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“The Future Of Packages” Jim Cochrane Manager, Package Services

“The Future Of Packages” Jim Cochrane Manager, Package Services. Agenda. Market Trends The New Law Re-Designing Products Transformation Strategies. Market Update. Market is generally soft both domestically and internationally

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“The Future Of Packages” Jim Cochrane Manager, Package Services

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  1. “The Future Of Packages” Jim Cochrane Manager, Package Services

  2. Agenda • Market Trends • The New Law • Re-Designing Products • Transformation Strategies

  3. Market Update • 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

  4. Market Update • 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

  5. Market Update B2C Shipments On The Rise

  6. Market Update What’s Fueling The Growth? • B2B Is Stagnant • As Noted - B2C Is Growing • Packages Are Getting “Lighter” • Online Retail Growth Is Replacing Manufacturing Segment Decline

  7. Market Update • 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

  8. The Right Products & Features Total Express Mail Volume FY 2002 2003 2004 2005 2006 2007

  9. Market Update Total Priority Mail Volume FY 2002 2003 2004 2005 2006 2007

  10. The Right Products & Features Total Package Services Volume FY 2002 2003 2004 2005 2006 2007

  11. Market Update Customer Buying Criteria • Service • Convenience • Price • Visibility

  12. Market Update Reasons Shippers Change Carriers * Morgan Stanley/ Parcel 2006 Annual Best Practices Survey

  13. Market Update Shippers Rated Carriers Less Favorably * Morgan Stanley/ Parcel 2006 Annual Best Practices Survey

  14. Market Update In Addition To Base Rate Increases, Competitors Continue To Add And Raise Rates On Surcharges Approximate Increase In Percent Change Reported Number Calendar Year In Competitor’s Total of Competitor’s Surcharges Average Surcharge Amounts 1 2003/2002 2.48% 3 2004/2003 18.94% 7 2005/2004 14.87% 3 2006/2005 15.46% 3 Surcharges Are Intended To Increase Package Contribution - They Are Rarely Discounted * Estimate Note: The table above does not include fuel surcharges. 1 Based on Competitor’s accessorial charges published before each rate change.

  15. Competitive Prices

  16. Competitive Prices Net Minimums Reduce Discount & Drive Up Cost

  17. Competitive Prices 2006 Priority Mail Vs 2007 Competitor’s Ground Residential

  18. Competitive Prices 2007 Priority Mail Vs 2007 Competitor’s Ground Residential

  19. The New Law & Package Business

  20. The New Law & Package Business Two Product Categories • First-Class Mail • Periodicals • Standard Mail • Single-Piece Parcel Post • Media Mail • Bound Printed Matter • Library Mail • Special Services • Single-Piece International Market-Dominant – 89% Competitive – 11% • Priority Mail • Expedited Mail • Bulk Parcel Post • Bulk International Mail FY 2005 Revenues

  21. The New Law & Package Business 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

  22. The New Law & Package Business 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.

  23. Re-Designing Products

  24. The Right Products & Features Japan Shipping Options – 3 lbs.

  25. The Right Products & Features Product Enhancements Global Express Guaranteed Express Mail International Priority Mail International First Class Mail International

  26. The Right Products & Features 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

  27. The Right Products & Features Simple Relevant Product Offering

  28. The Right Products & Features Packaging To Add Value • Flat Rate Box • $577 Million Since Launch • $227 Million In Sales FY 07 • Flat Rate Prepaid Envelope • Growing Adoption • Over $34 Million Since Launch • Priority Mail Shoebox • Growing Mid-Market Segment • Regular And eBay Versions

  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 Right Products & Features • 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

  31. The Right Products & Features • Significant Steps Were Taken To Improve Environmental Characteristics • Worked 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.

  32. The Right Products & Features 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

  33. The Right Products & Features Old Packaging Design New Packaging Design

  34. The Right Products & Features Old Packaging Design New Packaging Design

  35. Transformation Strategies

  36. The Right Products & Features 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

  37. Improve Convenience Revenue Growth Online Postage Millions

  38. Improve Convenience Carrier Pickup Volume 3.7 Million SCAN APO/FPO

  39. Improve Convenience Shipment Confirmation Acceptance Notice ONE Barcode Is Scanned for All Packages

  40. Improve Convenience E-VS Update • 9 Live Shippers • 18,555 Manifests Submitted YTD • 61 M Parcels • $74.8 M Revenue • Extended Mandatory Implementation Date • Technical Support

  41. Improve Customer Service Time In Transit • 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

  42. Improve Visibility 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

  43. Intelligence/Visibility 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

  44. Trailer Load Trailer Depart TrailerUnload TrailerArrive Improve Visibility Make It Intelligent ContainerLoad Surface Visibility Data Collection

  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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