Activity Based Costing At UPS

Activity Based Costing At UPS

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l Link operating behavior to Product and Customer
segment cost

l Support existing and new product pricing decisions

l Rpreopdourcttconsistent and reliable profitability results by

Operating Costs Profitability Company
Behavior Value

Activity Based Cost Overview

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• Identify the key activities within a function or process.
• Measure the cost associated with the activities.
• Assign costs to products, customers and processes based on

the use of the activities.

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Evolution of Activity Based Costing at UPS

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Transportation needs were moving toward time definite, feature
based services:

l JIT was used to reduce inventory

l Economy was moving from manufacturing to more service
based

l An information driven business environment was developing

Evolution of Activity Based Costing at UPS

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l Detailed knowledge of our cost to serve by Product and Customer became
a priority

l The market drove the need to better understand specific segments of our
business

l A focus on “average” cost was no longer appropriate

Activity Based Costing Overview

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Pickup Location Pickup Type Local Sort Central Sort Transport Predelivery Delivery

lCPU lHazardous Materials lHazardous Materials
lOn Demand lIncompatibles lIncompatibles
•Late PM lover 70 pounds lover 70 pounds
•Call Tag lSmalls lTime Committed
•ARS l Air/Internat’l lMulti Package Stops

CustomersShipperRegularStandard Standard Ground Standard Delivery
CustomersLocationAccountPackagePackageTransportPackageLocation

lCommercial Counters lInternational lGrounded Air packages lTime Sensitive
•Letter Boxes lAir lAir Movement lResidential
•Air Service Centers lIncompatible lRail Movement lCommercial
•Customer Counters •over 70 pounds lLayover Driver lBldg Type
•Drop lContract Carriers lCODs
•Hazardous Materials lConsignee Billing
•Late P/U’s

UPS’s Activity Based Costing Approach

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Collect Electronic Scan Package Scan Package Input Exceptions Capture Delivery
Billing Detail Information

Pickup Local Sort Package Sort Delivery Sort Deliver

Shipper Origin Ctr Sort Dest Ctr Receiver

Travel from Transport Transport Travel to
Customer Customer
Package Movement Package Movement
Capture Data Detail Detail Transmit Delivery
On International Verification
Shipments

UPS’s Activity Based Costing System

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Pickup & Pickup and Delivery
Delivery
Express Service International Service
Transport &
Sort 1DA Transport and Sort
1DA
Information
Services 2DA Express Service International Service

Deferre 1DA Letters Express Letters
Grou
Grou 1DA Information Services Systems

2DA

Domestic Air International Service

Deferre 1DA Letters Express Letters
Grou 1DA Packages Express Packages
Grou 2DA Packages Expedited Packages

Domestic Ground
Ground Service
CWT

UPS’s Activity Based Costing System

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l UPS has a substantial investment in Industrial
Engineering

l Work measurement studies have been performed on work
activity at UPS as far back as 1921.

l These studies provide important insights into the content of
activities and the rate at which products drive these activities.

l UPS maintains detailed package flow control systems

l How products move through our system provides important
cost insights.

l Ready access to this data allows for frequent re-calibration of
our models

Activity Based Costing Overview

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l UPS has a highly efficient network of shared assets that
constantly adjusts to meet demand.

l Resources are shared across product lines making it difficult to
identify unique cost differences.

l Analysis of UPS package flow models provides a framework
to begin to answer such questions as:

• What activities were needed to get the package to the final
destination?

• What information system resources were required?
• What share of the activities and resources did the package consume?
• What did these activities and resources cost?

UPS’s Activity Based Costing Approach

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For Example:

Customer in Marietta, Ga. sends a package to a customer in Asheville NC.

Marietta Charlotte Asheville
Center Hub Center

Customer Pleasantdale
Pickup Hub

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Customer
Delivery

Activity Based Costing Overview

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Marietta Center Asheville

.53 hrs Pleasantdale 4.19 hrs Charlotte
Hub
Hub 1.4 hrs

.02 hrs .02 hrs

Customer P/U Customer Delivery

Activity Based Costing Overview

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Atlanta 2.0 Block Hrs 4.0 Block hrs Denver Alamosa
Gateway Gateway Fdr a/c
Gateway
Marietta Ctr 1.0 Block hr
Louisville

Gateway

Alamosa Ctr

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Performance View of cost and profitability of a division by
Measurement product across the network.
Planning & Forecasting
Activity Based Forecasting to integrate financial
Cost Reduction Efforts business plans with profit objectives.

Pricing Database of cost information for internal cost
comparisons and analysis.

Tool to ensure appropriate pricing.

Incentive Administration Monitoring system to track performance by
System customer and account representative.

Customer Performance Data mining techniques to segment customers
Measurement

UPS’s Activity Based Costing Systems:

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l Generated monthly
l View by business unit and product
l Electronic report format
l Data allows multi period, product and/or business unit

reporting
l Information in the ABC systems is continuously updated

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Product

Next Day Air--Pkg

Revenue $ XXX

PU Cost XX

Del Cost XX

Sort XX

Segment Feed XX

Middle Market View Non-Op XX ____ Customer

Profit $ XXX Customer View

Customer ABC XXXX Entity Next Day XXXX
Customer TNT XXXX Ground XXXX
Customer… XXXX Total cost/profit Internat’l XXXX
Total Profit XXXX Total Profit XXXX

Regions XXXX

Districts XXXX

Processes XXXX

Functions XXXX

Total XXXX

UPS’s ABC Systems help reduce cost throughout the value chain:

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l Focus operational improvement efforts on high impact areas.
l Change shipping behavior to minimize cost impact on UPS’s

network.
l Modify distribution network to reduce total transportation cost.
l Integrate logistic solutions to help optimize benefits across the

entire value change.

Customer Strategy:
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• Change shipping behavior to minimize cost impact on UPS’s
network

• Modify distribution network to reduce total transportation cost

• Integrate logistic solutions

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Customer Strategy:

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l Customer level profitability gives insights into trends affecting our

customer portfolio.

l Data mining techniques such as CART, CHAID, Self Organizing
Maps, etc. are used to identify meaningful customer groupings.

l Monitoring customer accounts has enhanced our ability to
understand effects of various strategic initiatives.

Invested Capital & Economic Profit
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• Invested capital is assigned to products based on unique
usage of each asset type.

• Results reflect widely varying degrees of capital intensity
across ground and air operations.

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Cost understanding is a Core Strength at UPS

l Cost is measured at a fine level of detail in our G/L system.

l Detailed work measurement standards improve cost insights and
encourage continuous improvement.

l Combining cost detail and work measurement has given us a leading
edge Activity Based Cost model.

l This allows UPS to accurately measure financial performance and
make effective decisions in pricing, cost control, quality improvement,
reengineering, forecasting and customer relationship management.