Sunday, October 5, 2003

Delivery firms shift gears
as businesses pinch pennies

By Brad Foss
The Associated Press

To cut costs when the economy wilted, Pine Hall Brick Co. turned to its shipping budget. By keeping extra spare parts on hand, the Madison, N.C., brick maker has reduced the number of pricey next-day shipments it needs.

Link-Belt Construction Equipment Co. of Lexington also looked at its shipping expenses but took the opposite approach. The crane manufacturer scheduled smaller and more frequent supply deliveries - a net savings because it sharply lowered inventory costs.

The contrasting strategies illustrate the conflicting messages the shipping industry is picking up these days: Indications that the economy is perking up are tempered by signs of corporate stinginess.

"We do remain optimistic that the economy will strengthen," said Kurt Kuehn, senior vice president of investor relations at United Parcel Service Inc., although he said right now there are mixed signals. Home deliveries have been good, Kuehn said, but business-to-business deliveries have lagged behind expectations.

Likewise, executives at FedEx Corp. were disappointed with shipping volumes in the retail and manufacturing sectors during the June-August period, its fiscal first quarter, although the company reported its first quarterly increase in U.S. express-delivery volume in 21/2 years.

To be sure, FedEx and UPS, the biggest integrated shipping companies, have weathered these tough financial times pretty well.

They've cut costs, brought in new customers in underserved international markets and focused on expanding niche businesses domestically.

A year ago FedEx committed $1.8 billion to nearly double the size of its ground transportation unit, FedEx Ground, by 2009, in a bid to increase market share in an area where UPS is the industry leader. UPS, meanwhile, has made gains in the lucrative domestic air parcel business dominated by FedEx.

Yet while analysts and executives talk up these successes, and point to evidence of a U.S. economy on the mend, a measure of caution persists.

In discussing FedEx's 19 percent decline in fiscal first-quarter profit with analysts last month, Mike Glenn, the company's executive vice president of market development and corporate communications, noted that "improvement in retail sales didn't translate into improvement in demand for shipping."

"We also saw some slow economic recovery in manufacturing," he added.

To trim inventory costs, many companies are replenishing supplies less frequently and taking bulk shipments when it is absolutely necessary to restock shelves, Glenn explained later in an interview. The trend benefits large trucking companies and hurts traditional package delivery companies. FedEx has been able to capture at least some of this business through its FedEx Freight division, Glenn noted.

Shipping industry revenues also have suffered as companies looking to pinch pennies switch from overnight air deliveries to cheaper alternatives, such as next-day ground or 2-3 day deliveries.

This trend accelerated during the economic downturn, analysts said, but really began more than a decade ago as the on-time performance of ground shipments improved because of better fleet management. Moreover, package- tracking technology has given customers an added level of comfort with slower deliveries.

"People often care more about reliability than speed," said David Hoppin, who runs MergeGlobal, an Arlington, Va.-based consultancy for the transportation and logistics industries. "And road transport can cost one-tenth the amount of air."

FedEx's $1.8 billion in FedEx Ground attempts to capitalize on this shifting attitude of customers.

Tim Olsen, managing director of the FedEx Ground hub in Woodbridge, N.J., estimated that daily volume has grown more than 30 percent since 2000. He attributed some of that growth to the consolidation of operations in the Northeast as well as to an increase in demand for "next-day" ground services.

Notwithstanding the industry's upbeat prospects abroad, particularly in Asia, where the manufacturing sector is growing, shippers are constantly wrestling with how best to meet the changing demands of a mature U.S. market.

Atlanta-based UPS believes that by offering supply-chain management services, it can capitalize on the cost-consciousness that swept through corporate America when the economy soured in 2001.

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Delivery firms shift gears as businesses pinch pennies