The immediate attention of those in transportation industry was naturally drawn to the volume surge effect on UPS and Amazon in particular:
However, as already noted in our opening comments, the spread of concern was far wider. In short, the “market failure” pejorative scenario started to lurk behind the narrative coming from noteworthy commentators.
The downstream effects of Amazon Prime’s offer of “free shipping” has come under increasing scrutiny, with the implication often being that it is solely responsible for the mass of late peak orders, and the fractionalisation of orders (smaller individual consumer purchases) that is reducing shipment sizes.
The fact that “shipping costs” have now reached 9% of Amazon sales revenues is only one part of the “market failure” rubric mentioned in the article. The fact that transportation company operating costs are rising well above CPI, as are their shipping prices, and the rate of climb of Amazon’s shipping costs from 7-9% in a zero interest rate economy, should be noted.
In writing his article above, Mouton has picked up opaque industry jargon such as “due to a more adverse mix of packages” to explain past increases in UPS and Fedex rates.
However, I spoke recently of matters concerning Amazon's order pre-distribution and demand planning situation and perhaps this is more notable. Given what happened at Xmas perhaps the associated media at that time reflected some externalisation of general angst in that business in those respects.
Despite Mouton carrying negative testimony in his article in respect of the local stocking of inventories, there is no necessary causal link to lower yield potentials for carriers. Conjecture, however, may focus on three possible scenarios emerging downstream from the same observation:
1. Poor pre-distribution and demand planning by retailers can see the wrong levels of inventories arrive, short of, or in the wrong consumer location – and that high priced, long distance, premium priced transport necesarily employed may still not meet delivery deadlines in such circumstances due to the surge effect.
2. Bulk shipping to regional DC’s ahead of peak demand will see existing high rigid-cost centralised parcel hub operations of major express transportation companies being defrayed over a lesser volume of shipments outside of peak periods.
3. When demand planning fails to locate inventory according to the overall plan, and excessive levels express hub transport is employed at peak in a crisis, that both the shipper and the transportation company may be complicit in “market failure”.
Bear in mind that UPS and Fedex operate both regionalised ground package service hubs for economy package services; and large centralised air hubs for premium overnight long distance express transport. The latter dominate the cargo volumes moved through the general airports of their two major air hubs (Fedex - Memphis; UPS - Louisville), and we leave you to ponder the variation between the two sets of airport statistics that were reported for December:
note: this is a revised version of the original blog post which includes minor text changes. An unedited version was mistakenly originally published.