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Auburn University’s Beth Davis-Sramek on How the Logistics Sector is Changing and Why the UPS Strike Was Unlikely

06/25/2018 By

Late Thursday, the Teamsters Union and UPS reached agreement on a new five-year contract, averting what would have been the largest strike in the U.S. in decades. The International Brotherhood of Teamsters, the union representing UPS workers, had authorized a strike if the two sides do not come to an agreement before the current contract expires July 31.

About 93% of union members had voted in favor of striking if necessary. And with a membership of about 280,000 UPS workers across the country, the union has the power to significantly disrupt delivery services and the supply chains of companies that use UPS. The largest U.S. logistics provider by market share, UPS delivers 19 million shipments a day.

A central point of contention between the Teamsters and UPS had been a proposed two-tier wage system. Under this system, lower-paid package handlers would work as drivers on weekends. These drivers would make $6 less per hour than the standard driver starting rate, according to the Teamsters. The deal that both sides agreed on would raise wages for current drivers but go forth with the proposed class of lower-paid drivers for weekend deliveries, the Wall Street Journal reported.

Before the two sides came to an agreement, Spend Matters talked to Beth Davis-Sramek, associate professor of supply chain management at Auburn University, who made the prescient prediction that the strike would not go through. Read on for her thoughts on what the supply chain consequences would have been, potential contingency plans and what changes are in store for the logistics sector.

Spend Matters: The July 31 deadline is approaching, but there is still enough time for the two parties to agree on a contract. How likely would you say the strike is?

Beth Davis-Sramek: I think it is incredibly unlikely that it will happen. I would be shocked if there was a strike. Any time you have a big contract like this come up, there is going to be some saber rattling about it. And if you look at the decline of the numbers and the influence of unions, there aren’t that many big contracts like this left that are this visible. So it is strategic for the unions to make the most that they can, in terms of making it visible. It becomes visible when it looks more controversial. That’s when people start paying attention.

Spend Matters: What can we expect to see in the coming weeks? How will all of this play out?

Beth Davis-Sramek: I think something will be solved before the end of July. I think that they will play this out. There will be more drama. But my feeling is that it’s in everybody’s best interest to wrap this up, because of one reason. FedEx can’t take all of UPS’s volume, but they could take some of their volume. FedEx is going to take advantage of this. What they can do is go to UPS’s customers and say, “Hey, there’s a looming strike here. If you want to minimize your risk, we’ll take more of your business.” Well, every bit of business that FedEx does take from UPS, that is less volume. Less volume means fewer people needed. Fewer people needed means fewer employees. Fewer employees means less union dues.

If you think about how UPS would hire, there is some calculation based on volume. So every time UPS’s volume increases by some amount, there is a number of jobs that go along with it — X number of volume equals one job. It works in the other direction, too. If you lose some amount of volume, that’s one job that is no longer needed.

If UPS were to lose business over this because it gets too close to the end and it looks more like they’re not going to be able to work it out, the union gets hurt in this. It’s not in their best interest to draw this out to the very end.

Spend Matters: Which side do you think has the advantage in the negotiations?

Beth Davis-Sramek: I would be afraid to speculate on that. UPS needs flexibility. They are looking ahead and they’re talking about ramping up and doing Sunday deliveries, so they need some flexibility on their end. And the other thing that UPS is investing in — and I am quite certain they are taking a long-term look — is automation.

Whether it’s automation in the package handling or automated autonomous vehicles, they’re investing in that. They’re looking at drone deliveries. So flexibility is going to be key for UPS in the future. Now, automation and what you’re seeing in technology is potentially damaging for union activity, in terms of just number of people needed.

The other thing I think that’s going to take care of a lot of this is the market. Wages are picking up. They’re picking up because employment is so low. Companies now are competing for labor. When you’ve got a lot of demand for labor and a shrinking supply, then companies have to make concessions to acquire and retain their labor force. A lot of this I think is going to be as much market-driven as it is the negotiation itself.

Spend Matters: If the strike does occur, what would the consequences look like for supply chains?

Beth Davis-Sramek: It would be devastating to the union, it would be devastating to UPS and there would be a huge impact on the supply chain. If you think about the millions of boxes that UPS moves every day and look at just the way the industry is structured now, if something happened at UPS, then the only other option is FedEx. Those are the two giants in this industry. And you have a finite number of airplanes and a finite number of trucks. There is no way that FedEx could take on all of UPS’s volume. So they are fiercely competitive, but they also need each other.

Spend Matters: Should companies have a contingency plan in place?

Beth Davis-Sramek: They should. The problem is that they’re very limited in what those contingency plans are. The biggest contingency plan would be to move volume to FedEx, but FedEx doesn’t have the capacity to take all of it. Current FedEx customers would probably be first in line. And it would be the big ones too. It’s going to be the AT&Ts.

For small businesses [that] are moving just a small amount of volume, I just think that there aren’t a lot of options, and you would have longer lead times. The other thing that I think would have to happen is to prepare your customers. If it looks like this is going to come down the pipe, then it’s a matter of telling your customers that are depending on those deliveries, “We may be running into some delivery issues.”

Spend Matters: How is UPS preparing?

Beth Davis-Sramek: I will tell you that UPS has a contingency plan. UPS has contingency plans for their contingency plans. If you think about all of the risk factors, —whether it’s congestion, weather geopolitical events — they’re so big and so global that they have a contingency plan in place.

Every single manager who is not part of the union would be automatically activated. There was a 10-day strike in 1997. Everybody in UPS management was activated, and they became package handlers and drivers. You have some in management who are pilots.

Spend Matters: Speaking of the logistics sector more generally, Amazon recently rolled out Hub by Amazon as a way to get in on last-mile delivery. Do you think more e-commerce giants are going to introduce their own delivery services?

Beth Davis-Sramek: There’s a lot of innovation in dense urban markets, especially for the last-mile delivery. But it takes a lot of capital and a tremendous amount of skill and capability to build a transportation network. It’s very difficult to say, “Okay, we’re going to start doing our own deliveries, and we’re going to become our own transportation company.” There would be some significant barriers to entry.

Now, could Amazon do it? Yes. And this is what would make sense. If you think about the holidays and you think about that surge in volume, FedEx and UPS both have maxed out. So if Amazon wanted to step in and help deal with that capacity, especially at that time of the year, that would make a lot of sense. Because it doesn’t make sense for FedEx or UPS to invest in capacity that’s going to sit for 10 months out of the year and only use it during that surge.

This Q&A has been edited and condensed.