Surprise Package

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.