A BusinessWeek article suggests that FedEx and UPS have a dilemma – sometimes the box doesn’t have to be there overnight. I think they have a bigger problem – the box should never take a week.
I really have no major criticism of either FedEx or UPS. FedEx revolutionized the small package delivery business, and UPS has pushed them hard. Between them they are a critical link in the inevitable, massive ‘leaning’ of supply chains. Online manufacturers and sellers could not connect directly with end customers without increasingly efficient small package delivery providers. The old wasteful model is mass production of relatively few product variations in a faraway place, shipment in container loads to massive distribution centers, then by truckload to massive brick and mortar stores.
The new model is lean production of small quantities of a wide range of product variations sold via a web site, then shipped one at a time directly to the end customer. The radical improvements in macro-productivity; and in value for consumers resulting from shaking all of that non-value adding waste from the cost of just about everything could not possibly happen without the cut throat innovative competition between FedEx, UPS, and others such as DHL and the postal services.
I cite them simply because they are an easy-to-understand example of upside down thinking in terms of the economy of time – the absurdity of expediting charges.
If I were to send a package to my son in Tucson, the value adding time to ship it from my home in Illinois is about 24 hours if one were to drive – about 8 hours if I were to drive to O’Hare, put the package on a plane, then have someone meet the plane and drive it to my son. Any time beyond those figures is waste – waiting time, sorting time, time spent in trucks or planes moving somewhere other than directly to the destination. All of that extra wasted time adds to the cost of the shipment without adding to the value – in fact it detracts from the value since the value in this case is speed.
The upside down economics is that UPS and FedEx charge more for speed – the overnight charge is higher – a lot higher – than the charge to get that same package there in a week. The direct route –the route without all of that extra handling, moving around and handling – is apt to cost three or four times more than the slow route, even though the slow route is the one that incurs all of that additional non-value adding cost.
Again, the point is not to bash FedEx or UPS – it is to use them as an example of the absurdity of expediting charges. The higher price for over night delivery is essentially just such an expediting fee. And just about every manufacturer does the same illogical thing – whether it is in the form of a stated expediting charge or simply charging higher prices for customers that want shorter than the norm lead times.
The price for you to take the order directly to the factory, put exactly the right amount of material to the first machine, process it, move it directly to the next operation, process it, and so forth until it is complete, then take it to the shipping dock and send it to me is a lot higher than the price you charge for exactly the same process … plus doing all of those steps with a lot of extra handling in and out of the warehouse and piles of WIP inventory, tying up all sorts of floor space and material handling equipment, tracking the order with a bunch of paperwork and a big ERP system, etc…
How come you charge less when it costs you more? How come you charge me more for doing what I want plus a whole lot of stuff I don’t want than you charge for doing just what I want?
That is a very good question and one the production and accounting folks should be compelled to sit down and answer.
Of course, nine times out of ten the answer is that it takes too long to set up the machines. The one hour set up time has to be paid for by the one piece I want when you expedite. If you let my order sit in inventory you can wait until you need a bunch of them, make them all at once, then amortize that hour across a whole bunch of items.
Same with FedEx and UPS. They charge more because an overnight shipment means putting my package on an airplane whether they are ging to use all of the space on that plane or not. When I am willing to wait a week they can wait until they have a whole lot of stuff going from Chicago to Tucson and spread the cost of that plane over a lot of packages.
But that doesn’t really answer the question in a very satisfactory way, does it? It basically says that the waste of long set ups is accepted – and that customers who expect you to operate without the waste of long set up times are penalized, while those willing to accept your waste are rewarded. Hence, my assertion about upside down economics.
The measure of ‘lean-ness’ at FedEx and UPS should be their progress toward reducing their slow shipments from five days to four, then to three, then to one until they have only one class of service – the one with little or no waste in the cycle time of a shipment.
That same ‘lean-ness’ measure applies to manufacturers – the rate at which the cycle from order to shipment is reduced until the notion of charging more for speed is nothing more than a relic of past, outdated thinking.