FedEx Corporation and United Parcel Service, Inc. compete in the package delivery business. The major fixed assets for each business include aircraft

FedEx Corporation and United Parcel Service, Inc. compete in the package delivery business. The major fixed assets for each business include aircraft, sorting and handling facilities, delivery vehicles, and information technology. The sales and average book value of fixed assets reported on recent financial statements for each company were as follows:

                                                                                 FedEx | UPS

Sales (in millions).                                                 $47,453 | $58,363

Average book value of fixed assets (in millions)     20,213 | 18,317

a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.

b. Which company appears more efficient in using fixed assets?

c.  Interpret the meaning of the ratio for the more efficient company.

Answer:

a. Fixed Asset Turnover Ratio = =

 2.3

UPS: = 3.2

FedEx: $

47,453

$20,213

$58,363

$18,317

Sales

Average Book Value of Fixed Assets

b. The ratios show that UPS is 39% more efficient at using its fixed assets than 

FedEx [(3.2 – 2.3) ÷ 2.3].   

c. The fixed asset turnover is a measure of how efficiently revenue is generated from

underlying fixed assets. In the case of UPS, the fixed assets represent all fixed assets

necessary to deliver packages from one location to another. These include aircraft,

trucks, sorting and handling facilities, and information technology. For every dollar of 

these fixed assets, UPS is able to generate $3.20 in sales. The fixed asset turnover

ratio will be influenced by the degree these assets are utilized to their optimal 

capacity. So, for example, optimally filled planes, trucks, and sorting centers will 

cause the fixed asset turnover ratio to improve.

Several years ago, United Parcel Service (UPS) believed that the Internet was going to change the parcel delivery market

Several years ago, United Parcel Service (UPS) believed that the Internet was going to change the parcel delivery market and would require UPS to become a more nimble and customer-focused organization. As a result, UPS replaced its old measurement system, which was 90% oriented toward financial performance, with a balanced scorecard. The scorecard emphasized four “point of arrival” measures, which were:

1. Customer satisfaction index—a measure of customer satisfaction.

2. Employee relations index—a measure of employee sentiment and morale.

3. Competitive position—delivery performance relative to competition.

4. Time in transit—the time from order entry to delivery.

a.  Why did UPS introduce a balanced scorecard and nonfinancial measures in
its new performance measurement system?

b.  Why do you think UPS included a factor measuring employee sentiment?


Answer:
a. UPS wanted a performance measurement system that would focus more on the underlying drivers, or levers, of financial success. It believed that focusing on the financial numbers by themselves would not reveal how financial objectives were to be achieved, especially with new demands coming from customers in the Internet age. The balanced scorecard provides information on how the financial targets are to be achieved. Using common measures throughout the organization also aligns the organization, while simultaneously communicating priorities. Apparently, UPS determined that its future success as an organization depended on “point of arrival” measures. These measures emphasized customer
performance to a much higher degree than would straight financial numbers.

b. The employee sentiment number is common in service businesses. The employees are the face of the company to the customer. If employees feel poorly about the organization, or if they feel that they don’t make a difference, then they are not likely to deliver premium service experiences to their customers. Just
think of the variety of fast food experiences you may have had in the past month. Sometimes, the service is excellent with a smile; at other times, it’s poor with a scowl. Measuring the improving employee morale is critical to organizations relying on front-line employees that deliver the customer experience.