How UPS hedges against bad weather

It’s coming down to the wire for UPS and other delivery services as they rush to get presents to where they need to go before the holiday. Getting them there on time is not just about providing good service; it’s also about revenue. The Wall Street Journal reports that UPS takes a hit for late packages even when the cause is a blizzard or some other bad weather beyond their control (Inside UPS’s Weather Machine, Dec 23)

Freight operators generally have to eat the cost when a shipment doesn’t make its delivery on time, so snow, ice, rain, and fog can frost their bottom lines. UPS expects this week to be its busiest of the year, and estimates it will ship 120 million packages, 6% more than in the same week last year. Each late shipment will cost UPS between $5 and $30 in revenue, said spokesman Mike Mangeot.

So how do they cope with a rush of packages and winter weather? For one, they meteorologists and other staff who constantly monitor weather and develop contingencies. But they also have an operational hedge in the form of extra capacity.

A “hot status board” on the wall listed cities and regions where UPS had positioned spare pilots and planes, prepared to “rescue volume,” or packages stuck somewhere because of mechanical problems or visibility that makes it difficult to land.

The company says its “hot spares program” annually rescues more than one million packages that, if late, would cost UPS more than $20 million in revenue.

Near 10 p.m., a call came in from a UPS crew in Wichita, Kan. Heavy rain was affecting the aviation equipment on a jet that was due to take off in a half hour.

The jet, loaded with cargo in Wichita, was slated to travel to Springfield, Ill., where it would pick up more packages, and then continue on to Louisville, arriving at the hub at 1:16 a.m. with time for the packages to make connecting flights.

With some 5,900 packages potentially stranded in Wichita and Springfield, UPS’s contingency team diverted an empty jet that was flying from Laredo, Texas to Louisville to rescue the packages at Wichita, and “sent a hot spare” to Springfield, said Steve Merchant, contingency department manager. By 2 a.m., the packages were in Louisville.

This is a nice example of an operational response to risk. The article does not say just how many planes or how many crews are tied up in this rescue role. However, if they save $20 million annually with the program, that could justify a fairly significant investment just on a hard dollar basis. If one also considers more nebulous cost like customer good will that are very real but hard to quantify, this will look even better.