UPS Boss Preaches the Power of No

  • UPS Boss Preaches the Power of No

    UPS Boss Preaches the Power of No

    Carol Tomé is shifting the delivery giant’s focus to the bottom line, weeding out less-profitable customers in a high-speed overhaul; ‘Time for us to pivot’

    Carol Tomé took over United Parcel Service Inc. in the middle of a pandemic that has sent demand for its services soaring. She’s teaching the delivery giant how to say no.

    The longtime finance chief of Home Depot Inc. HD 1.32% and first outsider to lead UPS UPS 0.22% is remaking the company in her number-crunching image, in part by adopting the philosophy that delivering less can be more. And she is using the urgency created by the crisis to revamp its business model in months, not years.

    Since she became chief executive in June, UPS has become more selective about which packages it ships. The company is tearing up shipping contracts midterm. Sales leaders evaluate customers less by volume than by what they deliver to the bottom line. Executives are scrutinizing divisions for possible divestitures. Prices are going up.

    The push to transform UPS into what Ms. Tomé calls a “better, not bigger” company has created friction. Big retailers accustomed to UPS’s accommodating stance found themselves facing tighter shipping limits, especially during the crucial holiday season. Others were hit by price increases. Meanwhile, analysts have questioned whether UPS has become overly reliant on one customer, Inc., especially since the e-commerce company is building its own delivery network.

    “There comes a point where you’ve got to optimize and sweat the assets you have and really think about the economic model differently,” Ms. Tomé said in an interview earlier this month. “We’re 114 years old this year. It’s time for us to pivot.”

    The plan paid off during the first peak season under Ms. Tomé’s watch. While some customers faced delays on pickups, UPS pointed to third-party data showing the company outperformed rivals in on-time deliveries in the lead-up to the holidays. According to ShipMatrix Inc., a software provider that crunches shipping data, UPS delivered 96.7% of packages on time in the five weeks before Christmas, compared with 95.1% for FedEx Corp. and 93.2% for the U.S. Postal Service. And it came as UPS marshaled resources to start distributing vaccines around the globe to curb the pandemic. With the world mired in the second year of a pandemic, the pivot arrives at a tricky time. Entire sectors, from restaurants to travel, have crumpled under lockdowns and social-distancing measures. Every business has had to change the way things are done.

    As the economy seized up, UPS and rival FedEx initially worried their more profitable business of shipping parts to factories and inventory to stores would crater amid widespread closures. Job losses would crimp spending and economic activity. Teamsters union leaders braced for job cuts.

    Instead, business boomed on the back of an e-commerce surge. While lockdowns hurt business-to-business shipments, store closures shifted purchases of myriad items online—paper towels to clean, puzzles to entertain, desks to work at. They all needed a way to get to homes. FedEx, UPS and the Postal Service stepped up.

    “None of us expected the acceleration of e-commerce like we’ve seen this year,” Ms. Tomé said. U.S. online retail spending jumped 32% to $792 billion in 2020, according to the Commerce Department.

    Ms. Tomé, 64 years old, was a departure for a company historically run by men, some of whom started out sorting packages and worked their way up the ranks. Born in Wyoming, Ms. Tomé was the oldest of four children and learned to hunt, fish, cook and sew when she was young, according to a video memoir. She earned a communications degree from the University of Wyoming, where she skied often and met her husband at a toga party, before studying finance and holding jobs in commercial lending and corporate finance that would lead to her joining Home Depot.

    In her 18-year run as CFO at the retailer, she built a record of bucking convention. After years of building stores to chase growth, Home Depot curbed new openings and focused on operating its existing ones more efficiently as e-commerce reshaped shopping. It sold divisions, closed stores and shed jobs. During the 2008 recession, the company halted pay raises for executives but kept them for store employees and continued to pay out bonuses to them. Profits rose.

    She was one of three candidates for CEO in 2014 and stayed on despite being passed over for the top job.

    It is unclear how easily tactics that were successful for Ms. Tomé at Home Depot can translate to a non-retailer. Some investors from her Home Depot days have faith that she can replicate her success, said Allison Landry, transportation analyst at Credit Suisse. For others, Ms. Tomé still needs to prove it.

    “They think she is great but are a bit concerned that just because she did it at Home Depot, does that mean she can do it at UPS?” Ms. Landry said.

    The chairman of UPS’s board, William Johnson, said Ms. Tomé’s leadership qualities and “extensive knowledge of UPS’s business and people” set her apart from a group of internal and external candidates, and that her performance so far has validated the choice. “Carol was absolutely the right person for this time at UPS,” Mr. Johnson said.

    Her introduction to UPS’s roughly 500,000 workers came as the U.S. started shutting down. On March 12, the day after the National Basketball Association suspended play and actor Tom Hanks revealed that he and his wife had Covid-19, UPS announced a first for the company: Its next CEO would be someone who had never worked there.

    Appearing in the corporate cafeteria at the company’s Atlanta headquarters and streamed to employees elsewhere, then-CEO David Abney said in a speech that he would step down in June, then handed the floor to Ms. Tomé.

    Employees say the differences were stark. The towering Mr. Abney speaks in a deep, droning voice. Ms. Tomé, they said, was a more natural communicator. She was animated. She moved her hands when she spoke. She swore.

    “Right off the bat, you got the sense that this was going to be a different leadership style,” one employee said. The first woman to lead UPS, Ms. Tomé is currently just one of 30 female CEOs at companies in the S&P 500, according to Equilar Inc. (A 31st, Jane Fraser, is to take the top job at Citigroup Inc. on Monday.)

    Five days later, UPS told corporate employees to start working from home.

    Ms. Tomé knew UPS, having sat on the company’s board since 2003. Some senior managers got their first exposure to her at an annual management meeting in 2013, one former executive recalled, when she shared her management philosophy, called servant leadership. She viewed her job at Home Depot—and now at UPS—as doing all she could to serve customers and allow employees to do their jobs.

    She went out of her way in her first months at UPS to talk with workers across all its businesses, asking them what worked and what didn’t. In those conversations she discovered that the company’s strict dress code, which banned beards or traditionally Black hairstyles like Afros or braids, was making it hard to retain workers.

    So she relaxed the rules. UPS told workers it was part of an effort to “celebrate diversity rather than corporate restrictions,” according to documents reviewed by The Wall Street Journal.

    It was a break from the top-down management philosophy of UPS’s founder and longtime leader, Jim Casey, who instituted a culture of hard work and his own rulebook. Among Mr. Casey’s tenets: Seniority is king. Avoid left turns. No sneakers.

    As Ms. Tomé assumed her role, UPS was hiring thousands of workers to help with the surge in business—and competing with its biggest customer, Amazon, which was on its own hiring spree. Packages shipped to consumers, which pre-pandemic represented more than half the company’s business, were rising 65%, while those to businesses dropped by nearly 22%. That meant more stops, more miles driven, more costs.

    And the holidays were approaching.

    Ms. Tomé said the circumstances “allowed us to stop and think about how we are going to lean into this unique market.”

    One area of focus was prices. Costs to operate in the pandemic were rising, as drivers logged overtime, new hires came on board and new protocols and equipment were needed to keep operations safe. Prices would have to go up, UPS told customers.

    UPS started with surcharges on customers—primarily big retailers—whose shipping volumes spiked significantly during the pandemic. Later, realizing the pricing dynamics had moved in its favor, UPS began canceling some contracts that were no longer as profitable, using perfunctory exit clauses that shippers and consultants say had been rarely, if ever, exercised before.

    The higher prices carried over into the holidays, with peak-season surcharges up to $3 a package for ground shipment and up to $4 a package for some packages shipped by air. It also was a period when UPS customers came up against the delivery company’s new mentality.

    UPS had already been running near maximum capacity for months, so the peak season, which hits a crescendo between Thanksgiving and Christmas, posed an additional challenge. With more packages entering a strained network, where would they go?

    UPS’s answer was to take the packages—but only as many as the two sides planned on together, effectively capping some customers’ use. It held customers to stricter shipping limits than ever before, said numerous industry consultants, to avoid overwhelming the network. That resulted in large retailers like Gap Inc. and Nike Inc. facing temporary pauses on pickups in early December.

    Gap and other retailers said pausing order pickups from stores was part of plans they had developed with carriers to manage capacity constraints during the holiday shopping season and worked as expected.

    Those plans were laid months before, when UPS started meetings to prepare in earnest for a peak season like none before. Ms. Tomé said she attended primarily to listen and observe, though she encouraged some new practices, like having senior engineers visit regions in person to assess readiness.

    She also accelerated $750 million of spending to speed up the network by October so that shippers could take advantage of the improvements in time for the holiday season.

    In October, with shipping volumes picking up as retailers shifted sales events like Amazon’s Prime Day earlier on the calendar, Ms. Tomé and her senior leaders convened a “premortem” on the peak season, with each executive coming up with their own definition of what success would look like.

    “This should just be the way we run peak going forward,” she said.

    Sol Vizel, CEO of Brooklyn-based First Choice Shipping Inc., has moved more of his business, which helps Amazon’s third-party merchants sell their products globally, to UPS over the last year. He said that he was impressed with how the carrier was able to navigate international shipping challenges, including those that arose from the U.K.’s exit from the European Union.

    “They are very well streamlined these days,” Mr. Vizel said, adding that he was impressed with their performance during the holidays. “They were better than ever.”

    Other customers have gone elsewhere. The founder of an online business-to-business distributor who just a year earlier moved more of its shipping budget to UPS received notice during the holiday season that the carrier was terminating its three-year contract in 30 days unless it renewed at 30% higher rates.

    “They said the leadership change is the reason for their shift,” said the customer, who has since moved business to FedEx on terms similar to those it previously had with UPS.

    While not addressing specific customers, Ms. Tomé said the current environment, with too much demand for limited capacity, means UPS needs to be paid adequately for its services.

    “If the customer isn’t willing to pay and they elect to leave us, then we wish them all the best,” she said.

    The pricing shift highlights two new realities at UPS. Package volume, which the company for years chased to fill its network, was no longer paramount. Instead, UPS could pick better, more profitable deliveries—like heavier packages that cost more to ship or shipments that tend to include multiple packages per stop—and turn away some accounts with lower margins, according to analysts.

    At the same time, Ms. Tomé is taking more of a retailer’s approach to UPS’s 1.9 million customers, viewing them as a portfolio that needs “segmentation.” That means some larger customers who may not require as many services, such as warehousing, don’t provide huge profit margins but do tender a steady flow of package volume to keep the network full. On the other side, UPS is focused on courting small and medium-size businesses, which tend to need a wider spectrum of services that UPS offers, to boost profits.

    “Home Depot didn’t make much money on lumber. They made more money on the attachments that they sold on lumber,” Ms. Tomé said. “As we look at our customer mix, we run it like a portfolio, much like retail.”

    At UPS, Amazon is providing most of the lumber. The e-commerce giant paid UPS $11.3 billion last year for shipping services, making up 13.3% of its $84.6 billion total revenue for the year. That was up from 11.6% of all revenue in 2019.

    Tied to her focus on “better” customers is more scrutiny on costs. Early in her stint, Ms. Tomé passed on a chance to add to the company’s aircraft fleet since it would have forced UPS to find cargo to fill the new jets. She acknowledged that UPS in the past may have taken up the purchase in an arms race for capacity. Likewise, she is also focusing on using all of UPS’s existing sorting capacity instead of investing in new super hubs that would face a similar push to find more packages.

    “At Home Depot, it was, ‘Build a store and they will come,’” Ms. Tomé said. At UPS, she added, “we were: ‘Build facilities and packages will come.’”

    Soon after the holiday crush ended, Ms. Tomé struck her first big deal—one that will shrink her company. She agreed to sell off UPS Freight, a division with about 14,500 workers and hundreds of tractor-trailer trucks crisscrossing North America.

    The division provides what are known as less-than-truckload services, in which cargo from multiple customers is combined into a single trailer. It is a fragmented and competitive market. UPS Freight brought in about $3 billion in annual revenue but operated at a 2.3% profit margin.

    The less-than-truckload business “was like a loss leader” for UPS, Alain Bédard, CEO of TFI International Inc., told investors after he agreed to acquire UPS Freight. The Canadian company plans to overhaul the fleet and renegotiate prices.

    Ms. Tomé plans to disclose more cost-saving measures to investors during a virtual meeting in June. Those could help soften future price increases, as UPS shares savings with customers. It was something she said Home Depot did. “I would love to do that here,” she said.

    By Paul Ziobro at WSJ

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