry is having higher government regulations because of checks and balances however, the overall competition is still concentrated. Due to lack of larger players in other countries, UPS, FedEx and DHL are the major global players in this industry. This report will provide a strategic review of UPS and will also make a comparison of its activities with other players in other countries. More specifically, this report will offer an strategic insight into different factors associated with UPS. Nature of the Product or Service As discussed above, UPS offers parcel delivery service however, over the period of time, it has been able to diversify its product ranges and is now offering a comprehensive package of logistic and supply chain services along with its basic primary service of package delivery. The overall range of services now not only includes general logistics solutions but it now offers very specific and niche market services to hospitality industry also. (Niemann, 2007) It is important to note that technology plays an important role in offering these products and services. Integrated tracking services for parcels are now an important part of the overall product life cycle of the product. It is important to note that alternative or substitute products have been in the market due to technological advancements. Earlier technologies such as fax machines have reduced the need for sending documents especially through courier services. Introduction of email has further reduced the need for sending physical documents. However, the need for other logistics and supply chain services exists but these services are not typically offered to the general consumers and are mostly B2B. It is also important to note that these services are highly price elastic in nature as presence of other players in the market more specifically makes the price competition more sensitive to the changes. Mushrooming of smaller players in the market specially those service smaller localities and communities also tend to add more to the competition and resultantly prices remain low and more sensitive to the changes across the whole market. In other countries, similar firms are mostly concentrated into the one segment of the business i.e. parcel delivery and are into the supply chain management services for the local or international firms. Market Trends One of the key parameters of consumer behavior for UPS is the seamless integration of technology with parcel and package delivery services. Consumers prefer to have their goods and packages reach at the right destination, in right time and also require real time tracking of their shipments. E-commerce and technology therefore are the biggest drivers of change in the consumer behavior in this industry. (Strategic Direction, 2003) There has been a continuous growth for the B2C market in what is called free shipping services especially in US. UPS along with other players, in order to attract online customers, continue to offer free shipping services. These trends are shifting the demand patterns as it attempt to influence the consumer preferences. The overall shift in the demand and supply therefore is mostly due to changing customer preferences. Supply curve for UPS is also mostly dominated by the changes in technology as consumers prefer for better integration of technology with the services they are availing. A higher or superior technology introduced can actually result into a rightward shift in the supply curve as existing and new firms may capitalize on this new technological shift to drive up the supply. (Jesse W.J. Weltevreden, 2008) With the increase in population as well as globalization trends, it may be forecasted that the overall demand for the services will increase specially in other countries which are still catching up on this new and speedier mode of parcel and package delivery. Other domestic and international firms may enter into new markets to improve overall forecast outlook for the services. Production and Supply Process It is important to note that UPS America offers services therefore it is not directly involved in any kind of production activity. Its production therefore is not driven by the traditional manufacturing organization. What is however important to note that in order to deliver the services it has to incur higher levels of fixed costs and sunk costs because it has to invest in infrastructure development, vehicles, ships as well as planes which are used in the shipping business. Most of the costs incurred by UPS therefore are fixed in nature. It is also important to note that variable cost is mostly driven by the nature of the parcel and its characteristics. Higher volume, higher weight parcels and goods are priced higher and therefore cost more too. Most of the marginal cost is driven by the very nature of the parcel and other goods. It is also because of this reason that the overall marginal cost is even below the average cost because of higher ratio of total fixed cost in delivering the overall service to the customers. Due to this typical nature of the costing within this industry, it has been able to keep its prices down because marginal cost forms very low part of the total cost of delivering the services. It is also because of this reason that UPS and other services also charge premium prices depending upon the overall nature and size of the parcels and goods delivered. At the international level, smaller firms tend to dominate too because these firms have better penetration into the local areas and are somewhat more mobile than UPS. Such mobility therefore allows them to procure business from areas where traditionally UPS is not present or have limited access. In such situations, mostly public sector organizations procure the business in other countries. Structure of the Industry Overall demand at the domestic level is relatively higher and it is because of this reason that the industry is basically split into different segments or components. One and major section of the market is controlled by the larger players such as FedEx, UPS and DHL however the lower end of the market is mushroomed by the smaller players. It could be however suggested that the industry is oligopoly in nature because at the international as well as domestic level, it is mainly controlled by very few sellers. (Li, Riley, Lin, & Qi, 2006) Overall industry concentration is higher and the merger of TNT with UPS in Europe was scrutinized by the European Competition Commission on the pretext that the horizontal merger of two of the largest firms might harm the interest of the consumers. (Webb & Credeur, 2012). Apart from this, the merger might have resulted into creation of a much larger firm to threaten other smaller players at the EU Level at least. At the EU level, TNT is still the major player in the market with Royal Mail in UK as the second largest. It is important to note that Royal Mail however, offers limited services and does not have the same range and depth of services as offered by firms like UPS and TNT across the whole globe. Main players in the industry include FedEx, UPS, DHL & USPS whereas at the international level TNT competes with UPS in the European market. At other domestic markets, local firms also compete with UPS and other international chains in this industry. These players in the market are mostly price setters with exit barriers because of the higher fixed cost involved in the setting up of the business. It is however important to understand that overall price competition is relatively low and firms mostly compete on the non-price basis. Government Role Terrorism has been one of the fundamental security risks faced by United States and since parcel industry deals in the movement of goods and parcels across different locations therefore security has become a primary issue where government can actually interfere into the affairs of UPS. (GARDNER, 2010) There is higher level of government involvement especially in the shipment of forbidden technology and other items which can be used in the terrorism. Firms like FedEx have paid fines in the past for shipping technology products which could have been used in the terrorism. Since the overall cost is low especially for retail customers therefore governments do not offer any subsidies or price reduction. Though parcel delivery services work under the public sector also but companies working in the private sector are not largely influenced by the intervention of government into the affairs. At the international level where border controls are strict, government tend to have more involvement as each parcels and shipment goods are thoroughly scrutinized in order to ensure that movement of illegal goods is restricted. It is also important to note that parcels and other packages are subject to domestic and international duties and taxes. Especially international shipments require receivers of parcels to pay custom duty which can actually increase the overall cost of the delivery. However, the overall impact of taxes may have relatively lower impact in the domestic markets because import and any similar duties are not imposed on the domestic movement of the goods. It is also because of this reason that most of the firms including UPS focus on maintaining their presence in the domestic market in order to serve the local customer base. Business Environment Due to globalization, UPS and other firms have been able to establish their base in different countries. Parcel and shipping industry also works through the development of different networks and international firms form strategic alliances with the local firms in order to establish themselves or procure the business. By forming strategic alliances with the smaller courier and shipping agents, UPS actually procures major business by becoming the agent in between transition. Local agents pick up the parcels and charge the customers and subsequently forward the parcels to UPS. It is also important to note that the trade agreements as well as embargos can also have an impact on the business. A trade embargo placed by one country on another country would virtually mean that UPS will not be able to ship the parcels and goods from one country to another. Trade embargos therefore can result into significant revenue losses for UPS. The recent economic condition in the world over has also an impact on the supply chain side of the business also. Shipping companies are now looking for low cost solutions in order to cater to the needs of the firms which are looking to save costs. Due to low volumes of export business, shipping business have been affected too and thus shipping and delivery services are facing difficult times due to this economic environment. Firm/Industry Location Since UPS is primarily in the services sector with movement of smaller parcels as its main service therefore location is not critically important for its success. UPS does not require access to the cheaper raw material or labor to enter into any market as this may not be the key economic variables for the Though economic potential of a location is necessary before entering into any region however, there may not be an optimal location for the parcels and shipment companies. One important factor which can potentially provide geographical advantage is to have access to the sea routes therefore geographical locations with easy access to sea routes can be ideal locations in terms of supply chain business of the firm. Since most of the shipment and delivery services within the country and at the international level take place through the air and road therefore the advantage of having access through sea may not be relatively of critical importance for UPS. Better road and air transportation system of a country can effectively reduce the cost of delivery for UPS as it will not have to incur costs to use other alternative channels. The presence of business clusters can help UPS especially in countries like China where by situating itself into geographical regions where economic activity is higher. This way, UPS and other firms can actually maintain their presence in areas where manufacturing activities are higher and therefore can procure business in terms of improving the supply chain management practices of these firms. Business and Pricing Strategies Prices are mostly driven by the fundamental factors of distance and the overall characteristics of the parcel and goods to be shipped. Higher distance parcel deliveries are charged higher prices whereas shorter distance parcels are charged at lower prices. It is also important to note that UPS and other firms in the industry focus more on the value added services in order to bolster their pricing strategies. UPS offer free tracking services, insurance and other value added services which can invariably help it to charge premium prices on the parcels for shorter as well as longer delivery routes. (Dennis, 2011) It is also important to note that there are different prices for different segments of the markets. Corporate clients as well as bulk shippers are offered discounts and bulk shipping whereas the retail customers are not offered that much leverage in terms of prices. Corporate deliveries are offered at relatively lower rates as compared to the general retail prices. Predatory pricing strategies may not be entirely successful for UPS because it also has to compete with the public sector organizations which are also engaged into similar business and offer much lower prices. Though their delivery times may be lower however, especially those customers who are price sensitive may make a tradeoff between delivery time and prices and may prefer to lower priced services. Such characteristics of market may invariably not allow UPS to be a price setter in one segment of the market for longer period of time. Entrepreneurial ability of Managers It is critical to note that the growth of the parcel and time definite delivery services started out of the entprenuerial ambitions of those who started it. The story of FedEx is one of the most famous about the entrepreneurial potential of this industry and how it can actually help the young people to actually take risk and become much more successful than the traditional services in the market. (Brewster & Dalzell, 2007) Innovation plays an important role for UPS and other firms in the industry as focus on innovative use of technology plays an important role. Much of the innovation for UPS has taken place in terms of technology and its use. By introducing real time tracking systems, use of delicate hardware and software has allowed the growth of these firms in the past and it was because of this technological superiority that larger firms prevailed over small firms. Culture at UPS is more open and management style is little flat with much of the work being delegated to the field staff. Though strategic direction of the business is set at the centralized level however, the field staff which collects and delivers the parcels also seem to much more independence and discretion over the way they can contribute towards the work. Due to very nature of the business, risk taking may not be possible in terms of performing the hardcore functions however, in terms of innovation it is performed at UPS. This culture is however is not prevailing in other countries specially where higher management controls exist due to public sector nature of firms. Conclusion The above discussion suggests that UPS or United Parcel Service is the largest parcel delivery service in the world. It is also called brown tiger because of the color of its trucks which deliver the parcels all over the world. Delivering billions of parcels every year, UPS works in an industry which is dominated by few players at the global level however, it also faces competition at the local level too from the smaller firms. It has been able to form networks with the domestic and international agents which collect the parcels on its behalf and deliver the same to UPS for onward international shipments. Overall fixed proportion is relatively higher in this business with marginal cost is even lower than the average cost. It is also because of this reason that UPS and other firms at the local and international level have been able to offer lower prices to the customers. Price sensitivity is often tackled with the help of offering value added services besides offering other variants of the services. UPS as well as other firms offer additional services such as express deliver, overnight deliveries etc and charge higher prices for such services. Though this type of business does not require any specific location however, UPS need to focus on concentrating itself in areas where air, sea as well as road transport infrastructure is relatively superior in nature. By associating itself with the countries where overall infrastructure is good, UPS can take advantage of the geographical location. Further, the presence of business clusters can also play an important role in terms of procuring new business. UPS can significantly help international firms located in developing countries in improving their supply chain management services. Innovation and creativity is on the higher side too because UPS have been experimenting with new technology to improve customer satisfaction. Other firms in other countries have not been able to implement such technology which can enhance overall user experience of using shipping services. Bibliography Brewster, M., & Dalzell, F. (2007). Driving Change: The Ups Approach to Business. New York: Hyperion,. Dennis, W. T. (2011). Parcel and Small Package Delivery Industry. New York: William Dennis. GARDNER, D. (2010, October 31). They WERE bombs: Barack Obama confirms explosives found on UPS and FedEx planes are a 'credible terrorist threat'. Retrieved September 25, 2012, from Daily Mail Online: http://www.dailymail.co.uk/news/article-1324951/Obama-confirms-explosives-UPS-FedEx-planes-credible-terrorist-threat.html Jesse W.J. Weltevreden. (2008). B2c e-commerce logistics: the rise of collection-and-delivery points in The Netherlands. International Journal of Retail & Distribution Management, 36(8), 638 - 660. Li, B., Riley, M., Lin, B., & Qi, E. (2006). A comparison study of customer satisfaction between the UPS and FedEx: An empirical study among university customers. Industrial Management & Data Systems, 106(2), 182 - 199. Niemann, G. (2007). Big Brown: The Untold Story of UPS. New York: John Wiley & Sons. Strategic Direction. (2003). E-business high on the agenda for UPS and FedEx: Picking up the pace in package delivery. Strategic Direction, 19(7), 5 - 8. UPS. (2012). Company History. Retrieved September 24, 2012, from UPS: http://www.ups.com/content/corp/about/history/index.html Webb, A., & Credeur, J. (2012, March 19). UPS to Purchase TNT Express for $6.8 Billion. Retrieved September 24, 2012, from Bloomberg: http://www.businessweek.com/news/2012-03-18/ups-said-to-reach-deal-to-buy-tnt-express Read More