Capacity Planning at Parcel Companies in the Era of e-commerce.

Eyas Al Bakri
18 min readAug 27, 2021


My objective in this document is to explain how Courier companies ( UPS as an example) manage growth and its supply and demand. How Parcel companies are undertaking many operational investments to manage consumer demands effectively, especially when it comes to capacity planning and peak preparation.

United Parcel Service, Inc. (UPS)

1. Company Profile

United Parcel Service, Inc. (UPS) is one of the leading courier service providers worldwide with a market share of 22% in the last decade, as you can see in figure 1–1 (Statista, 2019). According to UPS 2019 annual report, UPS handled 5.5 billion packages that falls under three reporting segments: International and Domestic Package, which together are referred to as “global small package operations (GSPO)” and contributes for 99% of the business, which will be our main focus in this study. The third segment is Supply Chain & Freight.

Figure ‎1‑1:UPS Segments Packages (In thousands) (UPS, 2020)

2. Operations characteristics (4Vs and 1P)

UPS GSPO service provides delivery services for express letters, documents, and small parcels via air and ground services for domestic and international businesses through one global integrated pickup and delivery network. Operations characteristics are as below:

Volumes: In 2019, UPS processed and delivered around 21.9 million packages and documents each day, passing through 1,800 facilities and 125,000 delivery fleet (UPS, 2020). This reflects the enormous volume UPS is processing. Hub processing capacity could reach 100,000 parcels per hour via a highly orchestrated series of conveyors and sortation systems (BURNS, 2018).

Variety: UPS GSPO services are limited to air, ground, domestic and international. Nevertheless, all are being processed similarly through the same pickup and delivery network. As per UPS “We combine all packages within our network unless dictated by specific service commitments. This enables one UPS driver to pick up customers’ shipments for any of our services at the same scheduled time each day” (Pressroom.UPS, 2020).

For Variation, UPS GSPO service is coming from mail and parcel delivery, but mail share is swiftly declining in the last period, and e-commerce business is taking over the business growth as seen in figure 2–1 and figure 2–2. Business is stable over the year, however; e-commerce energies a large seasonal spike during the holiday period beginning at Thanksgiving and lasting through Christmas, which is responsible for as much as 30% of total retail sales (mckinsey, 2019).

Figure ‎2‑1:Overall market-to-parcel Volume, ratio (Briest, et al., 2019)
Figure ‎2‑2: Parcel overall Market compound growth Rate, % (Briest, et al., 2019)

Demand predictability is a challenge for courier companies as UPS, still achievable. UPS have it is own forecasting models along with getting projections in advance from big retailers. Furthermore, many companies as National Retail Federation and Deloitte Retail do their forecasts.

Forecasts are done based on two variables: past results projected into the future and what consumers say they are going to buy (Danziger, 2017).

Customer visibility is limited to pickup and delivery process only, the rest will not be visible to customers at all, from sorting, consolidation and transportation to the end destination. However, with the new tracking technology, customer enablement the bar of visibility has increased, yet it is still far from being high or essential to manage.

Operations characteristics summarised in figure 2–1:

Figure ‎2‑1: Parcel Delivery Operations 4Vs and 1P Model

3. Performance Objectives

UPS strategy is to provide advanced logistics solutions through comprehensive services integrated with their customers’ businesses, commitment to deliver value, enhance quality and efficiency as they do, UPS performance objective falls under the below:

4. The Last-Mile Challenge

When it comes to parcel services, the most challenging part is “last-mile delivery” — the final leg of the parcel journey where a product arrives at the consumer’s hands. Below are the most challenging elements:

4.1 Cost:

Last-mile services account for more than 40% of total supply chain costs, as in figure 4–1. Parcel companies are a resource-based model with high operating costs, in which it consumes most of the organisation revenue stream; 89% for UPS, 88% for Aramex, and 95% for FedEx in the last two years (Aramex, 2020) (FedEX, 2021) (UPS Annual Report , 2020).

Figure 4‑1: Last-mile delivery is the most significant cost driver in the supply chain (Capgemini, 2019)

4.2 Speed and Consumer changing demand:

It is a key value-added step for those seeking a competitive advantage, especially with the growing consumer’s desire for faster home delivery. As Figure 4–2 shows, 55% of customers says that a two-hour delivery option would increase their loyalty, and 61% say the same for same-day delivery. On the other hand, only 30% say this will increase their loyalty when delivery moves out to three days or more.

Figure 4‑2: Faster deliveries build greater loyalty (Capgemini, 2019)

Large e-commerce players “which are the main revenue stream for parcel companies” have identified last-mile services as a key differentiator for their customers. Summarising figure 4–3, people expect to receive their parcels today, and online shopping decisions increasingly depend on it. Yet only 19% of firms offer two-hour or faster delivery (mckinsey, 2020).

Figure 4‑3: Polling respondents on delivery-time factors (mckinsey, 2020)

4.3 Demand & Supply Constraints:

Last-Mile companies are an asset-based model with a high operating expense. Therefore, assets should be carefully managed according to volume to avoid higher cost margins since operating expenses are directly impacted by the volumes, which means that extra resources are not feasible on the balance sheet.

Demand seasonality occurs when demand fluctuates based on the time of year or a month, including holidays, sales, and Merchants promotion (APICS, 2016). For UPS, holidays sales boost the total number of parcels in the last quarter of the year and fall in the next quarter, generating a high variation in demand throughout the year.

Figure 4‑5:Supply and Demand Characteristics

By looking into supply and demand characteristics (figure 4–5), parcel delivery service has a short lead time with predictable demand if there is proper forecasting and coordination with the clients. Still predicting the exact delivery location will be a mystery until the parcel is received at the operations facility. Coping with customers demands is vital to keep the service going.

4.4 Flexibility:

Consumers do want fast delivery, yet 73% said that receiving the parcel at a suitable time requested is more important than speed (Capgemini, 2019). Flexible drop-off options are essential for end customers, like secure lockers or local convenience stores, allowing customers to retrieve their package when it’s most convenient for them without meeting the driver (bringg, 2019).

4.5 Quality:

It refers to the ability to have performance in “a perfect delivery”, which means actual parcel being delivered to the right location, with the right products, in the right quantity, at the right time, in the right condition, with the right documentation, to the right customer, with the correct invoice (APICS, 2016). 48% intend to stop purchasing from the poor-performing retailer, and those who will continue to shop reduce their spending by 45%. (Capgemini, 2019)

5. Capacity Planning

5.1 Capacity Constraints

Capacity is the maximum rate of output of a process or system that the organisation can perform in a time (Karjewski & Ritzman, 2010). For UPS, Capacity is the maximum number of shipments that the operations can handle or deliver in a day by keeping the service at optimum level.

For UPS, the Capacity challenge originates from three main constraints:

1. Service Constraint (Product Design): There is a limited time between pickup and the promised delivery date, as seen in figure 5.1–1, UPS ground service transit time map for shipments originated from Texas. All shipments should be processed immediately after pickup to guarantee shipment arrival on time.

UPS offers eight and ten different speed options for national and international shipping respectively, with specific services, delivery commitment is within 24hr (UPS, 2020). imposing UPS to have enough supply to meet demand all the time, inventory is not an option here.

Figure ‎5.1‑1:Figure ‎4.1 1: Transit Time Map — UPS Ground Service, (UPS, 2020)

2. Supply Constraints: UPS operates an asset-based model; one global integrated pickup and delivery network built on the delivery fleet, operations staff, operating facilities, and dedicated aeroplanes. By looking at UPS operating cost margin in table 5.1–1, a high operating expense is eye-catching (88%-90%), which represent the business’s operational activities cost (corporatefinanceinstitute, 2020). UPS carefully manage their assets according to volume to avoid higher cost margins, since the volumes directly impact operating expenses, which means that having extra resources is not feasible for UPS.

Table ‎5.1‑1: UPS Operating Cost Margin in millions (2015- 2019), (UPS Annual Report , 2020)

3.Demand Constraints (Seasonality): Seasonality occurs when demand fluctuates based on the time of year, which is in our case are the holidays (APICS, 2016). E-commerce is a significant part of UPS business, holidays sales boost the number of shipments in the last quarter. By studying GSPO revenue, a growth of 15% from Q3 to Q4 is noticed in the same year followed by a 12.5% reduction in Q1 the following year, triggering a high variation in demand throughout the year (Figure 5.1–2).

Figure ‎5.1‑2: GSPO Service Revenue (in millions) (USD), (UPS Annual Report , 2020)

5.2 Capacity Planning and Strategy

Capacity decisions have implications on all cross-functional departments. Accounting and Finance need to prepare the cost projections for the expansion and financial analysis for the proposed capacity; same applies on human resources, sales, marketing, and even procurement to communicate the plan for external partners and suppliers (Karjewski & Ritzman, 2010). There are two types of capacity planning time horizons decisions:

5.2.1 Long-term capacity planning:

Those plans deal with long-term investments as new facilities, equipment, technology and air fleet for UPS; these plans cover at least two years into the future. Such investments are initiated to support both current existing business and expand the capacity for anticipated growth in the future. Below are some of the long-term capacity planning investment that is done by UPS.

  • In 2019, the company announced plans to add a total of 60 planes to its fleet by 2022, increasing the linehaul capacity (UPS Annual Report , 2020).
  • Combined with 2018, they have opened a total of 41 facilities with 10 million square feet, raising sorting capacity by approximately 800,000 pieces per hour, along with $750 million investment plan in its worldport global shipping hub at Louisville (Otts, 2019).
  • UPS signs partnership agreement with CVS pharmacy in the US to expand its Access Point network through more than 6,000 pharmacies. They are increasing their pickup capacity and providing more convenient service for their customers (UPSPressroom, 2019).
  • Investing in last-mile technology to enhance couriers productivity. As per UPS “The ORION program is the result of a long-term operational technology investment and commitment by UPS, ORION saves UPS about 100 million miles per year”; in which will increase UPS capacity indirectly by increasing driver daily stops (Sawers, 2020).

When it comes to infrastructure and assets, UPS is following an expansionist over wait-and-see strategy to expand its capacity in the long term; this can be noted by the amount of investment spent on the operations as anticipation of business growth (Karjewski & Ritzman, 2010).

Investment is a necessity to compete in the market. However, nothing good comes as risk-free:

Longer-term forecasts: are needed for long term planning purposes, forecasting into the future becomes inherently less reliable as events further out in the future, creating more uncertainty (APICS, 2016). UPS need to place less reliance on them and keeps reviewing them frequently.

Diseconomies of Scale: Bigger does not always mean better, however, if investments were not carefully studied, placed in the right place and time, will result in diseconomies of scale, causing the average cost per shipment to get higher (Karjewski & Ritzman, 2010).

Expansionist strategy investment will pass through this phase in the early stages until economies of scale have been achieved, as seen in figure 5.2–1.

Figure ‎5.2‑1: Expansionist strategy concept (Karjewski & Ritzman, 2010)

5.2.1 Short-Term Capacity Planning:

UPS is a service provider company, and they have to cope with the varying demand; they need to adjust and grow their capacity in order to meet sales demand and avoid services failures. On the other hand; keeping the operations working at an efficient level is a necessity to compete in the market.

By looking at UPS GSPO Service Revenue in figure 5.2–2, having a level capacity plan will not be sufficient with the demand variability; thus resulting in lost sales or delay in service during peaks period, and excess capacity and underutilised resources and assets in off-peaks (Slack, 2018).

Figure ‎5.2‑2: GSPO Service Revenue (in millions) (USD) along with Level Capacity Plan, (UPS Annual Report , 2020)

UPS is obligatory to continually adjust its network and assets to align capacity with the fluctuations in demand. UPS operation is a complicated mix of resources. These resources are inputs to the process that allows the capacity to be expanded or contracted; changing these inputs will change capacity outputs. Below are some of the actions that UPS takes during peaks to adjust its capacity:

  • Seasonal employees to support the anticipated annual increase in package volume. UPS expects to hire more than 100,000 seasonal package handlers, drivers, driver-helpers, and personal vehicle drivers in October 2020 (Berman, 2020).
  • Weekend pickup and delivery services: UPS expands Saturday and Sunday operations, to provide more capacity for pickup and delivery as anticipation for peak season volumes.
  • Sortation Capacity: for 2020 Holidays, UPS has added 5 million more square feet along with expanding automated package sorting capabilities by 400,000 shipments/hour (CNBC, 2020).
  • Extended working hours: late-night pickup for Local Next Day Delivery services to expand collections time windows to adapt to the growing number of pickups for the holidays (UPSpressroom, 2019).
  • Linehaul Capacity: preparing for 2020 Holidays, UPS has leased 14 new aircrafts to cater for the transportation of the business across the US (Clifford, 2020).

Crowdsourcing is one of the trending solutions companies are utilising to increase last-mile capacity in peaks likemazon Flex (Amazon, 2020). On the other hand, Aramex the leading global provider of comprehensive logistics and transportation solutions in the MENA ergion, use ‘Aramex Fleet’, a crowd-based delivery platform that connects national citizens to flexible last mile delivery work to leverage on sharing economy and support strong demand for Aramex services (Aramex, 2018). This is something that UPS is not implementing currently.

We are looking at a hybrid strategy that mixes the chase and level concepts (APICS, 2016). UPS Model is designed to focus on economies of scale by utilising the base capacity (resources and assets) over the year, and temporarily extend the capacity when needed only in peaks as noticed in figure 5.2–3.

Figure ‎5.2‑3: GSPO Service Revenue (in millions) (USD) along with Hybrid Capacity model, (UPS Annual Report, 2020)

Last-Mile companies are struggling in adjusting their capacity temporarily to the peaks, a lot of efforts, preparation, and investment are being made by companies like UPS, FedEx and Aramex; this comes as results of focusing on customer experience regardless of the cost. However, it is worth mentioning that some of those costs are observed by the big retailers to fulfil their customers’ demands, as discussed in the next section of demand management.

6. Demand Management

Adjusting capacity is not the only thing UPS is doing, demand-influencing activities that align the demand and supply with the minimum investment is also on the top of the list for peak preparation. The main objective of demand management decisions is to reduce the variability of the demand, which is the holiday season for UPS (APICS, 2016). UPS is doing the below:

  • Preparing and communicating demand: the objective is to ensure that everyone in the organisation and retailers gets the same information about demand (Karjewski & Ritzman, 2010). UPS works collaboratively with the largest E-Commerce customers to leverage capacity and to develop solutions to smooth out demand spikes during the peak season (Elliott, 2020).
  • Capacity allocation per Client: during peak preparation, UPS and large retailers agree on the capacity allocation; UPS will make sure that those retailers will not go beyond the assigned capacity and will seize pickup process in case they did, as happened with Nike and Gap during 2020 season (Higgins-Dunn, 2020).
  • Peak Surcharges: as per UPS, surcharges are applied during the peak period compensating the extra cost to cope with the temporary increase in demand, as shown in table 6. 1.
Table 6–1:Peak Period (inclusive of starting and ending dates) and Applicable Peak Surcharge ($/package) (UPS, 2020)

One of the hidden objectives behind this volume thresholds surcharges concept is to flatten the demand curve, minimising the investment impact during off peaks periods.

  • Heavy / Additional Handling Surcharges: UPS is applying a high surcharge on such shipments. UPS is encouraging shippers not to send large parcels or prioritising small parcels business to avoid extra pressure on the network. Or it is taking advantage of the duopoly in the parcel space to collect extra revenue and enhance their bottom line (Figure 6–2).
Figure 6‑2: Applicable Peak Surcharge ($/package) (UPS, 2020)
  • Shifting Demand, Earlier Promotion: flattening the demand curve by encouraging shippers to start their campaigns early. UPS says: “We’re recommending that customers work even harder to manage their volume and consider launching even earlier promotions” (Anon., 2019). This will help UPS to penetrate holiday demand by shifting demand outside the surge days.

Diverting to different delivery channels: UPS try to divert customers demand to different delivery channels as pickup points. Through UPS “My Choice”; provides options for customers to choose options other than door delivery, reducing stress on the last-mile delivery (Guffey, 2020). On the other hand, FedEx incentivising customer to choose pickup by getting $5 Walgreens Cash rewards with every FedEx pickup and drop off (FedEx, 2020). Aramex in the middle east is doing the same through a program called “Aramex Spot”, Aramex has partnered with commercial locations to utilise their outlets as convenient PUDO locations for its customers’ shipments (Aramex, 2019).

Figure 6‑3: FedEx promotion email (FedEx, 2020)

7. Summary

From an operations perspective, consistent demand with a low level of fluctuation will ease handling the operation, provide service stability, and cost-effectively cope with it (Slack, 2018). Unfortunately, this is not the e-commerce case; seasonality is built within the model, and parcel companies are absorbing the majority of the pressure and cost; 41% of the cost is coming from the last mile alone.

Parcel companies advise retailers, shop early, and flatten the curve of peak shipping volumes because infrastructure and labour can’t scale overnight. Parcel companies are trying to flatten the demand curve before and after the peak seasons with the demand-influencing activities, hoping to raise capacity baseline and reduce capacity adjustment costs (figure 7–1). Nevertheless, there is no way to avoid capacity adjustment costs to cope with demand. It is not about raising the supply bar; it is also about what will happen after peak demands stretch back to normal.

Figure 7‑1: Actual demand curve along with smoothed demand Concept

Parcel delivery is a resource-based model with a high operating cost in which it consumes most of the organisation revenue stream; 89% for UPS, 88% for Aramex International, and 95% for FedEx in the last two years (UPS, 2020) (Aramex, 2020) (FedEX, 2021). Last-mile is growing in the logistics sector and will go through many changes in the upcoming period; innovation will play a crucial part in surviving and winning the market by meeting service expectations and efficiency. With consumers, behaviour is also changing, which makes it a more Challenging situation than ever.

The holiday season has the potential to bring joy to revellers around the world, but it can also strike fear into the heart of unprepared courier companies. Preparation is a key to avoid surprises and being able to adjust to anticipated demand. Improved forecasts will aid in coping with unforeseen events. Sharing information and coordination between all stakeholders and retailers will bring all the operations in the chain into line with each other. Improved operational efficiency will increase capacity indirectly and reduce chain complexity. Managing and prioritising some retailers’ demand over others will be an excellent option to optimise revenue as a last resort for courier companies.

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