Commentary

Guarantee It

ny doubts that logistics and fulfillment are the key tosuccessful online retailing should have been dispelledby this holiday season. The Grinch didn't exactly stealChristmas, but poor logistics by online retailers left

many consumers in a decidedly Grinch-like and grouchy mood.Toys R Us is the target of a class action lawsuit filed in Wash-

ington state that alleges the company failed to deliver toys pur-chased at Toysrus.com by Christmas. A reportin the E-Commerce Times warned that e-tailersthat failed to deliver could face sanctions underthe Federal Trade Commission's Mail OrderRule, which governs the performance of mail-order companies.

While online retailers must focus on logis-tics to improve distribution, one companycould do much to ensure the growth of online

retailing. United Parcel Service, which owns the lion's share of thebusiness-to-residence parcel delivery market, should guaranteeall residential deliveries. Such a guarantee would be a big shot inthe arm for e-commerce.

Since UPS is the market leader for business-to-residenceground parcel service, a look at all UPS service offerings explainswhy residential deliveries for ground service also should be guar-anteed. (See Table 1.)

For a long time, the industry limitedguaranteed delivery to premium-pricedexpress services only. In 1997, when indus-try observers exposed the pricing premiumfor guaranteed air express over comparableground service, UPS responded with aguarantee for ground deliveries in May1998. However, it was not offered for resi-dential addresses. The decision to limitguarantees to commercial addresses had tobe based on the realization that there wasno competitor in the business-to-residencemarket to preempt UPS, unlike RPS inbusiness-to-business market.

With the surcharges for residentialdeliveries and increase in business-to-resi-dence volume that reduces delivery cost,UPS should guarantee residential deliver-ies. Table 2 illustrates the premium forresidential deliveries over commercialaddresses for a five-pound parcel. Therates are for customers with automaticpickup and for delivery to rural ZIP codesfor which the surcharge increases from $1to $1.50 effective Feb. 7.

In addition to revenue surcharges for residential deliveries,UPS has some cost savings in some areas with business-to-resi-dence parcels. For example, the pickup cost for business-to-resi-dence parcels at 7 percent is considerably lower than business-to-business parcels at 12 percent of total operating cost. Otherreasons for UPS to guarantee residential deliveries are:

• Residential deliveries for express services already are guaran-teed and there is no difference in the delivery process forexpress and ground services.

• There is no difference in the entire transportation processfrom pickup to final delivery between commercial and resi-dential addresses.

• UPS guarantees delivery to a small corner store located in aremote rural ZIP code. While it incurs the same deliverycost to a residential address, it has a revenue surcharge of$1.50 for a residential address without guarantee. With newprivate competitors entering the business-to-residence mar-ket, this discriminatory pricing and service approach is notsustainable.

• UPS drivers release guaranteed express services to resi-dences. Hence, it can do the same for ground service andstill guarantee delivery.

The annual revenue for the domestic nonexpress (ground)parcel market is about $21 billion. The business-to-residenceground market in terms of parcel volume and revenue is about

UPS Guarantees by Delivery AddressUPSPARCEL SERVICES

Next Day AirNext Day Air Saver2nd Day AM Air2nd Day Air3 Day SelectGround

COMMERCIALDELIVERIES

GuaranteedGuaranteedGuaranteedGuaranteedGuaranteedGuaranteed

RESIDENTIALDELIVERIES

GuaranteedGuaranteedGuaranteedGuaranteedGuaranteed

Not Guaranteed

UPS Ground ChargesCommercial vs. Residential Delivery

PRICINGZONE

2345

TRANSITTIMES

1 day2 days2 days3 days

GROUNDGROUND (RURALIBASEi SURCHARGE!

$4.32$4.60$5.07

$5.30

$1.50$1.50$1.50$1.50

GROUND(TOTAL)

$5.82$6.10$6.57

3.80

GROUNDCOMMERCIAL

(TOTAL)

$3.32$3.60$4.07

% PREMIUMOVER

COMMERCIAL

75%

69%

January 24, 2000 • trafficWORLD . 47

CARRIER

UPSPriority Mail - USPSParcel Post - USPSAirborne@homeCTC DistributionParcel DirectPaxis LLCHarte HanksPostal Freight Inc.RPS Inc. (FDX company)

one-fourth of this total market. Yet there are more competitors inbusiness-to-residence than in the business-to-business segment.While there are over 10 competitors seeking business-to-resi-dence parcels, only two carriers presently have a residential deliv-ery infrastructure. (See Table 3.)

With the business-to-residence parceldelivery market dominated by UPS and thePostal Service, the implications from guar-anteed residential delivery are as follows:

• Raise barriers to entry into the busi-ness-to-residence market.

• With significant presence in the busi-ness-to-residence market, USPS willhave to accelerate guarantees for Pri-ority Mail and Parcel Post service.

• The lack of guarantee will hinder Pri-ority Mail growth.

• Many parcel consolidators that useUSPS for final delivery will be left tocompete for low-end products thatare not service sensitive.

• FDX will have to respond by guar-anteeing its business-to-residenceinitiative being rolled out by RPS inMarch.

The retailers and their customers arelooking for improvements in the online retail supply-chain pro-cess. Yet even with improvements in their logistics operations,they will be unable to provide a definite delivery date to their cus-tomers. While online consumers tend to have higher income andhigher service expectations, most items bought over the Internetcannot support the express service charge for guaranteed deliveryand are thus shipped via deferred services like UPS Ground.

The Grinch didn't exactly stealChristmas, but poor logistics

by online retailers left many

consumers in a decidedly

Grinch-like and grouchy mood.

According to a study by Zona Research, only 2 percent of onlinebuyers are willing to pay for overnight delivery, and more thanhalf are willing to wait four to seven days. Hence a guaranteeddelivery service for residential addresses can enhance the cus-tomer experience and promote online sales. The benefits of guar-anteed ground service to this industry are:

• Allows online retailers to provide expected delivery date totheir customers.

• Enhances the consumer's ability to accept parcel in person.• Helps online retailer achieve higher level of customer satis-

faction.Over time, the online retailers will feel the pressure of ship-

ping and handling costs, shift their focus from increasing cus-

tomers to managing costs, and gain more clout with parcel carri-ers. This will allow them to pressure delivery companies to guar-antee residential deliveries.

With a proactive response to the needs of the online retailersand consumers, UPS can enhance its market position as follows:

Competing Carriers(in the B2R Ground Market)

ABILITY TOGUARANTEE

DELIVERY BY DELIVERY

UPS

USPS

USPS

USPS

USPS

USPS

USPS

USPS

RPS /starting March 2000)

YesNo*

NoNoNoNoNoNoNo

Yes

* U.S. Postal Service has a minimum 12-month process to implement such changes

• As it faces new competitors in the business-to-residencemarke t (RPS, Shipper .com, Webvan, HomeGrocer,Ko/.mo.com, etc.) UPS can differentiate its service with aninitiative difficult for the competition to implement.

• The introduction of DSCF and DDU discounts by the USPSin January 1999 created an opportunity for consolidators tocompete with lower shipping charges while offering bettertransit times and higher on-time performance. However,their dependence on the Postal Service for the final deliverylimits them from offering a delivery guarantee.

• Guaranteeing residential addresses for ground service willsimplify' internal processes and promote greater account-ability since all other UPS services already are guaranteed.

• By introducing this guarantee now, UPS will keep e-tailcrsfrom defecting when competitors like RPS guarantee resi-dential delivery.

• It is an opportunity for UPS to be the first to offer a newservice as it did with Next-Day Early AM, 2nd Day AM Airand 3-Day Select.

• It can minimize loss of business to same-day delivery carriers.The delivery cost to a residential address in a rural ZIP code is

not different from that to a commercial address. Yet the residen-tial parcel is priced at 78 percent premium without a deliveryguarantee. This pricing premium for inferior service cannot besustained in a competitive market. RPS is expanding its residen-tial delivery service to 50 percent of the U.S. population inMarch. With more private carriers having the ability to competeon service issues with UPS, the market will demand a guaranteefor residential deliveries.

— //m/i'/ is president oj S] Consulting, Pittsburgh.

48 • traffic\VOi:i. l> • January 24, 2000