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United Parcel Service (UPS)
Tough competition and soaring costs
United Parcel Service (UPS)
United Parcel Service (UPS) is an American multinational corporation that operates in three major industry sectors i.e. logistics service, freight forwarding service, and courier express service. UPS is services-based company and is headquartered in Atlanta, Georgia. The company has worldwide operations. Being a public limited company, it is traded on New York Stock Exchange (NYSE) having the ticker symbol UPS. Scott Davis currently serves as the Chief Executive Officer (CEO) of the company. The company operates through a structure of several subsidiaries operating worldwide. Some of the main subsidiaries of the company are The UPS Store, UPS Capital, UPS Logistics, UPS Express Critical, UPS Professional Solutions, and UPS Supply Chain Solutions. Total revenues of UPS for the fiscal year FY 2012 were $54.1 billion with an operating income of $5.874 billion. Net income of the company in FY 2012 was $3.804 billion (UPS Annual Report, 2013). The company total number of employees throughout the world is nearing 400000.
The company was founded in 1907 as a 'private messenger and delivery service provider'. Jim Casey (Claude Ryan was another founding partner of UPS) was the founder of UPS and the company offered the services of package delivery, baggage delivery, notes, and food delivery, as well as accomplishing common errands for their clients. Based at Seattle, Washington, the initial years' operations of UPS were conducted on foot and on bicycles for longer trips. Main value prepositions developed and implemented by Jim Casey were "reliability, customer courtesy, 24/7 service and low rates (UPS, n.d.). Some of the main facts related to long and trying foundation of UPS as the world's superior logistics manager are summarized below.
Founder: Jim Casey
Year of foundation: 1907
Borrowed capital: $100
Place of foundation: Seattle, Washington
First delivery car: Purchased Model T. Ford in 1913
Expansion: 1919 Oakland, CA. 1922 Los Angeles with Innovative common carrier. UPS also built conveyer belt system for handling packages. UPS expanded to the East coast in 1930 and UPS Air Service initiated in 1929.
The company has been posting Year-on-Year (YoY) growth of revenues and net income from their operations. The annual report of the company filed with SEC indicates that post-financial crisis of 2008; the company's revenues got decreased in FYs 2009 and 2010 falling behind the 2008 level. However, since 2011, UPS is once again on growth track as far as revenues, operating income, net income, and profit margins are concerned. This brings us to the last financial figures of UPS field for the last FY i.e. 2012. For the FY 2012, total revenues, total operating expenses, total operating profit, income tax before taxes (IBIT), and net income was $54.127 billion, $52.724 billion, $1.343 billion, $974 million, and $807 million respectively. For same financial indicators, the company's 2011 statistics were total revenues $53.105 billion, total operating expenses $47,025 billion, total operating profit $6.08 billion, IBIT $5.776 billion, and net income was $3.804 billion. This indicates that in FY 2012 (in comparison with FY 2011), total revenues of the company increased by 2.5%, and operating margin increased by 1.4%. Company's annual report mentioned that higher adjusted operating profit during 201 compared to 2010 was mainly due to increased network efficiencies and improvement in revenue per piece. The company attributed sharp decreases of operating margin in 2012 (40 basis points as compared to 2011) to the change in product mix and decline in transcontinental trade having high cost infrastructure. Adjusted operating profit got decreased by 3.7% in 2012 compared to 2011. Foreign currency exchange rates and decreased rate of air forwarding business also decreased company's forwarding and logistics revenue in 2012 by $126 million. Freight revenue and other businesses revenue increased by $77 million and $57 million in 2012 respectively when compared with 2011 statistics. It seems that company's profitability as well as other margins decreased in 2012 compared with 2011 due to reasons such as European debt crisis, slow growth of Chinese economy, and sluggish performance of the U.S. economy (on which UPS depends for most of her operating margins).
NASDAQ (2013) reported financial ratios of UPS also indicate that the company had better financial ratios in 2011 as compared to 2012. Current ratio (current assets minus current liabilities representing a company's ability to pay short-term obligations) of UPS was 1.86 in 2012 compared to 1.89 in 2011. Cash ratio (company's total cash & cash equivalents minus current liabilities representing that company's ability to satisfy short-term debt) of UPS was 0.94 in 2012 compared to 0.66. This implies that lenders confidence in UPS as a debtor would have increased with an increase in cash ratio of the company. Operating margin in 2012 remained 2% compared to 11% in 2011. After tax Return over equity (ROE) is an important indicator for investor confidence and the same decreased to 17% in 2012 compared to 54% in 2011 (NASDAQ, 2013). A healthy ROE represents a company's ability to generate more profits from shareholders' equity invested in the company. Although the financial ratios of UPS decreased in 2012 compared to 2011, these ratios were still better as compared to the industry average, for instance industry average of current ratio was 1.28 during 2012 whereas that of UPS remained 1.86. BETA (an indicator of volatility of a security or stock in comparison to the market) of UPS was reported to be 0.85 by MSN money that indicates that UPS stock is more stable as compared to the market, in case uncertainty or risk prevails (MSN Money, 2013). Data also indicates that UPS had a positive sales growth whereas having a negative income growth. This may indicate towards increased cost of services, decreased margins (due to decreased service rates), as well as increased operating expenses.
UPS bounced back well post-financial crisis of 2008, increasing her revenues, operating margins and profitability after taxes by manifold. This represents company's tremendous potential as the world's largest courier and logistics service provider. However, last fiscal year's financial indicators show that company, despite having sustained growth in revenues, is unable to maintain high operating margins thereby making company stock less attractive to common shareholders and investors. Increased competition from non-traditional logistics companies, such as those relying on information technology (IT) to beat traditional companies like UPS on operating costs, pose big threat to the company. Amazon has built distribution warehouses close to major customer segment areas (Barr, 2013). A cut by UPS in earnings forecast also indicate towards a bigger and sustained challenge for survival. The company now faces challenge in managing profitable business operations.
Tough competition and soaring costs
There is an interesting situation developing at UPS. Volumes of logistics being shipped with the courier brand are increasing, revenues are also improving, but profits are decreasing. This indicates that the company is faced with some real challenges in managing costs. After 2012 results reported by the company, it was expected that increased economic activity in the U.S. And China may bring handsome profits for the company. The second quarter (Q2) financial statistics of UPS indicate otherwise. Q2 profits of UPS fell by 4% as compared to same period in the previous year. A careful analysis indicate that most of the large scale courier service providers such as UPS, FedEx, and DHL heavily rely on industrial activity in both the U.S. And Europe for gaining profits. An increase in the volume, somehow, has not brought the desired results for UPS. U.S. package revenue of UPS grew by 2.3% but profits dropped down in this segment by 0.2%. Daily volumes was up by 1.9% but unable to translate in an increments in margins.
The problem for traditional logistics companies such as UPS and FedEx is not only related to untraditional logistics suppliers posting stiff competition. The problem is also that traditional logistics companies are competing fiercely against each other as well. Their attention is more diverted towards mitigating threats from each other. UPS has and shall maintain, for some time to come, financial edge over FedEx as is indicated by a prospective deal (between UPS and TNT) that was struck down by European Commission (EC). If the deal could have been materialized (it has now been nullified by EC), UPS would have positioned itself as most competitive firm in the logistics industry (Levitz & Sechler, 2012). Failure has left the non-traditional suppliers of bulk packages more concerned. The deal was much important for UPS as the company would have gained potentially valuable infrastructure and sales channels in Europe to mitigate slow growth of her operating margins.
Main issue faced by industry leaders (such as UPS in logistics and Microsoft in operating systems OS) is that their ability to innovate gets halted after becoming leaders. The management becomes less bold and more concerned about taking risks. Stalemate in trying new business approaches and offering value added services also get a severe blow. It seems that UPS did…[continue]
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