UPS & Amazon’d Logistics

A possible Disruptive Strategy approach for UPS (or other Freight Forwarder) in the light of Amazon’s entry into Supply Chain Logistics.

UPS is the world’s largest package delivery company, delivering worldwide around 4 billion packages annually. UPS operating model is based on single pickup and delivery network that manages all its business air, ground, domestic, international, commercial and residential. Since their focus is on small package delivery, UPS gained competitive strength using its single network efficiently across all the formats of delivery in an optimal way. The online e-commerce model played perfectly well into UPS business model. UPS “Job to be done” is about delivering small packages to its customers in a timely and secured way. This along with their single network model helped them to become a major freight forwarder of the e-commerce business and generate more revenue when compared to Fedex while achieving much higher Operational efficiency using its existing assets.

However, in the recent years, Amazon’s ambitious entry into the logistical area of Supply Chain is threatening to disrupt the core business model of freight forwarders like UPS who were generating revenue in delivering packages from e-commerce companies to their customers. Amazon has been outsourcing its logistics both inbound and outbound when it started its e-commerce platform. However, lack of control over the outsourced processes impacted the customer satisfaction on its delivery models. Process inefficiencies provided an opportunity for Amazon to enter into logistics to simplify the process and improve the performance of deliveries made to its customers. In addition to developing a technology based solution, Amazon has offered Free Delivery options to its customers who subscribe for its Prime Services (a premium service offer). This is to attract and retain its customers to use its shipping services which it hopes to reduce the time it takes for the products to reach its customers.

UPS has taken notice of Amazon’s entry into the world of logistics but with any disruption, the incumbents face the dilemma of how to approach the disruption (look at it as an opportunity or ignore it as not being a threat. The rest of this paper analyzes the disruption using the frame work of disruptive strategies and recommends the approach UPS need to take to deter any disruptions in its business.

Disruptive Theory

Amazon’s entry into Logistics aligns well with the New-Market disruption theory as Amazon is trying to introduce the technology based efficiencies in the package delivery market. The e-commerce model is relatively a new model in the last 2 decades. Customers served by Amazon are new to the concept of having their product ordered online and delivered in few days as opposed to paying and picking their product immediately from a Brick and Mortar retailer. Amazon’s initial model of making money is based on its volumes with a small gross margin. Its primary aim is to make the process of delivery efficient and eliminate the cost of engaging 3rd party logistics partners to offset its smaller margins.

From outside it appears that Amazon’s entry will disrupt UPS core business. Further with Amazon’s plan to become a global supply chain leader (recent lease of Boeing 737s), UPS domestic and international package delivery business seems to be threatened as well.

Job to be Done

The Job to done for UPS is to deliver packages safely in a timely manner to its customers. Its customer segments comprise of Commercial (Industry based clients), retailers, small business, walk-in customers via its stores. However, Amazon’s Job to be done is to remove inefficiencies in delivering packages to its customers and enhance their overall experience with their Amazon purchases. Hence Amazon’s focus is currently only with the customers that use their market place and purchase products. Also the Job to be done and the experience that arises out of it for UPS is different from that of Amazon’s.

Maintaining a Disruptive Scope

Amazon’s is at the early stages of being a logistics company. Its proposed solutions tend to be interdependent of the other processes within Amazons e-commerce business. Thus its market segment is currently restricted to amazon market place customers. It will take time for its process to be matured enough to become modular and provide an opportunity for Amazon to scale it commercially to other non-Amazon customer base.

UPS on the other hand has been the largest freight forwarder in the market. With matured and robust operation, it caters to different market segments and is not restricted to Amazon-market place customers alone. They can continue to serve other e-commerce retailers who are not planning to develop their logistical solutions like Amazon.

Insights

Amazon’s disruption is still at the early stages. When a disruptor emerges in a market, they will most likely to target on non-consumption market, in which customers have not brought the product due to lack of money or skill. In e-commerce situation, the whole concept is new to customers. Hence, Amazon initial foray into logistics will be only to improve their delivery efficiency of their online customers while eliminating the costs of 3rd party logistics providers. Since they have international customers as well, they seem to be expanding their model globally but still their target customers are their online customers.

The Job to be done for Amazon is different at this point then that of the UPS. Their business model of generating revenue from delivering packages to its customers will affect the existing business of UPS it does with Amazon. However, UPS other business will not be affected by this as Amazon does not seem to extend its logistics service to other market segment.

There is a lot of interdependence of Amazon’s current logistics solution. The solution is not yet mature where it could be separated from Amazon’s e-commerce business and become a business by its own so that it could be offered to market segments that is other than Amazon market place. As the processes mature, Amazon will certainly be looking to expand its logistics service to other customers as well but that is going to take time as Amazon has to establish itself in the market to compete with UPS in other segments.

As it could be seen Amazon’s current model do not pose a immediate threat to UPS except the latter will have its business with Amazon market place slowly terminated.

Recommendation

When trying to understand a disruption, an incumbent has to look at the opportunity the situation presents. In this case Amazon’s technology solution can present something UPS can consider implementing to make its existing operations more efficient. For example, Amazon deploys around 30,000 Robots in its warehouses. UPS can adapt this in a way that is suitable for its operating model or a concept something similar in nature. Eventually when Amazon is ready to move up the Logistics segment (which it will do), UPS can make sure that it matches Amazon’s technology

UPS should develop a Disruptive strategy which should include a Deliberate Strategy and an Emergence Strategy.

Deliberate Strategy

UPS strength is its mature processes of its existing operations. It should continue to develop sustained innovations that provide performance improvements that is valued by its most demanding customers. In UPS case this could be its commercial customers in various industries. By providing niche services to various industrial customers, UPS can improve its profit margins while retaining its top customers.

Emergence Strategy

While developing sustaining innovation at its existing process, UPS can deter the disruption by designing an Emergence Strategy. This should consist

  1. How to overcome the business it will lose its Amazon market place business?

UPS can consider entering into an exclusive partnership with other e-commerce retailers who do not OR not wishing to have a logistics firm of their own. Recently Walmart has acquired e-commerce Jet.com to compete against Amazon. UPS can become exclusive logistics provider for Walmart. Also unlike its current business model, UPS should spin off the e-commerce service into a separate business model. This way it can evolve as the e-commerce develops and does not affect its original business model.

  1. Encourage new ideas from within the organization which may develop a new business model.

The competitive landscape is changing for Supply chain. Firms with strong technology background are trying to enter and disrupt the market. The future is hard to read and the products/services are in their early phases. Empowering employees to come up with ideas at this stage may provide UPS some new way of approaching the evolving business model of technology based logistics.

UPS is witnessing the ground underneath shifting with the advancement of Technology. A two pronged approach should be considered by UPS. While UPS is not new to technology as it has adapted technology successfully in the past, the disruption happening now is altering the business model with automation and elimination of lot of redundant resources (brokers, agents..). UPS cannot turn a blind eye on what is happening in its area and need to successfully adapt to the changing conditions. As analyzed the disruption is still at an early stage which could be a good opportunity for UPS to develop an Emergence strategy before it turns into a threat. A sustaining innovation approach to improve performance, efficiency and niche services to its existing demanding customers could help it further consolidate or improve its Margin on the top level.

Ref: http://www.investopedia.com/articles/markets/120115/ups-vs-fedex-comparing-business-models-and-strategies.asp

https://techcrunch.com/2016/01/29/is-logistics-about-to-get-amazoned/

https://www.ups.com/content/us/en/bussol/browse/industries/industries.html

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