By reinvesting the funds generated, the company sustains growth through acquisitions, the development of new products and the improvement of the services provided. A result of the reinvesting process is the Package Flow Technology. This is a multi-year re-engineering of their pickup and delivery of packages. It has proved very efficient.
Types of Costs Involved
As in the case of FedEx, UPS is basically confronted with the same types of cost. The variable costs are the wages of the employees; these are strongly related to the number of hours they spend working. Others are the ones which depend on the distance of transportation, or on the weight of the package. As for the fixed costs, they consist of the amortization, the salaries paid to the employees in the administrative or other departments (that receive a fixed sum).
Because they work within the same domain, UPS and FedEx depend on the fuel prices. This is a period cost, while the basic charges are product costs. Because of the service providing profile of the company, the manufacturing costs do not exist, while the non-manufacturing costs are all comprised in the financial statements. Also, this is not the case for process costs; we can only refer to the job-order ones.
The Relationship Between Cost, Volume and Profit
When analyzing its cost, volume and profit, the company refers to each of its branches separately. The results may differ in accordance with the competition on the market or with the efficiency that the division has. Generally, the profit is strongly related to the volume of sales and to the cost involved.
Taking as an example one branch, "U.S. Domestic Package revenue increased $1.650 billion, or 6.1%, for the year, primarily due to a 3.4% increase in average daily package volume and a 2.5% increase in revenue per piece. Ground volume grew 3.4%, and was positively impacted by a solid U.S. economy and our focus on middle market sales initiatives. Next Day Air volume grew 2.8% and deferred volume increased 4.0%, with growth in the manufacturing, business services, telecommunications and retail sectors. The growth in total U.S. Domestic Package volume strengthened throughout the year" (UPS Annual Report, Dec 2005).
The Relationship Between Financial Statements and the Net Income
Taking into consideration the Income Statement for the year 2005, we can depict the computation of the net income. All computations made in millions, from revenues that sum all the branches in amount of $42,581 we can subtract the operating expenses (compensation and benefits, others) in amount of $36,438. Then, we take into consideration the operating profit (loss), which in this case is a profit of $6,143 and other income (expense), which in this case represent an expense of $68. Thus, the net income before taxes is $6,075 and the net income after taxes is $3,870.
Allocating Costs to Departments and the Costing Method
UPS is composed by a set of three departments which act together in order to provide the best services in the range. These three components are: Domestic Package Products and Services (this means the delivery of packages by ground transportation), International Package Products and Services (this involves international shipments to more than 200 countries worldwide; the investments are focused on developing the infrastructure and technology in Asia.) and Supply Chain & Freight Services (these include the freight delivery and logistics businesses; they act with the goal of improving the performance by selecting the best solutions). The UPS Company allocates the costs in accordance to the requirements of each of these branches. This is identified as activity-based costing.
The Decision-Making System
Being a delivery service providing company, UPS is depending on the price of the fuel. The corporation is perfectly aware that the impact is major. Therefore, the pricing policy changes in accordance with...
In accordance to their response, UPS can prolong the offers or change them. The main interest of the company is to widen its network because it is a well-known fact that bigger networks mean greater profits and grater market penetration.
The Costs and the Budgets
The financial statements are disclosed at the end of each year, meaning on the 31st December. Some aspects comprised in these statements are mentioned based on previous experience and other assumptions, as their actual value can't be computed. As examples, we can provide contingencies (if they is established for an amount bigger than the assumption, then the result will be a future charge on income, otherwise it will result in a future credit to income), self-insurance accruals (a series of benefits for the employees which can differ from the actual final result) etc.
The Performance of the Company
Using the financial statements' disclosure, the company can work out the revenues, expenses and net profits. This is a method of assessing the financial performance. Yet, for other aspects, the company evaluates the strength and the width of the network, the level of customer loyalty etc. For the time being, it seems that UPS is the leader within its domain of activity.
Capital Budgets and the Discounting Cash Flow Method
We use a discounted cash flow model (DCF model) to estimate the fair value of our goodwill. The completion of the DCF model requires that we make a number of significant assumptions to produce an estimate of future cash flows. These assumptions include projections of future revenue, costs and working capital changes. In addition, we make assumptions about the estimated cost of capital and other relevant variables, as required, in estimating the fair value of our reporting units. The projections that we use in our DCF model are updated annually and will change over time based on the historical performance and changing business conditions for each of our reporting units" (UPS Annual Report, Dec 2005).
Present Mission, Vision, Goals and Strategies
Michael L. Eskew, the CEO of UPS asserts: "Our vision is to bring the world's businesses together through synchronized commerce. We do this by coordinating their distribution systems, supply chains and order management cycles, helping them to compete better in an expanding global economy"(UPS Annual Report, Dec 2005). For the year 2006, UPS wishes to generate a healthy cash flow, grow operating profit, increase earnings between 11 and 16% over 2005 results, grow the small package business, focus the supply chain activities on the high tech, health care and retail sectors.
As a conclusion, regarding the SWOT Analysis, we can point out some aspects. Strengths consist of the global reach and scale (their network is the singular in the competitive area which handles all types of service: domestic, ground, international, commercial, residential and express through one incorporated pickup and delivery service system), technology (they are the global leader in extending the technology required to a better satisfaction of the customers' needs), e-commerce (leader in global e-commerce), customer relationships (one of the goals is to maintaining long-term customer loyalty) etc. Weaknesses: the impact of fuel prices fluctuations. Opportunities: expansion on other markets. Threats: the currency exchange, the economic changes and regulations etc.
Bibliography
FedEx Annual Report, May 2006
United Parcel Service, Inc.: Company Report. On the Internet at http://moneycentral.msn.com/investor/research/profile.asp?Symbol=UPS (n.d.). Last retrieved on October 28, 2006
UPS Annual Report, Dec 2005 http://www.FedEx.com/us/about/today/mission.html
http://en.wikipedia.org/wiki/FedEx
