UPS’ recent agreement with the Teamsters Union has driver compensation set to reach $170,000 per year, on average, in salary and benefits. The popular story is about wage pressures and inflation, which the Fed insists still require more interest rates hikes, but this is missing the bigger point.
This deal could mean the end of the perennial “truck driver shortage” and rise of a new kind of logistics career that stretches from early adulthood through retirement with enough growth, learning, and money to attract plenty of ambitious young people to apply. It will also probably pay for itself with innovation driving labor productivity gains.
Labor and Capital Get Married
Supply chain, more than other functional departments like finance, HR, or Sales, hires many people without college degrees or formal certifications. As a cost center, supply chain has always tried to hire cheap, but recent advances in technology have started to change that. More and better digital controls on machinery, including delivery vehicles, have started to increase output per worker. ROI thresholds on capital investments are getting easier to clear with the tech improving, while labor costs are increasing.
UPS’ deal may lift all boats in a rising tide of productivity that could usher in an era of growth decoupled from inflation courtesy of a well-funded boom in technology and infrastructure investment. This has happened before. In 1914 the Ford Motor
F
The equation worked then because labor and capital providers both won. Together they delivered a transformative industrial boom. Absent the cheap capital bonanza that floated ecommerce’s early adventures, this new phase looks like labor getting its due, while capital insists on efficiency gains in return.
You Get What You Pay For
I’ve been writing about supply chain for 25 years and the “truck driver shortage” has been around for so long that its practically a meme. Serious sounding people debate the reasons without ever facing the truth – it has been disrespected and underpaid and therefore doesn’t draw enough jobseekers. Turnover in some of these local loop delivery businesses is over 100% annually, and although the public did a nice job of celebrating our heroic “essential workers” through COVID, it took the threat of a strike to deliver real money.
$170,000 may sound like a lot, but it will be worth it. Success in parcel logistics depends on dozens of constantly shifting variables like weather, order volumes, and special drop requests, that interact in unpredictable ways. It is an extraordinarily complex, perpetual non-stochastic optimization problem that toggles between an irate customer missing an important delivery and the rare serenity of a perfect route.
One of the key controllable factors is driver experience. Adding capital investment to digital systems that support the driver, delivery station teams, and even the customer will improve flexibility and troubleshooting in real time, but without an experienced driver able and willing to apply judgement it won’t work well. There are simply too many subtle failure points at the moment of truth when each delivery is made.
What About Inflation?
UPS’ stock took a hit with this news because its EPS estimates dropped. The costs will initially be passed on to customers. But there is something different about the idea of wage-price spirals dooming us to stagflation. The Fed, along with most economists, seem to be underestimating the power of customer choice today. In the 1970’s when stagflation made its name there was no ecommerce or omnichannel, no way to work from home, no endless selection of items on sale 24 hours a day. UPS will need to keep inventing or customers will dry up, and that is the good news for everyone.
This deal is exciting because it lays the groundwork for an ecosystem of ever-evolving parcel delivery capabilities that could include drones or AGV’s, multi-purpose hubs and retail sites, or even completely new approaches to packaging and returns. The possibilities are endless, but without experienced drivers some will fail unnecessarily, while others will never be discovered.
The heroic COVID delivery drivers of 2020 are an engine of future logistics innovation.
Read the full article here