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Is Carol robbing Peter to pay Paul at UPS?

UPS CEO Tomé’s moves have shaken UPS and the parcel industry. Will her wrestling with Big Brown’s deep-rooted culture pay off?

The new road under the new CEO (Photo: Jim Allen/FreightWaves & UPS)

In her first 10 months as UPS Inc.’s (NYSE:UPS) CEO, Carol Tomé has shaken the Big Brown oak with a ferocity unprecedented in the company’s history. Her moves have been wide-ranging, quick-hitting and counter to the “all-deliberate-speed” and paternalistic mentality that characterized UPS’ culture for nearly 114 years.

The early results of Tomè’s stress test have been positive. UPS has reported two blowout quarters since she took over June 1. UPS’ share price, which has been a major disappointment for much of its 21-plus years as a public company, rose from $91 in March 2020 to $168 a year later and today sits just under $160. UPS acquitted itself well during the record 2020 peak-season delivery cycle, hitting 97.6% on-time performance levels, according to consultancy ShipMatrix.

It should be pointed out that UPS and other parcel-delivery providers had massive business tailwinds during 2020 due to the COVID-19 pandemic and its favorable impact on e-commerce activity. UPS imposed meaningful peak-season delivery surcharges that boosted its numbers. The carrier also curbed a lot of peak volume from enterprise customers, actions that helped avoid overtaxing its infrastructure but angered big shippers that have been longtime customers.

Tomé, 64, is a disciple of the financial world, having retired in 2019 as CFO of home improvement giant The Home Depot Inc. (NYSE:HD). Her objective at UPS is to improve financial metrics that she has said have not been as good as they could be. Achieving that goal at a company as large, complex and set in its ways as UPS requires breaking a fair amount of china.

“In any company that’s over 100 years old, there are redundancies and inefficiencies that build up over the decades,” said Amit Mehrotra, lead transport analyst at Deutsche Bank. “I think Carol and her team are assessing costs through that lens.”

Tomé has said there are few, if any, sacred cows. She proved it in February when UPS sold its flagging LTL operation, UPS Freight, to Canadian carrier TFI International for $800 million in cash. UPS bought Overnite Transportation Co. in 2005 for $1.2 billion with the idea of attracting high-margin parcel business by bundling it with an LTL offering that was cheaply priced. 

There is no way to quantify how effective the bundling strategy was, but Tomé, who joined the UPS board in 2003 and has followed UPS Freight’s travails ever since, obviously had enough of the business. UPS isn’t acquisition-driven to begin with, and it is unheard of for the company to sell any asset that it acquired.

Glenn Gooding, who runs shipping consultancy iDrive Logistics and spent 21 years at UPS in high-level roles including developing and managing high-profile accounts like Apple Inc., Dell Inc. and IBM Corp., among others, said Tomé is “doing everything she can to make sure that every package pays its way.” This approach is behind the dramatic reconciling of longtime enterprise accounts that tender massive volumes but have margins that sometimes (or often) don’t meet her strict margin guidelines. 

Measuring each package’s profitability is a tall order for a company that delivers about 17 million of them a day, but UPS’ powerful costing platform and methodology is probably up to the task, Gooding said.

A task for an outsider

As the first nonemployee to hold the CEO job, Tomé is unencumbered by the mindset of her predecessors, almost all UPS lifers and deeply rooted in a culture born from being a private company for most of its history. Dean Maciuba, managing partner of North America for Last Mile Experts, a consultancy, said that “Tomé has no history with UPS, so it will be easier for her to cut people loose” than it would have been for her predecessor, David P. Abney, who started with UPS as a package handler and spent his entire career at the company.

Tomé’s outsider’s prism has manifested itself in ways that might be jarring to longtime UPSers. More than 11,000 non-operations middle-management employees were offered voluntary separation packages during the second half of 2020, a by-product of an efficiency drive known as Transformation 2.0. About 1,600 applied for the packages, and most were accepted, according to an industry source. UPS has about 481,000 employees, 399,000 of them in the U.S.

The cuts will continue through 2021 and may no longer be voluntary since Tomé has committed to achieving $500 million in net savings this year. The current phase will be followed by Transformation 3.0, which will focus on UPS’ operations, the core of the business. There is no announced time frame for that phase.

UPS declined to comment on any staffing changes. In a statement, the company said, “We have and will continue to execute on our plans with little interruption for our customers. We are investing in more capabilities and delivering higher value with our Customer First approach.” 

Tomé has acknowledged on UPS’ earnings calls that there will be fewer jobs, but those that remain will be more “impactful.”

The likely by-product of the job cuts will be a decline in service levels as years of cumulative institutional knowledge walk out the door and those who remain are required to pick up significant slack, one industry source said. Gooding of iDrive said there was some bloat and much complacency within UPS’ midlevel managerial ranks. However, cuts of any magnitude inevitably result in “valuable people being caught in the crossfire,” he said. 

Maciuba said that UPS and archrival FedEx Corp. (NYSE:FDX) have not been filling vacant sales positions for several years. FedEx, in fact, recently said it would cut thousands of positions in Europe as its protracted integration with European delivery firm TNT Express LLC nears completion. “Some of the staff reductions have been enabled by tech advancements, but much of it is simple headcount reductions,” Maciuba said. 

UPS and FedEx are also mindful of their cost structures because Inc. (NASDAQ:AMZN), which is being positioned to compete with both companies for parcels from non-Amazon shippers, runs its logistics business with a fraction of the headcount.

Kicked to the curb

Perhaps Tomé’s highest-profile impact has been in the upheaval in UPS’ relationships with its enterprise customers, high-volume accounts that have shipped with the company for years, even decades. Starting in mid-2020, UPS notified an undetermined number of big customers of significant rate increases and caps on volume heading into the peak holiday shipping season when shippers planned to move unprecedented volumes of parcels.

Richard Metzler, CEO of regional parcel carrier LSO, said he heard from new customers that UPS told a 30-year shipper that it would need to reduce volumes by 30% before peak season started. For many shippers, the message came at the worst possible time because by the August-October period it was virtually impossible to secure alternative capacity for the holidays.

Metzler said he’s been told that shippers have a C-level mandate to diversify from UPS and FedEx — which behaved similarly last year though not as aggressively — due to the change in direction during 2020. 

“This is the first time I have seen shippers show strong anger [toward] any parcel carrier,” Metzler said, referring to UPS. “Heretofore, it was all about making the best choice on price and service as unlimited capacity was a given. Not anymore.”

Demand for parcel delivery business in 2020 exceeded supply for the first time since 1997, the year the Teamsters union staged a 15-day strike against the company and effectively shut down its ground-delivery network, according to Rob Martinez, founder and co-CEO of consultancy Shipware LLC.

There has been a visceral reaction from big parcel shippers to what transpired during peak season, Metzler said. Big shippers have long memories, he added, and although efficient deliveries will always be the first order of business, “there is no doubt in my mind that if they can find a way to punish [the carriers] and make it hurt, they will.”

In its statement, UPS said its efforts are “delivering close, collaborative and mutually beneficial relationships with our customers. With our unmatched global network and extensive portfolio, we enable our valued customers of all sizes to better compete in the market.”  

Maciuba of Last-Mile Experts said concerns about UPS’ enterprise accounts looking elsewhere are highly overblown. FedEx will not slash prices to rescue aggrieved shippers, so many of those accounts will remain at UPS, pay higher rates and pass on the added costs to their customers, he said. “It is also just too damn hard and costly for large enterprise accounts to change carriers, and both carriers know that,” Maciuba said.

In comments submitted for a roundtable conducted by trade magazine Logistics Management and published two weeks ago, Martinez said that UPS, more than FedEx, is “focusing aggressively” on margin improvements. As a result, UPS is “hitting many loyal customers with exorbitant rate increases to force out the undesirable volume,” Martinez said.

Both carriers are very active in pursuing the small to midsize (SMB) customer market because those customers often use a broad range of the carriers’ services and they don’t have the huge volumes to use as pricing leverage. However, UPS’ business has leaned so heavily toward enterprise accounts for many decades that it has found it difficult to pivot to the SMB segment, according to two industry sources.

In addition, FedEx has freed up much domestic capacity for SMB business after ending its air and ground contracts with Amazon in 2019. Mike Erickson, founder of consultancy AFMS LLC, has said that FedEx’s new business with SMBs dwarfs the business that disappeared with Amazon.

In its statement, UPS said it is achieving “high, double-digit SMB growth” through investments in its capabilities.

What’s next?

It’s difficult to take umbrage with Tomé’s actions over the past months. E-commerce activity remains highly elevated, and with it parcel-delivery demand. In addition, UPS and FedEx have a de facto duopoly on national-network carriage. It would be folly for both not to capitalize on what has been, and continues to be, the strongest parcel-pricing market in history. 

Many experts believe that the carriers will continue to dominate much of the U.S. delivery market until Amazon branches out beyond its own customer base. Amazon seemed poised to strike before the pandemic changed everything. The project may be tabled even for this year because Amazon is consumed with delivering its own tsunami of parcels and restoring nationwide one-day shipping for orders placed by millions of Prime customers. 

In addition, Amazon is set to open the first phase of its global air hub operation in Cincinnati later this year and may not want to be distracted by a project as immense as challenging UPS, FedEx and the U.S. Postal Service for stand-alone delivery business. 

The Postal Service, for all its strengths, is not perceived by businesses and merchants as operating at the same level in business-to-consumer deliveries. Regional delivery carriers, meanwhile, are filled to the brim with traffic and could not absorb much of UPS’ traffic even if they wanted to. 

The UPS brand is strong and resilient, and the company has a well-earned reputation for being able to figure things out, experts said. UPS has dramatically improved its domestic ground delivery transit times with its Our Fastest Ground Ever initiative. Experts like Mehrotra at Deutsche Bank said the personnel cuts will cull the fat from the herd and not cut into muscle. 

UPS is currently rolling in the parcel duopoly dough. However, a cautionary tale is embedded in Tomé’s current decisions. Many captive UPS shippers were blindsided by the 1997 Teamsters strike and had no realistic alternatives. The blowback was sharp. For years, shippers steadfastly refused to use UPS, feeling that a partner they knew for predictability, reliability, dependability and integrity had betrayed them. Within months after the strike ended, FedEx acquired the parent of a small UPS competitor named Roadway Package System, rebranded it as FedEx Ground, and became the fiercest threat ever to UPS’ core U.S. ground-delivery business.

A similar undercurrent of shipper disgruntlement exists today, and competitors have already begun to capitalize by making inroads into UPS’ book of business, industry sources said.

Metzler of LSO, citing Tomé’s pledge to make UPS “better, not bigger,” said the mantra may one day be “looked back upon like burning the furniture to keep warm instead of getting a bigger furnace.”

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  1. SStepisnik

    UPS your new CEO is an idiot. Saving pennies means putting drivers lives at risk with outdated equipment and vehicles. Management are severe pathological liars and look forward to their stock options doing well now they have no pensions to count on when they retire. COVID 19 is not being addressed at UPS except as good excuse to overcharge and have no accountability for delivering anything on time. How do I know because I am a UPS user professionally and a UPS spouse, I see and hear it from both sides.

  2. Debby

    Those “middle management” jobs that are being severed. Yeah. That’s our US based HR. The hiring process is now a nightmare where you have to call out to India to get information or change things. The workday “upgrade” is a joke, the interface is not user friendly at all. There was enough on our plates and then because they got rid of HR we have to do that part of the job too. To anyone thinking if becoming a supervisor or manager. Become a driver. You’ll thank me later.

  3. Nick

    This article is spot on. (Take it from a UPS Mid-manager.) I have never before read any reporting from the media that captures the essence of what is happening inside UPS and what will happen quite as astutely as this article does.

      1. norman f smith jr

        You need to be careful saying they stole your package.All carriers occasionally loose packages , example labels coming off package who packaged your mess You. did you enclose an extra label inside the package ? You probably used a previously shipped box. Did you completely remove or mark out all the labels on the used carton. and occasionally drivers mis deliver a package. how do you not know Ups or any vcarrier did not wreck or catch on fire. . LOTS OF REASONS CAN HAPPEN to a package Do not state something was stolen unless you have proof, you are setting your self for a lawsuit of slander.

  4. Big Duke

    No surprise ups management always preach honesty but they are the most dishonest people I know .Deal with snakes you will get bit sooner or later . Sad pinching pennies n they will pay dollars

    1. Tommy Trucker faster

      I agree. UPS is very dishonest. I returned a tool box to Northern Tools. I never removed it from the original packaging. I went online to get UPS to return it. I used the exact measurements and weight Northern did. My label said $34. I slapped it on the box, dropped it off at the local UPS store. Two days later I got an email saying they were charging an ADDITIONAL $53 for my package, no reason just that there was a mistake….I agreed, it was a mistake to use UPS!!

Comments are closed.

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.