Strangling on Growth


Six years ago UPS strayed from its traditional practice of putting someone in charge who had risen through the ranks. “Previous UPS chairmen started in entry-level jobs, including bicycle messenger, accounting clerk, package car driver and management trainee.” Not this time, however. They wanted growth and who better than their CFO, Scott Davis?

As it turns out, just about anyone who understood the operations might have been a better choice. They got their growth, all right, but the price is turning out to be one they will spend decades paying. All across America people are telling sad Christmas stories like that of Jeff Cormier of Dallas: “… my grandma, she didn't have anything to open.” The reason: UPS grossly over-sold their capacity.

Oh they had a capacity plan, all right. They hired 50,000+ temps to get the job done. On paper – where former CFO’s do their best work – that should have done the trick. People are a variable cost so, by definition, all you have to do is vary the number of people and, voila!, instant capacity. Only it doesn’t really work that way in a world of people, trucks, sorting facilities and airplanes. It never is even remotely as simple as accounting analyses make it out to be.

Employees responsible for sorting packages—already deep into a 100-hour week—were furiously getting them ready to be sent on to their destinations at airports around the country. But dozens of other workers responsible for loading those packages into planes to be shipped out were left standing around idle, because the unexpected glut of packages from last-minute shoppers had swamped the company's air fleet.”

That’s Theory of Constraints 101. There is always a constraint. Overcoming one constraint simply means a new constraint is elsewhere. So they threw 50,000 inexperienced warm bodies at their constraint, undoubtedly increasing the error rate and sucking the air out of their experienced folks who had to help the newbies and constantly look over their shoulders, show them the ropes and undo their mistakes, thereby overcoming the constraint with brute force, only to run smack into a different constraint.

The customer ill-will they created is enormous – not only among the Jeff Cormiers and their grandmas whose Christmases they trashed, but among the Amazons, Walmarts and other big retailers. Amazon if giving $20 gift cards to their irate customers, and you can bet they will take each of those $20 bites out of UPS’ hide.

The excuse-making is truly pathetic. UPS blames the weather – even though FedEx and the Post Office report that they had a few hiccups over Christmas, but nothing nearly so widespread as UPS and it seems a safe bet the weather was pretty much the same along their routes as it was along those of UPS. The industry ‘experts’ are blaming customers, (When has that ever been a good idea?) suggesting the problem is that too many retailers offered goods for Christmas delivery a couple of days before Christmas. In other words, the fools should have known UPS’ next day and second day guarantees weren’t worth the paper they were written on.

The crux of the problem, however, is the disconnection of sales from operations and capacity – and that is a problem for a lot of companies even though most don’t have their disconnection played out quite so publicly and emotionally as ruining people’s grandmothers’ Christmases.

You can read a lot about the source of the problem and the steps UPS coulda and shoulda taken; but the one you won’t read is the simplest of all – say no to the customer. It’s really quite easy – just tell Amazon and Walmart, “We are over capacity and can’t deliver this stuff on time- you should give the packages to FedEx and the Post Office in order to assure they get delivered on time”.

But that never happens, does it? It doesn’t happen because sales folks are typically a silo unto their own. They are tasked with selling as much as they can of whatever they can to whoever they can; and it is operations problem to figure out how to deliver. And when sales sells a volume and mix that operations can’t deliver, that is an operations failure. It is a very, very safe bet that the sales and marketing arm of UPS will actually be rewarded for this debacle – the recipients of healthy commissions and bonuses, even as they created immeasurable havoc. And it is a safe bet because growing the “top line” and growing the business are seen – especially among former CFO’s now running the whole show – as goals and objectives all on their own – as though there is some benefit to doing so regardless of their impact on the overall business. Wall Street certainly thinks so and they know everything about the package delivery business, don’t they?

The objective is to align capacity – the basic cost structure – with sales volume. Of course, the greater the better, but the fundamental objective is alignment. The huge obstacle to this is the thickness of the sales silo walls – usually made virtually impenetrable by the steel and mortar heaped onto the walls by accounting. Equally safe bet that UPS accounting determined that the cost of the $14 shipment was $10, regardless of whether it was the only package shipped, or the last one piled on a hopelessly backed up sorting facility – because all of those costs are variable, right?

Excellence comes from executing the core processes from end to end – and cannot happen when the sales folks are exempt. Taking sales and volumes out of the value stream turns lean into nothing more than a relatively ineffective cost reduction tool; and lean is a growth strategy – not a cost cutting strategy.

UPS is unlikely to learn the right lessons from the mess they created for themselves. Most likely they will believe their own fairy tales about the weather, and look to spend millions more on computers and software to ‘fix’ operations. But everyone else can learn, and hopefully avoid disappointing grandmothers on Christmas Day as a result of their growth strategy.

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