To cut costs when the economy wilted, Pine Hall Brick Co. turned to its shipping budget. By keeping extra spare parts on hand, the Madison, N.C., brick maker has reduced the number of pricey next-day shipments it needs.

Link-Belt Construction Equipment Co., of Lexington, Ky., also looked at its shipping expenses but took the opposite approach. The crane manufacturer scheduled smaller and more frequent supply deliveries — a net savings because it sharply lowered inventory costs.

The contrasting strategies of these two companies illustrate the conflicting messages the shipping industry is picking up these days: Indications that the economy is perking up are tempered by signs of corporate stinginess.

“We do remain optimistic that the economy will strengthen,” said Kurt Kuehn, senior vice president of investor relations at United Parcel Service Inc., although he said right now there were mixed signals. Home deliveries have been good, Kuehn said, but business-to-business deliveries have lagged behind expectations.

Likewise, executives at FedEx Corp. were disappointed with shipping volumes in the retail and manufacturing sectors during the June-August period, its fiscal first quarter, although the company reported its first quarterly increase in U.S. express-delivery volume in 2 1/2 years.

Making adjustments

FedEx and UPS, the biggest integrated shipping companies, have weathered these tough financial times pretty well. They’ve cut costs, brought in new customers in underserved international markets and focused on expanding niche businesses domestically.

A year ago FedEx committed $1.8 billion to nearly double the size of its ground transportation unit, FedEx Ground, by 2009, in a bid to increase market share in an area where UPS is the industry leader. UPS, meanwhile, has made gains in the lucrative domestic air parcel business dominated by FedEx.

Yet while analysts and executives talk up these successes, and point to evidence of a U.S. economy on the mend, a measure of caution persists.

Vernon Moore, vice president of manufacturing for Pine Hall Brick Co. in Madison, N.C., says new ordering practices are saving the company money. By keeping extra spare parts on hand, the brick maker said the company had reduced the number of pricey next-day shipments. Moore is shown Sept. 30 in the plant's supply room. Similar changes by companies across the country are creating uncertainty for shippers like UPS and FedEx.

In discussing FedEx’s 19 percent decline in fiscal first quarter profit with analysts last month, Mike Glenn, the company’s executive vice president of market development and corporate communications, noted that “improvement in retail sales didn’t translate into improvement in demand for shipping.”

“We also saw some slow economic recovery in manufacturing,” he added.

To trim inventory costs, many companies are replenishing supplies less frequently and taking bulk shipments when it is absolutely necessary to restock shelves, Glenn said. The trend benefits large trucking companies and hurts traditional package delivery companies. FedEx has been able to capture at least some of this business through its FedEx Freight division, Glenn said.

Cheaper routes

Shipping industry revenues also have suffered as companies looking to pinch pennies switch from overnight air deliveries to cheaper alternatives, such as next-day ground or 2-3 day deliveries.

This trend accelerated during the economic downturn, analysts said, but really began more than a decade ago as the on-time performance of ground shipments improved due to better fleet management. Moreover, package-tracking technology has given customers an added level of comfort with slower deliveries.

“People often care more about reliability than speed,” said David Hoppin, who runs MergeGlobal, an Arlington, Va.-based consultancy for the transportation and logistics industries. “And road transport can cost one-tenth the amount of air.”

FedEx’s $1.8 billion in FedEx Ground attempts to capitalize on this shifting attitude of customers.

Tim Olsen, managing director of the FedEx Ground hub in Woodbridge, N.J., estimated that daily volume has grown more than 30 percent since 2000. He attributed some of that growth to the consolidation of operations in the Northeast as well as to an increase in demand for “next-day” ground services.

What worries analysts is the possibility that FedEx Ground might siphon away business from its next-day air division, FedEx Express, where profit margins are higher. Executives of the Memphis, Tenn.-based company downplayed this theory, saying the decline in domestic next-day deliveries has been offset by increases internationally.

Still, the company began offering early retirement in May to about 14,000 U.S. employees to shrink FedEx Express. The move is expected to save more than $150 million a year beginning in 2005.

Notwithstanding the industry’s upbeat prospects abroad, particularly in Asia, where the manufacturing sector is growing, shippers are constantly wrestling with how best to meet the changing demands of a mature U.S. market.

Atlanta-based UPS believes that by offering supply-chain management services, it can capitalize on the cost-consciousness that swept through corporate America when the economy soured in 2001.

The services are intended to help customers make wiser decisions about their inventory and shipping, something that is still on the minds of businesses even as the economy begins to recover.

“Like everybody else we’re looking at our costs and trying to hold everything in line as much as we can,” Vernon Moore, Pine Hall Brick’s vice president of manufacturing, said.

It is not possible to prevent rush deliveries altogether, even with the best inventory management plans, Moore said. “But we try to avoid them.”