Read "Not Going the Extra Mile," a Web Exclusive about UPS' latest breakthrough technology.
They call it the "end of the runway," although technically speaking, it's on the wrong side of the fence surrounding Louisville International Airport. And it's across the street. But close enough. This is prime real estate for companies, as advantageous as rail position at Churchill Downs. The closer they are to the airport, the closer they are to customers. Got a last-minute order? Not a problem. Throw it on a plane.
Naturally, UPS has a sprawling campus here. No surprise there. But what is surprising is what the world's largest delivery company is doing for customers inside the six unmarked, off-white monolithic buildings.
April Bell, who used to load packages for UPS, works in an emergency room for electronics in Building One. Her specialty is repairing printers. A few desks over, Jason Bennett is diagnosing digital projectors. Other technicians are rescuing faulty laptops and cell phones. In another building, Shana Phillips, who used to drive a UPS truck, is supervising distribution of sports apparel. Her team puts shirts and jackets on hangers, attaches labels, rearranges cartons of basketball shoes by size or style. And in yet another building, UPS is packaging Nikon digital cameras with a CD-ROM, camera strap, and operating instructions.
Where are the brown trucks? The snappy brown uniforms? Not here. This is a little-known subsidiary of the giant delivery company. It goes by the unwieldy name of UPS Supply Chain Solutions, and it performs what are, for UPS, some very peculiar functions—everything from fixing busted electronics to answering customer phone calls to issuing corporate credit cards. Although SCS, as it is sometimes referred to in company shorthand, is largely invisible—which suits many of its customers just fine—it represents the company's aggressive play for new business and deeper, more lucrative relationships with companies. For those companies, it offers ways to become faster, more efficient, more competitive.
UPS is tapping into a powerful trend. For years, Peter Drucker and other management gurus have argued that companies are better off focusing on the front office and leaving the back office and similar functions to someone else who specializes in those areas. In other words, find a company whose front office is your back office. By offering to take on many of the various tasks known as the "supply chain"—which can encompass every step in producing a product or service and getting it to customers—UPS is trying to be that company.
Unlike the outsourcing of manufacturing, which has caused a massive migration of American jobs overseas, much outsourced supply-chain work stays in the United States, or wherever the customers are. The idea is to make the chain shorter and simpler, not longer, so that companies can operate quickly and efficiently. The best way to do that is to have raw materials, finished products, and repair technicians close to the people who need them. Or, if that's not feasible because the customers are spread out, then close to the next best thing: the end of the runway.
United Parcel Service Inc. still gets the vast majority of its annual revenue—$31 billion in 2002—the old-fashioned way, by picking up and dropping off boxes of stuff. With $2.5 billion in annual revenue in 2002, SCS represents just 8% of the company's total business. But UPS CEO Mike Eskew is gambling that these sophisticated behind-the-scenes services will be the company's next big moneymaker. SCS is now UPS's fastest-growing division. It has more than 750 locations worldwide, and UPS has acquired 19 companies, including a bank, in an effort to beef up its offerings. There's no question that the demand for outsourcing supply-chain services is growing. In his annual surveys of large American manufacturers, Northeastern University professor Bob Lieb reports that 82% used third-party logistics providers last year, up from 38% in 1991, the first year of the survey.
What's not as clear is how big the supply-chain market is. Eskew estimates it's $3 trillion, all told, globally. But there's little agreement on just what the supply-chain industry is. It used to be called "distribution," and then "logistics"; the term "supply chain" caught on in the mid-1990s. But what does that mean? Mention accounting, marketing, or manufacturing, and everyone generally agrees what they involve. The supply chain, in theory, can encompass almost everything a company does.
And that's just what makes the business so attractive to UPS. Its industrial engineers who design solutions for companies look at the entire life cycle of a product. "We've been talking all along about looking at this from a holistic point of view," says SCS president Bob Stoffel, "not just here's your warehouse group, your planning group, your distribution group, and your technology group." To SCS, those groups are linked—part of a chain.
In addition to the transportation providers that move raw materials and products where they need to be, when they need to be there, there's the bank that lends the money to buy the raw materials, the company that supplies the suppliers, the call-center outfit that processes orders, the warehouse workers who find the items, the technicians who repair products, and the supplier that provides parts for those repairs. Instead of hiring multiple providers with multiple computer systems, SCS tells potential customers, hire one company so that everything is integrated from the start.
In some ways, what SCS does for companies—balancing many variables, weighing risks, making trade-offs—is not that different from what UPS has been doing for years on the package side. The same type of systems that enable the company to track a shipment through its global delivery network can be used to help companies track materials and goods through a global supply chain. Several thousand UPS industrial engineers have solved all sorts of complex problems in creating one of the most efficient transportation networks in the world. Who better, asks Stoffel, to unravel supply-chain problems and design smart solutions?
SCS IS ALL OVER THE MAP. Not just in the things it does for companies, but where it does them. In Singapore, it operates one of the most automated warehouses in the world. In Germany, it installed 6-ton X-ray machines in hospitals. In Paris, it repairs cash registers for McDonald's. It even used to tune guitars in Europe for Fender.
Louisville, however, houses the largest concentration of projects. The proximity to Worldport, UPS's largest air hub, located across the street at the airport, makes the SCS campus a logical distribution center for customers. In five years, it has grown from one warehouse to six, encompassing more than 2 million square feet, the equivalent of nearly 35 football fields.
The place has a top-secret feel to it. An ID badge or escort is required to get past the small unobtrusive UPS sign at the security gate. Just inside each building, there's another guard or two, a metal detector, and bag checks for arriving and departing employees and guests alike. Companies store high-value inventory here, from digital cameras to best-selling basketball shoes. They don't want anything to go walking.
The supply chain can mean almost anything a company does—and that means almost anything is fair game for outsourcing.
Inside the tech center, some companies insist on anonymity, and SCS officials are adamant about honoring their privacy. No one except for authorized technicians wearing bright-blue lanyards is allowed in one particular work area. The customer is concerned about protecting its technology from so many other companies, including competitors, also having work done here. It monitors the busy repair bench via dedicated security cameras.
Bright yellow signs indicate where various components get re-paired: monitors, laptops, printers. New arrivals sit stacked on rolling carts near the appropriate aisle, tagged with a service form describing each patient's ailment. "LED flickering," one says. "System board damaged." "Bad DVD." And one that sounds particularly ominous: "Hold for customer abuse. Spillage and corrosion."
Brown dons blue here. That is, the staff wear blue antistatic lab coats. The pace is typical UPS brisk. Hunched over workbenches with magnifying glasses or seated at computer terminals running diagnostic tests, technicians work under a "time stamp," an estimated deadline assigned to each job.
The tech center is an impressive operation. The only things missing, really, are the companies that design and sell these products. But who needs them? When a customer sends in his laptop for repairs, he can have UPS pick it up, fix it, and return it—usually in less time and at less cost than the outfit whose name is on the machine ever could. How? The machine comes directly to UPS, so there's less transportation. And because every imaginable part is stored in the warehouse, there's no wait. UPS technicians have often been trained by the customer, so they know the latest techniques; there's less chance that the product will be returned shortly for a second repair or that it will get accidentally damaged. Ultimately, companies crunch the numbers and conclude that hiring UPS is cheaper than staffing and running their own facilities.
It's hard to imagine a more efficient, no-hassle arrangement. The delivery company doubles as the repair company. Brilliant. Repairs, in fact, are called "reverse logistics": Instead of sending a product out, the product comes back. When people find out what he does at UPS, says one technician, "it blows their mind."
When people find out what he does at UPS, says one technician, "it blows their minds."
Often, UPS must overcome customers' justifiable reservations about entrusting their products to an outsider. Last year, Infocus Corp., a digital-projector company, decided to hire SCS to run its supply chain—"the whole damn thing," says Kyle Ranson, president and chief operating officer. "It passed the logic test." With an increasing number of competitors breathing down its neck and profit margins shrinking amid constant demand for better, smaller projectors, InFocus needed to focus on developing new products. Ranson says it was also eager for more "velocity," getting parts and products in and out of inventory faster and holding less inventory, period. It couldn't afford to wait, and SCS already had the answers.
InFocus had no problem imagining UPS picking products and parts out of inventory and coordinating shipments. But repairs? SCS had never fixed digital projectors. "We were excited about their willingness to get up to speed, but we wondered, Do they have the personnel to repair one of these things?" says Ranson.
Enter Jason Bennett, a 23-year-old lead technician at SCS. Bennett can do it all—laptops, printers, in-vehicle monitoring system, and now digital projectors. Last fall, he and two team members traveled to InFocus headquarters in Oregon to learn about the machines. They attended classes and performed repairs alongside InFocus engineers. "I saw what they were doing, and I know we can do better," Bennett says. "This is my baby." Back in Louisville, he began designing the training program and repair process for SCS technicians, including a step-by-step worksheet.
So far, InFocus is pleased with the repairs. In fact, says Ranson, it's thinking about offering a new warranty in which customers would pay extra for a two-day turnaround, instead of the standard five to seven days. But there's no denying the risk in putting a major chunk of your operation in someone else's hands. That's why the handoff took InFocus six months. "When you're outsourcing the entire logistics of your business, it's something that has to be 100% dependable," says Ranson. "They [SCS] can't say, 'Sorry, it didn't work today' or your business shuts down."
Much of SCS's work occurs behind the scenes, so this arm of UPS is largely invisible to the public. Call Nike to ask a question or order shoes, for example, and you might get a Nike employee in Beaverton, Oregon. Or you might end up talking to someone in an SCS call center in Las Vegas. You won't know the difference; you're not supposed to. The handoff of this particular bit of the supply chain wasn't quite seamless, though. The UPS phone reps were a tad too formal for Nike at first, so the team flew up to Beaverton for training and exposure to the laid-back Nike way. "We want the sale, but if that's not what a customer is calling about, that's okay," says Ann Mullaly, director of consumer services for Nike.
ONE OF THE ATTRACTIONS of SCS is that it allows small companies to have a big-league supply chain. Take AND 1, a sports-apparel company based outside Philadelphia. Despite its modest size ($175 million in revenue in 2002), it has logistics experts around the globe, the latest inventory tracking technology, and two state-of-the-art warehouses in California and Kentucky. That's because SCS's resources are AND 1's resources, which is what persuaded AND 1's chief operating officer, Christina Houlahan, to give SCS her entire supply chain. "I compete on how rapidly I get our product out the door of the manufacturer and in the store," she says. "I'm at war with Nike."
The last skirmish was in November. The drop date for the company's latest shoe, the Rise Mid, was November 5. The shoe was scheduled to go on sale that morning across the country. TV ads featuring the Phoenix Suns' Stephon Marbury would air later in the day. If UPS didn't get thousands of cartons of the Rise Mid from manufacturers overseas to retailers in time, there was going to be hell to pay.
SCS didn't drop the ball. At the warehouse in Louisville, employees scanned the bar codes on incoming merchandise and compared it to what AND 1 had requested from the manufacturer. Then they tailored the orders to meet the requests of various retailers. Some require that shoes of the same size go in the same carton. Others require labels in a precise location on a box, so they can be easily scanned at the retailer's distribution center.
Without SCS, AND 1 would have shot an air ball the week after the Rise came out. Foot Locker, its biggest customer, called for more shoes. Ordinarily, AND 1 doesn't make extra inventory. The SCS team checked the computer system anyway and discovered a canceled shipment to another retailer. The software pinpointed the shoes' location in the warehouse, and SCS rushed them directly to hundreds of Foot Locker stores around the country.
AND 1 won the battle. The Rise became a best-seller. While design obviously had a lot to do with its success, Houlahan insists that a fast, reliable, coordinated supply chain was every bit as important. In that sense, AND 1, which outsources everything but its design, sales, and marketing, has the ideal partner in SCS. "We can't put stuff in boxes better than someone who does it for a living," says Houlahan. "It would be a nightmare for us to hire and manage a staff of pickers and packers—whoa."
But not for UPS. One company's nightmare is just another opportunity to deliver.
Chuck Salter (firstname.lastname@example.org) is a Fast Company senior writer.