“the future of packages” jim cochrane manager, package services
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1
“The Future Of Packages”
Jim Cochrane
Manager, Package Services
2
•Market Trends
•The New Law
•Re-Designing Products
•Transformation Strategies
Agenda
3
► Market is generally soft both domestically and internationally
“It seems to us that the economy is headed for a soft landing” — Rosalind Wells, Chief Economist for the Retail Federation
“We anticipate another good year despite a slowing U.S. economy,"
— UPS' Chief Financial Officer Scott Davis.
“The outlook among the parcel carriers is that domestic economic growth is slowing in the first half of 2007”
— William Greene, Financial Analyst for Morgan Stanley
Market Update
4
► Highest Published Increases In Over 10 Years
► Lightweight And Residential Continues To get Hit Heavier Than Published Rate Increase
► Subtle But Significant Changes In Discount Methodology
► Surcharges, New Ones And How They Are Enforced Continues To Drive Revenue
► Elimination Of On-Demand Rates
► Adjusted Net Minimum
Market Update
5
20% 20% 20% 22% 27% 30%
73% 70%
80% 80%80% 78%
0%10%20%30%40%50%60%70%80%90%
100%
2002 2003 2004 2005 2006 2007 Proj.
B2BB2C
B2C Shipments On The Rise
Market Update
6
►B2B Is Stagnant
►As Noted - B2C Is Growing
►Packages Are Getting “Lighter”
►Online Retail Growth Is Replacing Manufacturing Segment Decline
What’s Fueling The Growth?
Market Update
7
► Over 70% Of Packages Travel Less Than 700 Miles
► Significant Shift From Air To Ground
► Accessorial Surcharges Are A Strategy To Generate Revenue As Well As Yield
It Also Allows Our Competitors To Suppress Their Actual Rate Increases
Market Update
8
The Right Products & Features
-15.8
-9.7 -9.2
-11.6
-5.4
-12.1-12.3
-6.9-4.9
-3.1-1.4
-2.9
0.6 1.3
4.0 4.05.7
2.2
-0.9
-3.3 -3.1
-0.2 -0.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
% SPLY 8 Qtr Moving Average Growth Rates
Total Express Mail Volume
FY 2002 2003 2004 2005 2006 2007
9
-17.0
-12.6
-8.6 -9.0
-13.4-15.1
-14.0
-10.3
-0.3
-2.7-4.9
3.2 2.5 2.6
7.56.1
4.1
10.2
1.4 0.7 1.1
-5.3
-2.8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
% SPLY 8 Qtr Moving Average Growth RatesFY 2002 2003 2004 2005 2006 2007
Total Priority Mail Volume
Market Update
10
The Right Products & Features
-2.8
1.5
-9.2
-2.3
3.3
6.9
12.3
2.4 2.8
0.1
-4.7
2.3
-1.4
3.3
7.8
3.3 3.5 3.5
-3.5
-0.9
1.1
-2.7
0.8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
% SPLY 8 Qtr Moving Average Growth Rates
Total Package Services Volume
FY 2002 2003 2004 2005 2006 2007
11
► Service► Convenience► Price► Visibility
Segment Service Convenience Price Visibility
National/Strategic 1A 4 1 3
Premier/ Large 1A 3 1 4
Consumer/SMBS 1A 1 4 3
Customer Buying Criteria
Market Update
12
Reasons Shippers Change Carriers
* Morgan Stanley/ Parcel 2006 Annual Best Practices Survey
Market Update
13
Shippers Rated Carriers Less Favorably
Biggest Complaint About Primary Carrier *
1 Pricing
2 Surcharges
3 On-Time Delivery
4 In-Transit Damage
5 Difficulty Working With The Carrier
* Morgan Stanley/ Parcel 2006 Annual Best Practices Survey
Market Update
14
In Addition To Base Rate Increases, Competitors Continue To Add And Raise Rates On Surcharges
Note: The table above does not include fuel surcharges.1 Based on Competitor’s accessorial charges published before each rate change.
Surcharges Are Intended To Increase Package Contribution - They Are Rarely Discounted
Calendar Year
Approximate
Percent ChangeIn Competitor’s Total
Average Surcharge Amounts
Increase In
Reported Number
of Competitor’s Surcharges
1
2003/2002 2.48% 32004/2003 18.94% 72005/2004 14.87% 32006/2005 15.46% 3
2007/2006* 19.34% 4
2007/2002 109.29% 20
* Estimate
Market Update
15
Competitor’s Rate Increases 2002 - 2007
PublishedActual
CommercialActual
Residential
YEAR Increase 1 - 5 lbs. 1 - 5 lbs.
2002 3.50% 3.90% 4.08%
2003 3.90% 4.67% 4.64%
2004 1.90% 1.91% 6.06%
2005 2.90% 4.71% 5.80%
2006 3.90% 4.57% 7.57%
2007 4.9% 5.50% 5.56%
TOTAL 22.89% 28.02% 37.85%
AVERAGE 3.82% 4.67% 6.31%
Competitive Prices
16
Net Minimums Reduce Discount & Drive Up Cost
2007 Competitor Ground Commercial with 20% Discount - Actual Discounts
Wgt Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone 7 Zone 8
1 0% 2% 5% 9% 13% 15% 17%
2 1% 7% 15% 17% 20% 20% 20%
3 2% 11% 19% 20% 20% 20% 20%
4 5% 14% 20% 20% 20% 20% 20%
5 11% 15% 20% 20% 20% 20% 20%
Competitive Prices
17
Weight/ Zone L,1,2 3 4 5 6 7 8
Flat $ (2.00) $ (2.10) $ (2.23) $ (2.41) $ (2.65) $ (2.73) $ (2.84)
1 $ (2.00) $ (2.10) $ (2.23) $ (2.41) $ (2.65) $ (2.73) $ (2.84)
2 $ (1.90) $ (2.15) $ (2.00) $ (1.73) $ (1.95) $ (1.68) $ (1.65)
3 $ (1.14) $ (1.56) $ (0.65) $ (0.01) $ (0.06) $ 0.45 $ 0.66
4 $ (0.65) $ (1.13) $ 0.11 $ 0.93 $ 1.01 $ 1.80 $ 2.14
5 $ (0.40) $ (0.66) $ 0.85 $ 1.97 $ 2.18 $ 3.12 $ 3.63
6 $ 0.03 $ (0.37) $ 1.66 $ 2.44 $ 2.18 $ 3.15 $ 3.53
7 $ 0.26 $ (0.02) $ 2.52 $ 3.02 $ 2.94 $ 4.25 $ 5.04
8 $ 0.66 $ 0.40 $ 3.36 $ 3.68 $ 3.71 $ 5.20 $ 6.30
9 $ 1.11 $ 0.85 $ 4.24 $ 4.31 $ 4.53 $ 6.10 $ 7.61
10 $ 1.42 $ 1.30 $ 5.03 $ 4.97 $ 5.38 $ 6.89 $ 8.80
11 $ 1.83 $ 1.64 $ 5.67 $ 5.60 $ 6.26 $ 7.59 $ 9.92
12 $ 2.22 $ 1.99 $ 6.27 $ 6.21 $ 7.16 $ 8.29 $ 10.97
13 $ 2.57 $ 2.34 $ 6.91 $ 6.90 $ 8.02 $ 9.03 $ 12.04
14 $ 3.00 $ 2.70 $ 7.52 $ 7.48 $ 8.69 $ 9.69 $ 13.09
15 $ 3.39 $ 3.04 $ 8.15 $ 8.16 $ 9.42 $ 10.38 $ 14.22
3.50% FUEL SURCHARGE INCLUDED
$1.85 RESIDENTIAL SURCHARGE INCLUDED / NO DISCOUNT
USPS Rate Advantage
Competitors Rate Advantage of $1.00 or Less
2006 Priority Mail Vs 2007 Competitor’s Ground Residential
Competitive Prices
18
2007 Priority Mail Vs 2007 Competitor’s Ground Residential Weight/ Zone L,1,2 3 4 5 6 7 8
Flat $ (1.40) $ (1.50) $ (1.63) $ (1.81) $ (2.05) $ (2.13) $ (2.24)
1 $ (1.40) $ (1.50) $ (1.63) $ (1.81) $ (2.05) $ (2.13) $ (2.24)
2 $ (1.45) $ (1.30) $ (1.40) $ (0.73) $ (0.69) $ (0.53) $ (0.40)
3 $ (0.99) $ (0.66) $ (0.50) $ 0.89 $ 1.19 $ 1.55 $ 1.81
4 $ (0.35) $ 0.17 $ 0.56 $ 2.43 $ 3.06 $ 3.55 $ 4.09
5 $ (0.00) $ 0.79 $ 1.50 $ 3.77 $ 4.68 $ 5.37 $ 6.13
6 $ 0.48 $ 1.23 $ 2.56 $ 4.94 $ 4.68 $ 6.00 $ 6.63
7 $ 0.76 $ 1.68 $ 3.47 $ 5.72 $ 5.69 $ 7.40 $ 8.54
8 $ 1.01 $ 2.25 $ 4.26 $ 6.53 $ 6.71 $ 8.65 $ 10.25
9 $ 1.26 $ 2.85 $ 4.69 $ 7.36 $ 7.78 $ 9.85 $ 12.01
10 $ 1.42 $ 3.40 $ 5.13 $ 8.22 $ 8.88 $ 10.99 $ 12.40
11 $ 1.58 $ 3.89 $ 5.62 $ 9.05 $ 10.06 $ 11.14 $ 12.72
12 $ 1.77 $ 4.34 $ 6.02 $ 9.66 $ 11.26 $ 11.34 $ 13.07
13 $ 1.97 $ 4.69 $ 6.51 $ 10.30 $ 11.72 $ 11.63 $ 13.19
14 $ 2.20 $ 5.00 $ 6.97 $ 10.98 $ 11.99 $ 12.39 $ 13.74
15 $ 2.39 $ 5.34 $ 7.45 $ 11.21 $ 12.07 $ 11.98 $ 13.67
3.50% FUEL SURCHARGE INCLUDED
$1.85 RESIDENTIAL SURCHARGE INCLUDED / NO DISCOUNT
USPS Rate Advantage
Competitors Rate Advantage of $1.00 or Less
Competitive Prices
19
The New Law & Package Business
20
First-Class Mail Periodicals Standard Mail Single-Piece Parcel Post Media Mail Bound Printed Matter Library Mail Special Services Single-Piece
International
Priority Mail
Expedited Mail
Bulk Parcel Post
Bulk International Mail
Competitive – 11%Market-Dominant – 89%
FY 2005 Revenues
Two Product Categories
The New Law & Package Business
21
Pricing- Market Dominant Products
► Future Price Increases Tied To Consumer Price Index (CPI) By Class
► USPS To File With PRC 45 Days Before New prices Become Effective
Implications:
► Annual, predictable Increases
► Productivity Improvements Are critical, Since Costs Like Fuel And Health Benefits May Rise At Rates Above CPI
The New Law & Package Business
22
Pricing- Competitive Products
► New World- Allows The Postal Service To Compete Fairly In The Market Place.
Must Cover Costs
PRC Decides Cost Coverage & target Contribution To USPS
► Governors Set Prices
► Implied Income Tax To Postal Service MD Fund
Implication:
Ability To Respond To The Marketplace By Creating Products And Pricing That Better Meet Customer Needs.
The New Law & Package Business
23
Re-Designing Products
24
Services (today) Range (Days) Weight Price Features
GXG (Doc) 2-3 Up to 70 lbs $55.75
Guaranteed Track and Trace
Insurance - $100.00
GXG (Non-Doc) 2-3 Up to 70 lbs $61.25
Guaranteed Track and Trace
Insurance - $100.00
Global Express Mail 3-5 Up to 70 lbs $31.15
Guaranteed – 5 CountriesTracking (major countries)
Insurance $100.00
Airmail Parcel Post 4-10 Up to 70 lbs $25.80
Indemnity up to $270.00Insurance available
Limited Visibility
Economy Parcel Post 28-42 5 to 70 lbs $24.50
Indemnity up to $270.00Insurance available
No Visibility
Global Priority Mail 4-6 Up to 4 lbs $23.25
<24 inchesNo InsuranceNo Visibility
Airmail Letter Post 4-7 Up to 4 lbs $21.40
< 24”No Insurance No Visibility
Economy Letter Post 28-42 1 lb to 4 lbs $9.55
< 24”No Insurance No Visibility
Japan Shipping Options – 3 lbs.
The Right Products & Features
25
Old Services
Global Express Guaranteed (doc)
Global Express Guaranteed (non-doc)
Global Express Mail
Airmail Parcel Post
Economy Parcel Post
Global Priority Mail
Airmail Letter Post
Economy Letter Post
Services Today
Global Express Guaranteed
Express Mail International
Priority Mail International
First Class Mail International
Product Enhancements
The Right Products & Features
26
Simple, Relevant Product Offering ► Leverage Domestic
Supplies ► New Flat Rates
Express Mail International Flat Rate Envelope
Priority Mail International Flat Rate Envelope
Priority Mail International Flat Rate Boxes
Picture of new boxes
The Right Products & Features
27
ServiceFY2005 Revenue
FY 2005 Volume Strategy (Migration Flow)
Economy Parcel Post $80M 3MEliminateMigrate to Air Parcel Post
Economy Publishers $18M 14MEliminateMigrate to ISAL or Air Letter Post
Economy Books and Sheets $1.9M 493K
EliminateMigrate to ISAL or Air Letter Post
Economy Letter Post $23M 4M
EliminateMigrate to air letter postGlobal Priority Mail and Air Surface Lift
Economy Registered Service $225K 30K Migrate to air registered service
Recorded Delivery $3K 1K Eliminate
Aerogrammes $174K 246KMigrate to Air Letter Post
Simple Relevant Product Offering
The Right Products & Features
28
Packaging To Add Value►Flat Rate Box
$577 Million Since Launch$227 Million In Sales FY 07
►Flat Rate Prepaid Envelope Growing AdoptionOver $34 Million Since Launch
►Priority Mail ShoeboxGrowing Mid-Market Segment Regular And eBay Versions
The Right Products & Features
29
Customized & Co-Branded Packaging
New Parameters Are Being Set:
► Customized Packaging- Was $500,000 Will Be lowered To $250,000
► Co-Branded Packaging- Was $500,000 Will Be Lowered To $250,000
Example: Flat Rate Box #2 Minimum Quantity Would Be 12,000 Boxes Equivalent To Around 8 Pallets
Minimum Acceptance Amounts For Co-Branding Any Of The Standard Priority Mail and Express Mail Products
30
►The Last Major Change Was in 1995
Changed the Eagle on the Logo
4 Color Process to 2 Colors
►We’ve Changed
Fresher, Cleaner Look
Dual Use: Domestic and International
Reduced Supply Chain Management Costs
Certified Cradle to Cradle
The Right Products & Features
31
► Significant Steps Were Taken To Improve Environmental CharacteristicsWorked with Vendors to Analyze our
Packaging Composition
Changed Inks, Chemicals and Adhesives Used in Manufacturing
Redesign for Simplicity and to Minimize Ink
Reduced Label Dependence
Significantly Reduced Toxins, with No Increase in Cost.
The Right Products & Features
32
Earned Cradle to Cradle Certification
► Materials Earned Cradle to Cradle Certification for Eco-effectiveness
► First And Only Firm to Receive This Endorsement for Packaging
► Packaging to Feature Cradle to Cradle Logo
The Right Products & Features
33
Old Packaging Design New Packaging Design
The Right Products & Features
34
New Packaging DesignOld Packaging Design
The Right Products & Features
35
Transformation Strategies
36
Customized & Co-Branded Packaging
New Parameters Were Set:
► Customized Packaging - Was $500,000 Will Be lowered To $250,000
► Co-Branded Packaging - Was $500,000 Will Be Lowered To $250,000
Example: Flat Rate Box #2 Minimum Quantity Would Be 12,000 Boxes Equivalent To Around 8 Pallets
Minimum Acceptance Amounts For Co-Branding Any Of The Standard Priority Mail and Express Mail Products
The Right Products & Features
37
$0
$20
$40
$60
$80
$100
$120
Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept
FY04 FY05 FY06 FY07
Revenue Growth Online Postage
Mill
ions
Improve Convenience
38
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept
FY05 FY06 FY07
Carrier Pickup Volume
APO/FPO
SCAN
3.7 Million
Improve Convenience
39
ONE Barcode
Is Scanned for All
Packages
Shipment Confirmation Acceptance Notice
Improve Convenience
40
E-VS Update
► 9 Live Shippers
18,555 Manifests Submitted YTD
►61 M Parcels
►$74.8 M Revenue
► Extended Mandatory Implementation Date
► Technical Support
Improve Convenience
41
► Priority Mail & Express Mail
We Know That World Class Service Is Essential
Service Scores Are The Highest They Have Ever Been
► Parcel Select
Service Is Already At World Class Levels.
DHL/UPS/FedEx Last Year Trusted USPS To Deliver Over 300M Packages
Time In Transit
Improve Customer Service
42
Package Visibility Project - Goals
► One Intelligent Bar Code On Every Package
► End To End Visibility On Every Package
► Bar Codes That Tell Us More About The Package And Shipper
► Intelligence From Bar Codes Is Used To Manage And Grow Our Business
Improve Visibility
43
Where Are We?► Intelligent Mail Device (IMD)
210,000 Of 303,000 Deployed Through April 07-Full Deployment Sept 07
► APPS
Completed Deployment Of 75 Machines
Lifting Images Now – In PTS
60% Of PM Goes Across APPS
► SPBS
44 Retrofitted With Barcode Scanners
Total Of 226 Will Be Installed By End Of FY07
► Surface Visibility Will Nest These Events in PTS
Intelligence/Visibility
Trailer Depart
Trailer Load
U.S. MAIL
1025679
TrailerArrive U.S. MAIL
1025679
ContainerLoad
TrailerUnload
Surface VisibilitySurface Visibility Data Data CollectionCollection
Make It Intelligent
Improve Visibility
45
We Will Continue:
► To Design
►To Enhance
►To Research
►To Educate
►To Create A Marketplace Position That Is Compelling And Meets Customer Needs
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