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Business Locations: The Case of UPS

Introduction

A large number of articles and scholarly materials were published which stresses the past performance of Logistics Solutions industry during the past decades. But due to the significant and recent economic, social and political phenomena in the nation, the background and performance of the Logistics Solutions industry, particularly in the case of United Parcel Services (UPS) suddenly turned upside down. For many years, the Logistics Solutions industry served as the pillar of support of economic development of the nation and oftentimes being used to gauge the level of economic activity present in a given country.

For instance, having a booming and busy Logistics Solutions industry for UPS would mean robust industrialization and greater economic activity within the Louisville area as more transactions are met every single day. Foreign investors put their capital in the Logistics Solutions industry of the country because of the good performances that it presented to the global market.

But the prosperity of the industry could only last until the location of the UPS Worldport in Louisville as well as the current economic crisis of the United States. These two significant events had greatly impacted the performance of the Logistics Solutions industry in terms of investment, demand, price and other factors that are important to make the UPS running in the market. Profitability of the industry as a whole had started to decline as clients and foreign investors had started to downsize their investments in the country and move to other countries with relatively stable economy.

The once then impressive performance of the Logistics Solutions industry suddenly became chaotic and unstable after the existence of the above mentioned events. Given this urgency to investigate the effects of different social, political and economic factors on the performance of US Logistics Solutions industry, this paper will analyze the impacts of such factors on the onset of the location of the UPS Worldport as well as to determine its outlook given the present conditions of the political and economic climate of the United States.

Importance of Location         

The status quo according to Lynn: global corporations like UPS are admittedly the most cost-efficient beings to date. Employing advanced logistics, single-sourcing (receiving parts from a single supplier) was made possible; and this, coupled with just-in-time delivery, had considerably slashed inventories, not to mention insurance and security costs. With these factors, establishing a “hub” would be highly important for UPS operations. The Kentucky hub of UPS just sits in the middle of the United States which would serve as an important factor in the delivery of logistics services for the West and East coasts.

Indeed efficiency is the order of business for these global corporations. However, it in this efficiency that dangers lurk, as with less physical plants and employees to be had in these companies, their focus shifted away from promoting long-term productivity to attainment of short-term profit and high share price—the global corporations like UPS became more of system-squeezers rather than system-builders.

Also, UPS also put tremendous pressure on the suppliers and the government of a certain nation to charge them with lower input prices and lower tax breaks lest they transfer their investments out of that nation to another. The UPS search for greater efficiency in terms of location practically pushes that same goal into the throats of the productive network: Louisville.

And while some will not find a problem in this and may, in fact, even applaud and support this domino effect created by efficiency-seeking companies like UPS, Lynn pointed out the danger that most of its supporters overlook: that in pushing efficiency down the network’s throat, capital for innovation and risk-management for UPS suppliers becomes less and less. Plus the pressure applied to suppliers to provide lower prices for the global corporations had ushered hyper specialization in the Worldport.

Demand and Supply

Another important economic factor that greatly affects the performance of logistics industry would be the relationship of the demand and supply of demand from clients and ease of accessibility which the UPS Worldport serves. The recent financial meltdown in the United States, which caused the slow down of economic activity in the nation, serve as the triggering factor for the demand for logistical services of UPS to decline. These declines on the demand of logistics services due to various external forces can affect the price level of such services -lowering the market price of services in the industry as a whole since UPS was forced to cut down their prices so as to attract more clients.

Theoretically, the market price and demand have an inverse relationship; meaning if the price of a particular service has increased then demand will tend to go down as consumers would prefer cheaper services. But logistics companies such as UPS with enough funds to back up their operations even during a political or economic crisis sticks to their original price level or even higher. This is the reason why there are some companies that charges higher rates compared to others. But however, UPS would then have to find ways to save on operating costs. This would then include downsizing which includes the decision to locate the Worldport in Kentucky.

On the other hand, if the economic condition is favorable and running smoothly, then, economic activity of the United States will surely improve, leading to a higher demand for logistics services. The tendency of UPS after realizing the increasing demand for their services is for them to increase the number of their operations that are on service. Supply and market price have a positive relationship to one another. Meaning, if the price of a certain service increases, then, the supply also increases.

At the end of the day, the interrelation of supply and demand will determine the price level that will prevail in the market as well as the decision to locate the Worldport in Louisville. Aside from the supply and demand relationship, as noted earlier, external factors as well as a cost benefit analysis also affect the prevailing decision in the market and this will be discussed in the next part of this paper. 

Positive and Negative Externalities

Externalities are those external factors that can either positively or negatively affect a bystander or any particular party even without the consent of the latter (Tutor2u.com, 2008). In most cases, externalities are being coined as one of the market failures prevalent in most economies. The terrorist attack in New York, the Asian Financial Crisis and the recent US Financial Crisis are considered as negative externalities to the logistics solutions industry since these factors adversely affects the growth, profitability and development of UPS and the Louisville economy which highly depends on the Worldport.

On the other hand, globalization and minimization of trade barriers would be just few of the many positive externalities that boost the growth of logistics solutions industry since these factors create an avenue for the demand for services of UPS to increase, thus, experiencing higher profits. One positive externality is that, 75% of UPS manpower are part-time college students from nearby universities such as the University of Louisville. If the Worldport would be located there, several students who work part-time would be able to work for UPS which would serve as an advantage for the students.

On the other hand, one example of negative externality that adversely affects the performance of UPS, aside from economic and political crises, would be the natural calamities. Hurricanes, tornadoes and the like are just few of the many natural calamities that may pose potential damages on UPS operations or impede the schedules of UPS deliveries. This kind of factors directly affects the revenues and operational costs of UPS which are vital in maintaining its good performance.

Furthermore, one way of informing the workers or disseminating the information about the Worldport would be to release a memo to various department of the company stating the current status of UPS and that the management did done its best to prevent the relocating the company but unfortunately it did not work out. As for the media, press release would be an effective ways of disclosing the information of the relocation of the Worldport. With the mass coverage of media, disseminating the said information would be now easier especially in tapping the community (Loiusville) that relies on the company and also the loyal customers of UPS.

Aside from press release, another way by which UPS would inform the community regarding the shutting down of the company would be through public announcements to be posted on locations that mostly visited by the members of the community. With this kind of strategy, the welfare of the stakeholders of UPS is all considered and that the efforts of the company to somehow compensate the losses of the identified stakeholders are already enough.

References:

United Parcel Service of America, Inc Website. Accessed May 1, 2009 at http://www.pressroom.ups.com/mediakits/aviation/upsairlines/0,1366,,00.html

Krugman, Paul R., and Maurice Obstfeld. International Economics: Theories and Policies.

Harper-Collins, 1994.

Lynn, Barry C. The End of the Line: The Rise and Coming Fall of the Global Corporations.

Doubleday Publishing, 2006.

Nicholson, Walter. Intermediate Microeconomics and Its Applications

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