A Solutions Approach to Customer Value
At the 2017 Investors Conference, Kate Gutmann, UPS Senior Vice President of Worldwide Sales and Solutions, discussed ways the company’s go-to-market strategy creates a competitive difference for UPS and its customers.
Thank you. And good morning, everyone.
You’ve heard about our vision, our investments in new technology and efficiency and the markets where we see the greatest opportunities for profitable growth.
I want to continue the conversation by talking about how we differentiate UPS with our go-to-market strategy, leveraging our Solutions Group, our new product development capabilities and the innovative solutions that drive value for customers. I’ll also talk about how we continue to bring pricing into alignment with our cost-to-serve.
The UPS growth story starts with customers. Our 2.5 million customers around the world come in all sizes and cover a wide band of industry verticals. And while B-to-C and the e-economy are in the headlines, our customer and revenue base is diverse across industries and geographies.
UPS has the industry’s leading portfolio of supply chain services, but we also have a go-to-market approach that redefines the way customers think about and buy logistics. We do this through a dynamic sales organization of dedicated professionals around the world who understand our customers’ objectives, inject commercial insights and help them solve their problems and seize opportunities.
In addition to our sales team, we have a Global Customer Solutions organization of more than 1,000 supply chain professionals – largely engineers – who focus on retooling our customers’ global supply chains. Our freight forwarding and supply chain services, when combined with small package operations, provide unique capabilities, enabling UPS to create deeper relationships.
The Customer Solutions organization is a key differentiator for UPS and a critical component of our strategy. We help customers with critical decision-making on optimal shipment origin, distribution patterns, warehouse locations, technology and investment and the list goes on. Basically all the critical path decisions to optimize their supply chains.
And how do we know our solutions create value for customers?
Because customers who engage with us for solutions significantly grow their transportation revenue. For large customers, they grow transportation revenue up to 10 times faster than customers without solutions. And the majority of UPS's largest customers use our solutions group.
That’s the value proposition for UPS: contracting with our solutions team generates meaningful additional UPS revenue across the full portfolio. We connect these resources to companies of all sizes, not just large-enterprise accounts. And we have programs with the right specialization for small- and medium-sized businesses – our most profitable segments.
In fact, we know that small- and medium-sized businesses, after partnering with UPS, generate more total UPS revenue because we expand their use of supply chain solutions and create broader connections.
Next, I’d like to spend a few minutes on e-commerce and some innovative solutions we’ve rolled out for both B-to-C and B-to-B customers. Digitization is connecting companies and consumers in new ways, and this trend spans multiple industries. We know that 55 percent of shoppers today prefer to shop online rather than going to a store. We also know that one in three consumers wants to reroute packages to somewhere other than their home. Our Access Point network and UPS My Choice services address this growing need.
UPS My Choice offers more services, tighter delivery windows, less costly premium service upgrades and links to four times the number of alternate delivery locations than the competition’s offering. It’s simply a better solution for our customers and consumers.
We have more than 33 million registered users in 15 countries who value visibility – the ability to control when their package arrives and when to pick it up at an alternate delivery location. To that point, we now have more than 26,000 Access Point locations in 18 countries where consumers can pick up their packages.
In 2016, our customers picked up more than 36 million packages at Access Point locations, and the numbers continue to grow. For instance, in December, our Access Point volume grew 38 percent. With Access Point, we demonstrate to our customers the efficiencies and cost benefits due to higher-density deliveries. But also the potential for revenue gains. Sixty percent of consumers surveyed recently said their ability to pick up packages at an Access Point location allows them to order more online. When you combine My Choice with our Access Point locations, they provide an even more powerful solution for retailers to increase satisfaction by increasing the number of successful first-attempt deliveries.
It’s this kind of innovation that differentiates our services.
Next let’s turn to the UPS Returns Services portfolio. How important are returns or reverse logistics for the e-economy? While traditional brick-and-mortar retailers normally experience return rates of 4 to 8 percent, e-commerce return rates are typically in the 20 to 30 percent range. That figure can be higher, depending on the category. During our returns peak week, holiday shoppers used UPS to return nearly 5.8 million packages in one week. So there is a critical need for a comprehensive reverse-logistics solution. We continue to enhance our best-in-class returns portfolio, and our customers are noticing. Our returns portfolio volume grew 12 percent in 2016.
Our Mobile Returns service is an innovative new solution that further differentiates our complete returns service. UPS Mobile Returns allows retailers to send a PIN tied to a return to the consumers’ mobile device – email or text. The consumer simply stops by one of the more than 4,500 UPS Stores for a few moments to complete the return without ever printing a label. And while the retail industry will clearly benefit from UPS Mobile Returns, the process is applicable to many industries with warranty repairs and returns for field-service technicians.
Returns transportation is only a small part of the complete reverse logistics value stream that UPS is serving. Retailers are motivated to improve their customers’ merchandise return experience while at the same time trying to maximize the recovery value of the returned items and minimize processing costs.
To meet this need, we recently announced an exclusive alliance with Optoro to complement our existing returns portfolio. By combining Optoro’s predictive analytics software capabilities with UPS’s operational expertise, we have created an innovative and powerful suite of reverse logistics solutions to help customers manage and sell returned and excess inventory. We are very excited about our alliance and the differentiating opportunities it brings.
Our commitment to solutions also extends to our operating plans. Myron has already described our Saturday Ground operations. Expanding our Saturday Ground service later this year helps all businesses meet their customers’ expectations for faster delivery.
We talk a lot about e-commerce because this is where the market growth has come from recently. However, we are also very focused on the commercial shipments that tie to B-to-C. We have many omni-channel solutions helping to solve for needs like inventory movement between stores and Ship to Store, as two examples.
We continue to be focused on B-to-B and, remember, we have been the market leader in B-to-B for many years. In fact, the vast majority of our revenue across the enterprise in 2016 came from B-to-B customers.
For the next few minutes, I’d like to take you on a deep dive into one of our key B-to-B verticals: healthcare. UPS is a strong player in healthcare with an 8 percent share of a growing $70 billion market for healthcare logistics. The growth opportunities in both medical devices and pharmaceuticals are being driven by several factors, including:
- The aging populations in many developed countries
- The growing middle class in emerging markets
- Universal pressure to make quality healthcare more affordable
- The pervasive increase in chronic diseases
- Medical innovations giving rise to a new breed of custom or personalized medications
On that last point, we see personalized medicine creating greater need for smaller express and complex cold-chain solutions. Globally, healthcare is expected to grow 7 percent annually through 2021, and we are perfectly positioned to take more than our fair share of that growth. That’s because we are investing and growing our cold-chain solutions with our express freight and UPS Temperature True transportation services.
We’re also investing in our healthcare-compliant facilities to help our customers in both developing and developed markets with specimen logistics, clinical trials and other temperature-controlled services.
In 2016, we expanded our capabilities with the acquisition of Marken. Marken provides patient-centric supply chain solutions, transporting 50,000 complex drug and biological shipments every month to more than 150 countries. The Marken addition also makes us the leading player in the $1.5 billion clinical trials market – and makes UPS the world's largest integrated inbound clinical trials carrier. By leveraging Marken’s strong position in developed markets and its growing presence in emerging markets, we’ll further differentiate our innovative healthcare solutions.
I’d like to close out my talk by discussing one of the complexities that all delivery services face in an era when the public thinks shipping is free.
Yet, contrary to what you see in the banner ads, shipping is not free. And that brings me to our pricing strategies. We will enhance our pricing strategy going forward to ensure we align price with cost regardless of service level or package size.
For 2017, we have already taken a number of actions to achieve yield improvements.
First, the General Rate Increase became effective Dec. 26, 2016, and was designed to maximize our base rates and profitable growth. We expect to realize a base rate increase around the mid-point of the 2 to 3 percent range.
The changing characteristics of our packages require us to match cost-to-serve with targeted price increases. So we have created a new DIM weight divisor for U.S. packages greater than 1 cubic foot. We have increased the handling fees for packages where we incur more cost, and we also raised the maximum surcharge for all large and unusual-sized packages.
In addition, residential delivery surcharges were increased, and our fuel surcharge will be adjusted weekly. Each UPS service is priced to align with cost. However, when trends move quickly, like at peak, refinements can be needed. Our collaboration with high-impact peak shippers is at a record level. Through extensive forecasting efforts, we work together to understand the need and earmark the appropriate capacity for them.
In 2017, we are enhancing our peak planning process through a new Forecast Accuracy Tool. The process enables us to charge for unused committed space based on the UPS product reserved, as this drives forecast capacity required in our network during peak periods.
This is just one example of the continued measures we are taking to align revenue and cost to product mix and volume surges to ensure we are compensated for the value UPS creates.
To sum it all up, I am confident that the innovative solutions that differentiate our services and create value for our customers will allow us to meet our growth and margin objectives in 2017 and beyond.
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