While Amazon.com (AMZN) got a lot of press this month talking up future delivery by drones — and FedEx makes some fun of that — FedEx and United Parcel Service are trucking ahead with ways to optimize human drivers.
Robots figure in at the shippers' sorting facilities, but it's mostly less sexy technology that's powering savings and helping the companies cope with ever-bigger stacks of boxes and envelopes to ship. In their peak holiday-deliveries day, UPS (UPS) and FedEx (FDX) together likely handled a few million more packages than last year's peak day, Cowen & Co. analyst Helane Becker said.
The peak day may have been Friday or Monday, but "they won't know till after," Becker said. In October, UPS had projected Dec. 17 would be tops, with deliveries of 29 million packages.
Big Brown Data
Once a driver himself, 37-year UPS veteran Jack Levis now helms Orion, the company's truck-routing software system effort that involves a think tank of Ph.D.s and a total staff of 500. In testing since 2008, Orion launched in limited use two months ago and is set for full deployment by 2017.
Levis told IBD — in an interview during holiday shipping "peak week" — that the On-Road Integrated Optimization and Navigation software likely will save about 1.5 million gallons of fuel this year. And it's been rolled out only to 10,000 drivers so far.
Orion, he says, calculates "trillions and trillions" of possible routes to suggest which is best for Big Brown's drivers, though the drivers then make the final choice.
"We try to make our systems and the mathematics and analytics all synchronize with the process of what an individual does day to day," said Levis, a senior director of process management.
It's Big Data in action — UPS claims the number of route combinations a driver can make in a day is "far greater than the number of nanoseconds the Earth has existed.
The company invests about $1 billion a year in technology, but looks for its efforts to produce cost savings. UPS says cutting each driver's route by just one mile a day could save the company $50 million a year.
Both UPS and FedEx are gung-ho on improving processes via automation and data crunching. A big chunk of it is about streamlining the delivery path so drivers can do more per minute and mile. They're also exploring electric trucks and other alternative-fuel vehicles.
UPS drivers check a map kiosk for ideal routing as they begin a shift. "They don't have a navigation system in their hands yet," Levis says, but there will be one.
Drivers get other information on the handheld DIAD 5 (Delivery Information Acquisition Device) used to track and support package deliveries. Developed with Honeywell (HON), it has GPS plus Bluetooth, Wi-Fi, wide-area network radios and more, so it can run on multiple networks.
FedEx's own route-planning technology is Roads, the Route Optimization and Decision Support system, in use since 2008.
Both Roads and UPS' Orion system aim to accommodate all the varying time windows, rush jobs and updated delivery addresses that customers can request. Roads can "dynamically update the delivery sequence," a FedEx spokeswoman said.
For all their potential benefits, optimization systems such as these get criticized by some shipping company employees, complaining that one aim is to let just anyone step in as a delivery driver. Both companies face big pension costs, a point of labor contention.
Humans remain integral to the shipping business, but analyst Becker points out that UPS and FedEx are "far more automated" than they once were and are delivering "more packages with fewer people" per package.
UPS shipped 4.1 billion packages and documents in its latest full year, 2012, relying on 399,000 employees and taking in revenue of $54.1 billion. That's 10,276 items shipped or $135,589 per employee, up from 9,335 items or $116,859 in 2007.
"They are very heavily into robotics within the sort facility," Becker said of UPS and FedEx. But it's "not like Huey, Dewey and Louie (the drones from 1972's "Silent Running") where (the robots are) the walking-around type — it's all in the conveyor belts.
UPS is constantly trying to improve the system, not necessarily with robots, says Levis.
"We're always looking; we're always prototyping," he said. "And it often comes down to job simplification — it doesn't even have to be a robot." For instance, now when an employee at a sorting facility scans a package, a light flashes to show what bin gets the package.
"Rather than that person having to memorize where every ZIP Code goes ... in their peripheral vision they see a little LED light light up, and (know to) put it in that bin," he said.
Businesses deploying advanced analytics software to optimize their operations can miss the point that, ultimately, it's important to simplify a job, Levis notes.
Outside the sorting facilities, much of the concentration is on how to get delivery drivers where they need to be with the lowest cost in time and fuel.
With routing software "they try to do as many right turns as possible," instead of left turns that take more time, Becker said, describing such efforts as "definitely very big projects" for UPS and FedEx.
So what about the drones
Amazon (AMZN) CEO Jeff Bezos said in a "60 Minutes" interview this month that the e-commerce leader is testing octocopter drones for delivering small packages. He said the technology could be ready in maybe five years, though he conceded many issues remain.
It's "really highly problematic," Becker said. "First of all, the FAA doesn't allow drones in the U.S. anyway for just flying around to do deliveries. You can have a personal drone on your farm if you want, but you can't have delivery with drones," she said.
FedEx sounded less than supportive on its quarterly earnings conference call Dec. 18.
"There are two enormous transportation networks that are built around moving light packages and freight, and they are FedEx and UPS," FedEx CEO Fred Smith said on the call. "And the size and scale of these operations are so big that it's almost amusing, some of the comments about delivering items by drones.
But he also said FedEx has "studies under way in that area." He didn't elaborate beyond calling the company's chief information officer, Rob Carter, a drone expert whose own drone "can operate about eight minutes and carry four Budweiser beers at his farm.
UPS CEO Scott Davis told Bloomberg TV: "I think we will pay attention to the drone technology. I think the technology is not that far away, (but) I think regulation is years and years away.
He called it an extraordinary challenge for the Federal Aviation Administration to regulate drone technology, and said it's "further out in the future than we would like — I would say more like 10 years.
He added in that Bloomberg interview that 3D printing is set to affect the business sooner, in the next five years, likely bringing manufacturing closer to home as companies such as General Electric (GE) even make jet engine parts with such printers.
Robotics might step into shipping on a greater scale in coming years, but where and how they'll thrive remains an open question. Google (GOOG), which is working on self-driving cars, reportedly made seven quiet acquisitions in the last six months to get better at robotics. The New York Times noted in a Dec. 4 article that Andy Rubin, the brains behind Google's Android operating system, leads the effort.