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Talking Freight

Freight Productivity Impacts by Natural and Man-Made Disasters

July 21, 2010 Talking Freight Transcript

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Jennifer Symoun
Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Jennifer Symoun and I will moderate today's seminar. Today's topic is Freight Productivity Impacts by Natural and Man-Made Disasters. Please be advised that today's seminar is being recorded.

Before I go any further, I do want to let those of you who are calling into the teleconference for the audio know that you need to mute your computer speakers or else you will be hearing your audio over the computer as well.

Today we'll have two presenters, Paul Bingham of IHS Global Insight and Dan Gross of UPS.

Paul Bingham, a Managing Director for IHS Global Insight, has 27 years of experience managing consulting projects focusing on the economics of and markets for freight transportation. Research efforts have included extensive scenario forecasting including of the evolution of goods movement patterns, freight transportation planning assessments, transportation equipment operations, and patterns of domestic and international freight flows, including those subject to disruption. He has contributed to IHS Global Insight's international and domestic commodity trade forecasts, which include the forecasts for the FHWA Freight Analysis Framework and forecasts of the company's own TRANSEARCH North American freight flow data base product. Within TRB, he served in many roles including as immediate past Chair of the Freight Systems Group of standing committees. He serves on the Board of Directors of the International Trade Data Users group and on the National Council of the Transportation Research Forum.

Dan Gross, a 30-year veteran of UPS, is currently Surface Transportation Network Planning Coordinator for the company's North American operations. Based at UPS's world headquarters in Atlanta, Dan is an experienced manager in all facets of transportation operations. He currently is responsible for all North American ground transportation network planning, including package sorting, processing, and loading using multi-modal transport of both tractor-trailer and rail. Additionally, Dan leads UPS's transportation long-range planning. This encompasses building and managing strategies for all contingency planning for natural disasters, adverse weather conditions, and other unexpected and unplanned events.

I'd now like to go over a few logistical details prior to starting the seminar. Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the chat area. Please make sure you send your question to "Everyone" and indicate which presenter your question is for. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. Once we get through all of the questions that have been typed in, the Operator will give you instructions on how to ask a question over the phone. If you think of a question after the seminar, you can send it to the presenters directly, or I encourage you to use the Freight Planning LISTSERV. If you have not already joined the LISTSERV, the web address at which you can register is provided on the slide on your screen.

Finally, I would like to remind you that this session is being recorded. A file containing the audio and the visual portion of this seminar will be posted to the Talking Freight Web site within the next week. We encourage you to direct others in your office that may have not been able to attend this seminar to access the recorded seminar.

The PowerPoint presentations used during the seminar are available for download from the file download box in the lower right corner of your screen. The presentations will also be available online within the next week. I will notify all attendees of the availability of the PowerPoints, the recording, and a transcript of this seminar.

One final note: Talking Freight seminars are now eligible for 1.5 certification maintenance credits for AICP members. In order to obtain credit for today's seminar, you must have logged in with your first and last name or if you are attending with a group of people you must type your first and last name into the chat box. I have included more detailed instructions in the file share box on how to obtain your credits after the seminar. Please also download the evaluation form from the file share box and submit this form to me after you have filled it out.

We're now going to go ahead and get started. Today's topic, for those of you who just joined us, is Freight Productivity Impacts by Natural and Man-Made Disasters. Our first presenter will be Paul Bingham of IHS Global Insight.

As a reminder, if you have questions during the presentation please type them into the chat box and they will be answered in the last 30 minutes of the seminar.

Paul Bingham
Thank you very much, Jennifer, I appreciate the kind introduction and thank you to Federal Highway for being able to participate in this webinar today. I hope we all collectively get something out of this. Natural and man man-made disasters have become a topic of greater interest this year. I hope I can provide some great detail on this at a high level and then Dan will follow-up with details of the everyday world.

I will start with my first slide, the big picture of why we care about this. Why does it matter to a broader audience of transportation planners and carriers who have to operate? It matters because of the importance of freight and the economy. The growth of the economy and the health of the economy are dependent on freight productivity, capacity, and performance of the freight system. This has been changing; it's not static in terms of importance to the economy. The importance of freight has been increasing over time in terms of the importance as a facilitator and as the mechanism by which all other activity in the economy operates. That includes not only domestically within the borders, but across borders. However, the components of the freight transportation system are changing over time. These changes are not instantaneous and are not happening month to month in a visible form, but over time we have seen dramatic shifts that continue to happen and are affecting our planning horizons and factors we need to take into consideration in decision-making. An example of this is the importance of NAFTA surface freight to the U.S. economy has diminished in comparison with the importance of Asian seaborne containerized freight. China has overtaken over Mexico as this country's number two trade partner.

Now, within transport, the nature of the commodities and the goods being moved are also shifting over time. We have seen trends of lighter weight higher value products carried in trucks and containers out pacing the growth in the large bulk commodities, which has increased the importance of the higher service freight network in the United States and potentially made a greater proportion of transport vulnerable to disruption to that high service, high performance productive freight network.

We have seen continued effort that spans modes of transport to benefit from economies of scale. We have seen that in examples of larger ships being used in container trade, and longer train lengths being employed by the Class 1 railroads - all in an attempt to reduce costs to shippers and improve the productivity of the freight system ultimately for the consumers depending on it, and having consequences and some success in reducing expense to economy as a whole of the freight transportation system. There are consequences of this, though, that have potential impacts in the case of disasters, that includes the potential number of alternative terminals and routes available that can handle this larger equipment potentially being reduced in the cases of interruptions from disasters. We believe interruptions can be more significant to the U.S. economy in terms of what they can do to transportation system and follow on impacts to the economy; that is all contingent on how the freight planning community, investors and carriers themselves plan for and deal with disasters as they occur.

If we look at the top level importance of transportation and logistics in the economy to emphasize how important it is, we can look back over the last 15 years. This is data from the Council of Supply Chain Management Professional from their State of Logistics Report on the percent of gross domestic product which the entirety of transportation and logistics represent in the economy. It's been roughly 10% - and we have had some success in the last decade in reducing costs, although we have seen a sharp fall off in the past year, primarily due to the decrease of interest rates which reduce carrying costs. If we focus in on more than just the total logistics and transportation cost and look at the components of those numbers, the large majority of transportation logistics costs are taken up by the transportation costs themselves. This is the actually functioning system, network, and equipment running through the network. The transportation cost is at roughly two-thirds of the total cost and is not changing dramatically in terms of that share over time. These costs have been reduced but are still by far the largest of the costs so if there is a disruption and those costs go up, it translates to the top line.

In this slide I will try to summarize the most important slide in this presentation on disaster impacts: the factors affecting freight productivity across a number of dimensions. If we are trying to estimate or look the size of freight productivity impacts from a disaster, there are dimensions that matter on how it affects the network, the consequences for individual modes on the network and individual companies on the network and the economy as a whole. There are several of these of which there are four I identified that are the most important.

The first is whether or not a disaster can be anticipated. Even by a few hours or a few days. An example there might be a storm which weather trackers are tracking such as a hurricane. Weather forecasters are able to track out in the ocean and see the storms that are coming. If there's any advance notice there may be opportunity to mitigate by taking advanced action. Many carriers take planning into account to be able to deal with disasters that in any way can be anticipated in terms of location or size or scale or timing.

Now, another factor that matters significantly is the duration. The duration of interruption impacts, we believe, and have been shown in the past data, are a non-linear function of time. As the interruption lasts longer, the consequences and cost are not proportional to how long they last. They are disproportionately increasing through a period of time and then decline through the terms of sustained impact on the network, the system and economy as a whole. The initial cost of a few hours of disruption, impact is pretty low; the system has taken into account the potential for those to hit the system. However, as the duration increases there will be substantially escalating impacts going from days to weeks to several months. After which overall system operations and even planning to some degree will adjust and further impacts will increase at diminishing rate and so the duration matters in terms of impacts on the system. That will come into play if we look later in terms of how to estimate and quantify impacts for planning; if it is warranted from a benefit cost analysis in terms of how to deal with it. I won't get into all of that, but at least try to set up perspectives to deal with contingencies of disaster impacts.

Another factor is seasonality. Interruption in peak season, say October or December for other type carriers, has a greater impact than one of the same length, location and scope as in slow season when the volume and velocity of goods moving through the network may be less. If we look seasonally across on a month-by-month basis it varies quite a bit. In containerized trade there's a swing of 20% volume from the peak month to the slow month. The degree of impact also matters to when it happens. Obviously a disaster hitting harvest areas in agricultural areas right at harvest is different than in the dead of winter.

Lastly, the one we think of immediately always about disaster impacts on freight productivity is geographic location of the disaster. From the perspective I am bringing, it's really the economic geography that matters, not municipal or national borders, it's the business impact in terms of geography, in terms of the number of business establishments and value of freight network serving the economy from the business perspective that matters in terms of the scope of interruption and how much of the system capacity and reserve capacity is affected. All these factors are interrelated.

Defining the scope and impact, it's all four of these that matter in terms of estimating impact and from a planning perspective, thinking of consequences of potential disasters on the system, what might be done to mitigate it.

If we look at the impact on the economy, disaster interruptions have both direct and indirect impacts on the economy. The first are the most immediate, the lost economic activity of the freight system. You can measure that in terms of lost jobs, depreciated value of damaged or destroyed goods, freight assets. Indirect impacts often times, if the disaster is large enough, swamp the direct impacts. Those are how the disruption to the freight network immediately in and of itself with the goods immediately lost then play through the network and to the economy. This includes lost revenue associated and includes other transport service suppliers tied to those directly affected, but also other parts of the transportation network such as associated air, ocean carriers, rail freight, and trucking. A disaster's effects spans across modes. There are even some indirect impacts which can be benefits to certain modes if they are used as a substitute. These impacts are not all negative, some individual companies may benefit.

There is lost output and employment from disrupted U.S. trade. The indirect impact on output and employment in other industries caused by the first-round impacts on transport users are also impacts that are potentially quite significant and can cause further disruptions to the economy of a whole. If we extend impact estimates, you can even try to estimate what is the value of the lost output.

If we look at the consequences anticipated from an extended interruption ton existing freight network - this is a disaster that affects the system for more than a brief period of time - the consequences can be many. The consequences include diversion and/or lower productivity from the supply chain operating at a lower velocity which can consequently lead to increases in total delivered costs which are a big picture negative in terms of impacts on businesses, consumers in the freight transportation system. We have seen this in instances where disaster cause permanent damages to infrastructure network which takes quite a long time to restore service. In this case the network has to operate in a second preference, less than optimal, mode in terms of routes, equipment, services for extended period of time which than has the longer lasting consequences.

Increased cost can pressure retailers and other shippers to realign sources. If the cost through the supply chain over a portion of network affected by disaster is significant enough alternative sources can be used to shift country of origin trade. We can see product substitution in some cases if relative costs raised high enough because of consequences of network of disaster, we can see shifting. Example might be fuel shifting in the utility sector to serve electric demands of a particular region.

Looking at supply chains, they are adaptive but some of that adaption can be gradual. Because many investments are committed and not easy to change overnight and we cannot without what would be viewed as uneconomic and efficient in terms of change perspective timing. Change happens progressively over time and some of the consequences of disaster may not play out for several years. We could describe that from the big picture perspectives of 9/11 and Hurricane Katrina and as we look at the consequences of almost any other disaster such as what will play out over time to the air freight network from the ash clouds from the volcano in Iceland earlier this year.

Ultimately increased cost is passed through to customers as it reduces their spending on other goods, reduces economic performance through changes of consumption, and reduces standard of living. It has a real impact working its way through the entire economy. If we attempt to estimate the freight productivity impact of disasters, actually quantifying it, it requires an understanding of the aspects of how the network is affected. That includes considerations of the extent that the activity represents a permanent loss. That includes what I mentioned before including operating less efficiently, less optimally; perhaps dealing with less reliability to the network and operations that are more costly than what we were enjoying before the disaster affected the network and the economy.

Quantifying the extent to which loss can be recovered is important. Many simple first order estimates can overstate the long-term true losses to the economy as a whole because of such mitigation steps that can be undertaken such as the ability of businesses to advance or delay shipments in anticipation of the disaster. Also, the utilization of alternative routing can lessen effects on shippers, and acceleration of production following interruption where you run at higher capacity for a period of time. This is also true in terms of productivity in the freight network; you can run your equipment at a little higher utilization to make up for some of the lost time that happened during the period of interruption on the network. From the perspective of the audience today, advance planning can help facilitate the loss mitigation steps so when the disaster occurs there is capacity in the network, understanding of how those alternative operations can be affected in the network to help reduce, minimize the losses that follow from the disaster on the economy.

Now, just to illustrate this, I haven't attempted anything in great detail, but as an illustration of system disruption that is broad enough scale to affect the economy, the timing, impact duration, I have an example of the estimated consequences of sample interruption in the United States. This is specific in terms of definition looking at what I talked about before. From the seasonality perspective, we made assumption this happens in first quarter of year. The geographic economy here is the U.S. West Coast, looking at a disruption to the U.S. container ports on the West Coast. We are looking at three sample durations, a five-day, 10-day and 20-day, from a business perspective, a one, two or three-week delay in terms of facilities return to operation and the consequences in the economy measured across a couple of indicators.

The first is the full time equivalent jobs lost. This is the employment cost run through the entire economy from direct and indirect effects of these different durations of disruptions. The next measure is personal income, so that's also a national measure of what the disaster does to earning throughout the county. If you look at the length of disruptions where the ten day is twice as large as the five day, we do not see these impacts are linear because the ten days as compared to the five days are very close. When you start to look at income or real GDP, it escalates significantly when it gets to the twenty day period. Where the losses in multiple billions rather than less than a billion after only one week, and real GDP from less than a billion from the one week to approaching $16 billion in the three-week disruption.

This is a measure of the consequences of a sustained duration impact. We didn't run out scenarios for greater disruptions or look at alternatives of other geographies or timing, but did look at full play-out of these disruptions. These impacts take into consideration the recovery period, the ability to recapture losses after this period of time of the disruption. In other words bringing factories back, running the freight network at a higher level of utilization. These are net impacts that we measure at some point in the future. In this case looking at after several years out what was the consequence on the economy.

So, in summary, infrastructure logistics can amplify or reduce the consequences of disasters for freight. The freight system nodes and links are critical to how a disruption is going to play out across the network and in the economy. What matters here from a freight planning perspective is what's the capacity available as reserve. What are the limitations we will run into in terms bottlenecks, alternatives in the case of disaster or for the catch-up period after the interruption is over.

Factors that matter are the geographic concentration of freight corridors and terminals; in other words, how much of your total economic activity related to freight is concentrated in the area that is affected by the disaster. This is an all-the-eggs-in-one-basket issue as it plays out in terms of where we have freight moving on the network. Also significantly mattering is the capacity, from a planning perspective, on risk minimization, throughput service capacity how much more could we put through the network we have in place today in case we need it if some other part of the network is taken out or we are trying to catch up from a period of disruption. This varies by mode. Trucking can be more dynamic than fixed rail. Both face capacity limits, over a longer period of time. Often times the networks can handle more surge capacity than they can in the very short run.

There's a difference in terms of the amount of impact on individual businesses or industries based on the uniqueness in trucking and trail operation practices today, where the more unique the rail and trucking practices are, the more it's correlated for higher costs for substitutes. A tank truck operator or someone moving specialized liquid bulk chemicals face a very different case than somebody needing dry van trucking where they can find it more easily and it's more mobile. We look at the air and maritime modes, and they have no substitutes economically available, especially in the short run. Flexibility can be very different than for trucking and rail.

There are also logistics practices that matter. The growth in lean logistics practices over the last decade is has also affected the ability to recover from a disruption. Using freight equipment for warehousing puts that equipment as storage, at risk. If only serving a transport function and it gets disrupted. That's a limit of impact. If it is also serving as warehouse and serving the distribution function from the supply chain perspective, the consequences can be greater then in terms of the supply chain consequences on the economy.

In summary, disaster impacts on freight productivity are critically important to the economy, but the nature of disaster interruptions is critical to estimating their cost. Understanding those dimensions to the disruptions, planning for them, matter in terms of what's warranted and the way the disaster should be addressed. Disaster interruptions for freight have significant potential for permanent economic effects, but can be small short term. Planning is the key to mitigating. We believe the planning can help reduce economic cost of disaster interruptions. That concludes my remarks; I look forward to participating in Question and Answer. Thank you.

Jennifer Symoun
Thank you Paul, if you have questions you can type them in the chat area and we will get to them in the next presentation. I will turn it over to Dan Gross of UPS. Dan, go ahead and get started when you are ready.

Dan Gross
Thank you, Jennifer, and nice introduction there, Paul. Good morning to those in the West Coast and good afternoon to the rest. I am going to get right into this. I thought I would share some statistics regarding UPS. We are a global enterprise. Our corporate headquarters are in Atlanta. In 2009 we had revenues of roughly $45 billion. We have 408,000 employees worldwide of which 345,000 are right here in the United States.

Our delivery volume, average 15 million packages per day, delivered, and our fleet, over 96,000 vehicles on the road around the world, obviously most of those here in the United States. In our UPS jet aircraft fleet is 253 of which 214 presently in service, making UPS one of the top nine in the world in terms of jet aircraft fleets. I thought it was important to share with the group how in fact UPS is global, the fact we take contingency planning and alternative ops planning, the crux of my discussion, seriously, and why we take it so seriously.

I will start with our crisis management mission statement. This pertains to the worldwide UPS. We seek to maintain a constant state of readiness should UPS become exposed to any unexpected act of a critical magnitude. We maintain a crisis management strategy model which I will talk to going forward here to assist us in the prevention, response and restoration of our accident. We strive to protect the reputation, interests of UPS, our people, customers, share owners and communities. We want to conduct ourselves, responsibly, sincerely, honestly and with the utmost integrity to ensure the safety, security and well being of our folks.

The fact we are a global enterprise, our crisis management team is headed up by department heads from our corporate group and/or some attendees, designees of those folks. It's cross-functional, department heads from all functions within UPS operations, human resources, communications, etc.

The part I play in this is I deal with the operation side, as Jennifer mentioned, I have North America ground, so there are many facets to what we do with crisis management. The crux of this discussion will deal strictly with what we do from a transportation side here in North America. Certainly if you have questions about other elements I will attempt to answer them, but again, I am personally more involved with the transportation side here on the domestic side.

At UPS we break down planning into two different modes with the first being contingency planning and the second being Alternate Ops. Contingency is the one that probably we're all more familiar with. That would be something short-term in nature as Paul talked about, and typically weather related. For example, today we're dealing with a small contingency, folks that are on this call from Illinois or Iowa, you may be aware there was flash flooding in Western Illinois and Eastern Iowa and tornadoes. We had trains that are dealing with the flash floods. I had a call earlier today to talk about did we need to put the contingency plan in place and we determined we did not. I talk about these plans, something we talk about on a daily and weekly basis, as needed. Our Alternate Ops are those long-term types of things. Pandemics, for example, could be included. If we lose a facility for a long period of time, longer than two or three days, would fall under contingency. Anything longer, weeks, months or permanent loss of a facility we label under Alternate Ops. An example of that would be Hurricane Katrina. We lost our New Orleans facility for a considerable amount of time, several months. I will get more into that as I go through the presentation as well.

First thing I want to talk about is contingency planning, and how we do that at UPS. This is our short-term operating disruptions, typically winter storm and hurricanes. The one I will talk about during this presentation will be the winter storm in past winter in Central, Eastern Pennsylvania, State of Maryland, Delaware, and D.C. If you recall, upwards of two foot of snow in that general area and the contingency plans we have in place first and foremost, to make sure our people and our customer's packages are safe. We never want to put our employees into danger. Then, secondly, our goal, and as Paul mentioned, when the network gets out of kilter, and contingency turns from one to two to three days, the more days involved is certainly more cost involved with that. So with that, we believe at UPS that our network is extremely efficient and tight. Because of that we need to maintain our network. We will do many things to keep our network intact. The snow storm I am referencing here, we were not able to drive the North South corridor of I-95 or I-81. Our domestic service has three regions, one in the East, one in the Central part of the country, and one in the West. Amongst them, we have 20 districts. The districts involved in this were headquarters out of Philadelphia area. We could not drive through those corridors during this winter session. The contingency plans we put in place were in order to minimize the effect to our highly efficient network was to change the mode of transportation. Theoretically, if you look at a map you could say we could have drove around this, and although that's costly, more importantly to us, it would have taken people out of our network and then had a ripple effect causing a one-day event to become a two and three-day event. What we do in our plan is change the mode of transportation, put our loads on a train. For this example, loads coming out of Southeastern part of the country were being stopped in Southern Virginia and Northern North Carolina. Then, loads coming out of the Northeast were stopping in the South New Jersey area, putting loads on a train and train through there. You take a one-day service hit, which in itself is bad in our business, but in effect, it protects the second, third and fourth days, because we get to maintain the network once the highways opened up.

One thing to mention, I did notice that many of the folks participating on this call are from local and state governments. When we have contingency plans, we do make every attempt to include the local government officials. For example, the crisis or contingency plan I am talking about, the snow event, our district manager out of Philadelphia was in constant contact with the mayor of Philadelphia and his office throughout the weather event. We do that to see how we can assist and secondly, so we can know where and when we can put drivers safely on the road. That way we can also inform our customers of where the packages are, come is critical to both them and to us. We diverted, in this case, to a train. We have plans, where we will work out of an aircraft because of contingency and service it in that way. As we continue to be concerned for employees, we also want customers to know where their packages are throughout.

This slide continues on with the contingency planning. Typically contingency planning is handled locally. The plans they enact from a local level have been created by corporate contingency planning group, of which I am a member. Those plans are out there and are available at any day, for example, as I mentioned the flooding that, flash flooding that occurred in Western Illinois. The plan could have been enacted very quickly to divert, but fortunately for us we were able to get through with the trains we have in place now. There's certainly support from the three regions and from a corporate level. The determining factor for how many folks are in scope of support that the district would need is really determined by the event itself. If it's a one-day in nature type of thing it's a communication, typically a conference call thing. If something else is needed we will certainly fly into the area, the team we would put together and assist in that way. The biggest thing we want to do, though, is get back to normal operations, the normal network, as quickly as possible. This is beneficial for our customers, as well as us, from a cost perspective as well.

Some consequences you have, such as staffing, and Paul mentioned this. Certainly there's a disruption in staffing, number of people that can get to work. Facilities are located in major metropolitan areas typically. Many of our folks use mass transit, and those are the first things that go away when there's a snow emergency, for example. There's certainly a disruption in our people's lives, how they get to and from work. Then after the event there's a post-disruption and that's typically caused by the fact that now we have this abundance of packages we need to get processed and out for service, typically the next day, now we're working extra, longer shifts, trying to increase productivity in an effort to make service on packages. This can be disruptive to our employees. As with any company, the cost of this is important to us. There is certainly a cost impact to the affected areas during a contingency operation. Staffed operations, when there's no work, in the event referenced with the snow, we had people who came to work the first day but because of highways being closed we were not able to get trucks into the facilities, we had people there, no packages to process. That's a cost impact. The impact to cost from catching up, running extra shifts, paying overtime. And most appropriately from a customer's perspective is the service. There's typically a one-day service disruption, but again, our focus is getting that network back up and running as quickly as possible to minimize to a one-day. I can't stress enough how we don't want to tear the network apart for a one-day disruption to not impact to make a greater one, two and three-day.

With the contingency portion of it, our keys to success are first and foremost, communication. We review our contingency plans annually at a corporate level and take them all the way to the district level, and review them. Our contingency plans typically don't change from year to year. The only reason they would change is if we have a service change, corporately, and/or we have building closures, which is not typical of UPS. Then certainly managing the expectation of any contingency plan, making sure the folks know what their tasks are.

I will move to Alternate Ops, typically much more serious, and fortunately for us very seldom do we have to enact these. The most recent one being enacted was Katrina in our New Orleans facility which was flooded. We simply had to close the facility for some time in order to get it cleaned up and back up and running. These Alternate Ops plans are something we do annually at a high level in the organization. We have 32 what we call hubs which are large sortation facilities around the country, Alternate Ops plans for all 32 of these facilities. In other words, if the facility in Denver, Colorado were to take fire or something odd that would take the facility down; we now know and would enact our Alternate Ops plan. We have a team that would gather in one of two locations initially, that would be in Louisville, Kentucky where our air sortation facility is or Atlanta, where corporate headquarters are. The team would talk with folks at the site, local folks, district folks and region folks, and we would work through all necessary modes of communication in order to determine what impact, first to our people secondly to our packages, and thirdly to the service and how we're going to minimize the disruption and get the network back up and running as quickly as possible.

Typically these Alternate Ops plans are much more costly than the contingency plans. Once the team meets and we evaluate the situation, we go to the site and operate from there. This is a corporate region direction. The things we look at are quite similar in nature to the contingency planning. We look at alternate locations. In the example of Katrina in the New Orleans facility, we simply took the packages and started processing in the Jackson, Mississippi facility. That led to problems in Jackson, Mississippi in that now we were over capacity, more packages than the facility could hold. It had a ripple effect all the way back to Chicago where now our major sort facility, automated sort facility in Chicago was creating new loads to bypass Jackson, to go directly to the smaller delivery facilities. You can imagine the cost of that was quite considerable. But it was necessary in order to get the network back in shape, as well as maintain service to our customers. We also take a look at different modes of transportation. We work with the class 1 railroads and ask them for new trains, we will re-route as mentioned, re-route ground feeds and aircraft. Some of these moves, for example, back to New Orleans, we still have certain things we put in place for the New Orleans facility that are still in place today. Ironically, some of these things we're looking at evaluating to see if we can put them back into New Orleans to try to cut some of our costs and we think we can and are moving forward. We try to make all this as transparent to customers as possible in an effort to contain their concerns.

Continuing with our Alternate Ops, the planning handled through the corporate office. We have pre-determined plans, pull them off the shelf and enact them. We do have, every year we pick a facility and run an exercise. The most recent exercise was in Long Island. We ran a scenario where Long Island was hit by a hurricane and we lost the major facilities in Long Island. How would we respond the site is selected by the corporate management committee and then we enact our plan, literally in this case hundreds of UPS management people are involved and we run the plan from A to Z, critique ourselves and are highly critical of ourselves so we do not make unnecessary errors were the event to actually occur. The plan is to become normal as quickly as possible.

Some of the consequences from an Alternate Ops situation in terms of our people, in many cases, and the case of New Orleans, people have to move out of the area and you lose those people as employees. In this case we tried to take displaced employees and put them in another UPS facility in order to keep them employed. A lot have not returned to the New Orleans area. Existing workers are not available because of disaster, for example a pandemic. We did have a practice Alternate Ops situation, if you will, with the bird flu. We talked about how to handle that with people how to handle the situation if we had to close the facility. When you lose a facility, have to start to run other facilities at higher capacities. You have to hire more people and more training is involved. We also have to move vehicles; it's very high-cost. Service as one of our primary concerns initially is high. The service levels and as we move to get back to the network as quickly as possible, the service starts to come back to normal.

Our keys to success from Alternate Ops and contingency plan are that the communication is critical, both to people and customers, and manage the expectations of people and customers are of utmost importance. In summary, maintaining good contingency and Alternate Op plans are critical. We update both plans annually, and/or as operating plans change, and whenever necessary. We make sure all our employees understand the plan. We do this through both communication in writing, conference call and through our exercises for Alternate Ops for larger facilities. We role play and we are highly critical of ourselves during that scenario. As always, I guess with any organization, you hope you never have to enact any of these things. Contingency planning becomes second nature to us now, but the Alternate Ops, we certainly hope we never have to. There's been very few, fortunately, occasions where we had to, but we are well-prepared and believe that preparation, when the next event does occur, will allow us to cut the costs that may have occurred, maintain our service, get the network back up and running as quickly as possible and keep our people safe. With that, Jennifer, that concludes my presentation. I will turn it back over to you and look forward to questions that folks may

Question and Answer

Jennifer Symoun
Thank you, Dan. As of now I only see one question. We will get to that, but please keep typing in questions. We have time and will open the phone lines momentarily. The first question, Paul, it's for you. I would like to hear Paul's perspective regarding winter closures for I-80 in Wyoming, as an example. How does or could the DOT help during winter closures?

Paul Bingham
That's a good question. From a State DOT perspective, I think the long-term handling of winter closures is something that would fall into the area of predictable disasters, likely to happen every year. So the ability that it gives some anticipation that I talked about. It's also something where a State DOT can take advantage of planning to deal with the inevitable of winter storms. The model is to follow best practices that exist in other State DOTs, also the ones which more sophisticated carriers are able to conduct. Like what Dan just went through in UPS, that's a high bar that he's setting in terms of standards for carriers. Clearly a single independent owner operator won't be able to invest or have anything that matches, even approaches thinking being what UPS is able to do to maintain the network. That's where the State DOT becomes more important for users of network and the freight system that don't have the sophistication or capabilities of a big carrier such as UPS. Communication is the key for most of those users. That is not only in what you can do leading up to the event, but also during the restoration of the network right up to the very end so people know when things are close to being restored, how that's going in terms of recovery period, using all media available to do that. I am sure they do that today, but looking back through the lens of the freight industry and the freight community where individual operators may not be located in the metropolitan areas where you can reach local general media, you may need to reach out through the internet, other networks to do a better job of that.

Also importantly of best practices is looking back for lessons learned after events, a classic part of industry and planning to deal with disaster impacts. It's the best practices of how you can do better next time. How you can better set priorities is an example - or how to better deploy resources available and a continual reassessment of the network itself to see how it's being used or where it serves overhead functions, as well as the local communities, where the importance of the network is over time, and also at various times during the year. The seasonality factor does matter in terms of which resource priority should be based on how the network is being used at different times of the year. That's a quick overview, I don't have a good guide book to point you to, but there are many elements you can learn from best practices such as Dan just said.

J. Symoun
Dan, I will put it to you as well. Do you have suggestions on what State DOTs or State agencies can do to help UPS with their contingency plans?

Dan Gross
My first thought when the question was posed was, and we have done this in other states, but I can't speak to Wyoming, but we've sat in on state panels to talk about those things. Certainly the I-80 corridor, as most people know, is prone to snow, all across the corridor. We have sat in, for example Pennsylvania, and talked to if not the DOT, state troopers, state police, and talked to them about what benefits both the trucking industry and the state when a snow event occurs. I would suggest that perhaps this question in Wyoming, perhaps if you get some of the larger trucking companies, even the trucking companies represented by agencies within the state, simply ask them what is it we can do better as a state to support the trucking industry as a whole, would certainly support everyone, in order to get highways up and running quicker. Maybe it's as simple as let us know earlier type of thing if you are going to be closing highways so we can look for alternate means of transportation. I would encourage any state to include trucking companies, other type of transport in discussions prior to events.

J. Symoun
Thank you. Dan, the next question is for you. Do you find the operational costs of disruption match the example provided by the previous speaker, Paul, who ran a trial with West Coast ports? I'd also like to hear you talk about how you incorporate environmental regulations into your planning for disasters.

D. Gross
Well, the scenario Paul talked about with the West Coast ports, interestingly enough, if you recall a couple years ago, there were disruptions at the West Coast ports and the disruption to UPS from an economic standpoint was fairly good. Well, bad, high in this case, but more importantly from a service perspective, it hurt us very much. Typically the stuff that comes into the port in our case, most of it goes on a train and we were having trouble getting the volume through the port to the trains, having service disruptions. I know as an organization we worked diligently with folks in the state to see how to relieve and in fact talked to folks in D.C. to see if we could help relieve that. When those type things occur, it is extremely difficult to overcome and the cost certainly ripples for quite a long time. It takes while for UPS, in this case, to catch up in terms of service, even after the ports opened up, flowing freely again, we still had major service disruptions. Sorry, Jennifer, I didn't catch the second part of the question.

J. Symoun
Can you talk about how you incorporate environmental regulations into your planning for disasters?

D. Gross
Our focus in the mission statement is not only on money, but people and communities. We want to be and I believe personally we are good community neighbors. You may have seen in the opening slide, we have many modes of alternate fuels in our vehicles out there. UPS considers itself an environmentally-friendly company and we continue to work hard going forward with that.

J. Symoun
Okay. Thank you. The next question: given that disasters cause communications disruptions, what alternate means of communications do you intend to employ in short and long term disruptions? Dan, I am guessing that's meant for you.

D. Gross
That is a great question. During 9/11, we had severe problem with communication, towers were down, obviously, and lines were backed up. Our communication department and security function handled that as far as part of contingency planning. They do have alternate means of communication, many of them are very expensive and most of it is equipment we rent to do this. I don't know the specifics, but certainly if the person asking the question would want, I can get the answer for them and drop them an e-mail Jennifer, through you, or the group to get an answer back to them.

J. Symoun
If you are able to get an answer, I can get that out when I send the follow-up information.

D. Gross
I will do that.

P. Bingham
I could add a little bit. From the perspective of technologies employed, it's more than don't have a single point of failure where you depend on a website to be the sole point of information. Use all available media, including old technology like broadcast radio. Individual truck drivers may have legacy broadcast radios, as well as the satellite radio with traffic reports that are ongoing today. Just, the point is plan for and have in the contingency planning to use all available media, not assume a high tech website will be sufficient in case of a disaster.

D. Gross
Jennifer, one of the things I know the folks that control this for us is the satellite radio. We would use that quite a bit actually, going forward. Again, the experiences during 9/11 in the New York New Jersey area, we learned a valuable lesson from that.

J. Symoun
Thank you. Dan, I think this is for you, but Paul, feel free to jump in as well. Has there been a problem in restoring public roads needed by the freight industry, but maybe not the general public? How have you or other freight carriers communicated your recovery needs to local and state transportation officials? What about communications from local and state officials about the status of closed roads?

D. Gross
Well, from UPS' perspective, the roads we travel generally the public is traveling as well. There are very few, I can't think of any we travel the public isn't traveling from a trucking perspective so the concern is always that we want it to be faster, the road to return faster than it typically can. It's the nature of our business, speed. In terms of communication, we work a lot at a local level with the local municipalities and with the states as well when necessary. For example, the snow emergency I referenced in my presentation, when Interstate 95 closes, a major artery North-South, it's difficult. Most of that occurred in the state of Delaware. We were in constant contact with the state of Delaware. We immediately got off the road. We realized if we're on the road the folks that need to clean up cannot be out there. We offer as much assistance as we can, I guess selfishly, so we can get the road back up and running. The second part of the question I don't remember that, Jennifer.

J. Symoun
How have you or other freight carriers communicated your recovery needs to local and state transportation officials? What about communications from local and state officials about the status of closed roads?

D. Gross
Again, the communication is, during the crisis we try not to be bothersome. We know the local officials and state officials are quite busy, but we have in the past gotten involved, post-contingency plan, and talked with local officials, whether that is local or federal officials. We keep contact with state senators, congressmen, as well as DC. That's very rare that occurs. I can't think of a moment over the last 10 years or so we have had a problem we had to take to that degree.

J. Symoun
Paul, anything you wanted to add?

P. Bingham
I think the communication, as Dan referenced, has to be more proactive on the public side, but also measured. Part of that is communication to the general public, not just the freight community. You should make sure that you review communications such that it is relevant to the freight community that may not be local. I would add that. These communications are more useful to the freight community if a driver, who is not domiciled operating locally, would understand what it means for him.

J. Symoun
Okay. The next question is for Dan. I'd like to hear your perspective on balancing the competitive edge with contingency planning. How much do you collaborate with other companies and share equipment and resources?

D. Gross
When it comes to contingency planning, we're not selfish. In terms of our competition, we have in fact shared equipment. That's typically more at an airport or gateway facility where we share equipment. That's just in support of the aircraft themselves. For example: tugs, dollies, equipment to clean aircraft. We certainly share and they share with us as well. From a trucking standpoint, it's not that we haven't, it's that I don't know of any request from a corporate perspective for that to happen. I am sure we would entertain anything. Again, we want to be good community neighbors and competition at that point, when you're in a contingency mode really takes a back seat. We try to work through, collaboratively with anyone to get through a scenario. It happens somewhat frequently from an air side, but on the ground it's very rare.

J. Symoun
Thank you. The next question is to both of you. How can state or regional government best address, plan for, and mitigate the effects of potential disaster interruptions, such as the West Coast Ports example that Paul presented, using existing plans such as State Transportation Plans, State Rail Plans, and Goods Movement Plans? Can you suggest good informative sources for best management practices at the state level? Paul, I will put it to you first.

P. Bingham
Those are good questions. I think some of the planning has to start from the contingency planning that already exists to deal with the security and safety issues within a state or metro area. That's a broader context than what is the freight network impact, it's the transportation system ability to deal with disruption, interruptions from a safety/security perspective. I know after 9/11 there were a lot of efforts expanded at the State DOT level. At AASHTO there's an entire committee encouraging research, sharing of best practices in that area. The freight contingency planning follows on from the consequences of a disaster is a sub-set of that sort of research and planning. As far as being incorporated and included in a Goods Movement Plan or State-Wide Rail Plan or some other transportation planning activity which requires or at least should include a scope to look to the freight network, it's very important to do the stakeholder outreach, include an understanding through staff, consultants, to have an appreciation of the needs and requirements of the freight system in terms of access, throughput capacity. It becomes a decision on the part of the planners in terms of priority setting. It's going to be limited resources or the ability to add extra capacity in the event of some disaster may be limited, yet there may be low-cost options where investment may be made in terms of timing or in terms of capacity to alleviate a bottleneck situation, especially in the recovery period from a disaster. Some of that already exists in terms of planning for emergencies. States for years had evacuation route planning to move people but sometimes there's a freight element relevant in how you look at how you serve the economy, get your area or state back up and functioning following a disruption. The guidance as far as best practices and ongoing research in this area, since this isn't a static area I would look to traditional sources of TRB and AASHTO for that.

J. Symoun
Dan, any thoughts?

D. Gross
I would have to defer to what agencies to include to Paul's expertise on that. I would add that there are companies other than just UPS that are good at this contingency type of planning and processes. I will encourage local and/or state governments to reach out for these companies and just ask them to help assess where they stand in terms of their planning process. My wife actually worked for both a local and a state government and I have seen some of the activities she was involved with in regard to contingency planning, so oftentimes it seems silly to plan ahead, but boy, if the event ever occurs you will be so much further ahead had you done that.

J. Symoun
Okay. Next question for both of you as well. Have you considered climate change scenarios or predictions that suggest there will be an increase in the intensity and frequency of storms in the coming years? Paul, Dan would you want to jump in?

P. Bingham
This is Paul. We have not done specific modeling of this. There's been a lot of discussion around this topic in the last few years, obviously going back to Katrina and even before. What is relevant is this idea we see in recent global recession, the extraordinary events that can really effort your organization and that need to be taken into account in terms of planning. A small variance or standard deviation around some norm, whatever the context of planning is, may not be adequate in planning for the organization. Clearly that's evidence in what Dan discussed at UPS. This is standard operating practices from risk mitigation in large companies across the transportation sector - and should be reflected back in operations planning in the public sector at a metro, state, and federal level. There's a lot of planning ongoing that exists outside of DOT in the federal government and we see this in large organizations of all kinds already, the challenge for the economy is to spread it down further into smaller and smaller organizations where it's more difficult to allocate / dedicate resources specifically to planning for these sorts of problems.

D. Gross
Jennifer, this is Dan. We have not planned specific to climate change, but certainly our plans include some of the thing that's climate change, at least what the experts say climate change would give us, more storms, more hurricanes, those types of things. We feel very comfortable that our contingency plans are prepared for those likelihoods, but I don't know that we have done anything in regard specific to climate change.

J. Symoun
Thank you. Well, I do not see any more questions typed in so in a minute I will have the operator give instructions on how to ask questions over the phone. But in the mean time, if you think of anything and want to type it in, feel free to. Would the operator give instructions?

Operator
If you would like to ask a question press star one, record your name at the prompt.

J. Symoun
We will wait a minute to see if any questions come in.

Operator
I am showing no questions.

J. Symoun
If there are no more questions we will go ahead and end a little early. Thank you, Dan and Paul. I really appreciate your presentations. I think we had good questions and dialogue going. Thank you also to everyone in attendance. The recorded version will be available within the next few weeks online. I will send out an e-mail once it's available. As a reminder, if you are an AICP member and would like to receive 1.5 Certification Maintenance credits for attending, make sure you are signed in with your first and last name, or type your name in the chat area. Please fill out the evaluation form and e-mail to me afterwards. If you aren't applying for the credits, you can still download the evaluation and send to me as well, and that would be great. We are always looking for feedback. I am putting a poll up on the screen right now. Trying to get a better count of how many people were in attendance. If there were others in the room with you, indicate that in the poll, not including yourself. If it's just yourself, you don't need to respond on the poll.

The next seminar is August 18, will be about Freight Performance Measures. If you haven't done so already I encourage you to visit the Talking Fright website and sign up for the seminar. I also encourage you to join the Freight Planning LISTSERV. With that, we will close out for today. Thank you Dan, Paul, everybody in attendance and I hope you have a great rest of the day.

Updated: 03/29/2011
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