UPS capacity restrictions may provide some longer-term logistics takeaways

An article in The Wall Street Journal this week explained that freight transportation and logistics bellwether UPS “imposed shipping restrictions” a few large retailers like Gap Inc., LL Bean, Nike, and a few others should not come as a total surprise.

The reason for that, as we all know, is that with the ongoing COVID-19 pandemic leading to a major increase in online shopping, parcel networks have been constrained and restricted, in terms of the amount of available capacity they have, like never before. That is as plain as day.

What’s more, this frenetic e-commerce activity is going to remain fully intact through the holiday season and into the new year, too, when factoring in the impact of reverse logistics operations driven by returns, no surprise there. If you need more proof of that, then consider this statistic from the National Retail Federation that was included in the WSJ article: “The National Retail Federation estimated that online shopping jumped 44% over a recent five-day stretch that included Black Friday and Cyber Monday.” That is astounding but not entirely surprising either, given the world we are living in these days.

One of the most renowned parcel experts there is, Jerry Hempstead, president of Orlando, Fla.-based Hempstead Consulting, explained to me, when asked about the WSJ report, that the simple message in this—granted it’s a handful of large e-commerce shippers who have extraordinary surges of volumes between thanksgiving and Christmas—that the carriers have a finite amount of throughput in their networks in a 24 hour/seven-day span.

“Because of the ability of individuals to order 24/7 there is no longer a break over the weekend to clean up,” he said. “The carriers can’t invent more time. They can build out more capacity, but the business question for the carriers has to be “’how much do I want to spend to solve a four-week problem, for shippers with the most deeply discounted, lowest yielding business?’”
And right now, Hempstead said that the response is “sweat the resources we have to maximize the profits we can make, and we will deal with the fallout from the volume caps,” adding that, at the end of the day,
there are few choices and where are shippers to go.

So, what does this mean going forward, in the years to come?

Hempstead said he thinks 2021 could be the year of the regional carrier, as the large integrators are forcing the hands of the shippers to integrate additional transportation providers into their mix.

“This is going to be the new normal until the carriers once again have excess capacity,” he said. “So, the question becomes, once we solve the current pandemic will buying behavior change back to the way it was pre-COVID? There will be some recidivism but to what degree or will it just be replaced with the organic growth we have seen over the last decade? Shippers just need to plan on what we know at this point in time and that is that peak 2021 might be as, if not more, restrictive than peak 2020?”

While that may be difficult to ponder now, during the height of online holiday shopping and shipping, it is something to keep in mind a year from now?

And Ben Hartford, transportation analyst for Robert W. Baird & Co, said that this move by UPS is really a combination of the reality of the market right now.

“Given the fact that we are in COVID, many of us are still working from home and having limited social contact, and there has been a resulting spike in e-commerce-related activity that has consumed supply with parcel network; that is not new, we have seen that develop since the end of the first quarter, when the pandemic really broke,” he said.

Hartford pointed out that there were some surcharges applied in the second quarter, as well as surcharges that were put into place by UPS on the back half of the year for Peak Season in anticipation of continued capacity constraints.

“Part of it is a continuation of the dynamic the parcel spaced has experienced throughout this pandemic,” he said. “There is the added layer as well that is presented by Carol Tome and hew leadership and philosophy of making UPS better not bigger. They have talked about this on the last couple of conference calls and are focused on the reality of making sure they are fairly compensated for the services they provide and the scarcity of capacity now allows them to do that.

And on a historical level, he added that that for Peak Season, this period over the past several years shows that some of the disruptions associated with peak are really just caused by a few dozen customers with specific needs between Thanksgiving and the end of the year.

“So, for UPS to put these caps into place I don’t think is terribly surprising, in the context of what we have seen already in 2020 from an environment or fundamental perspective,” he said. “There is also the added layer of what we know UPS is attempting to do longer-term with its new leadership. These elements are very much logically in line with the elements we have seen develop over the past few quarters.”

That is a lot to chew on, especially as we all scramble to get our holiday gifts ordered and shipped out on time. It may sound easy on paper but rarely ever is, for the most part. Granted that these measures taken by UPS only applied to a few major retail shippers, but, still, it really serves as, maybe not a wake-up call for shippers, but yet another thing to address and ponded during the busiest, and, of course, most wonderful time of the year.  

About the Author

Jeff Berman, Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman