UPS – BROWN GLOBALIZATION
By
Ken Cubbin
Ninety-six years after its inception, UPS has grown to become the
largest package distributor in the world. Currently the 9th largest
airline in the U.S., UPS now serves over 200 countries and territories worldwide
with a mixed fleet of 259 airplanes. Revising its long-term (10 year) plan
annually, the company has invested heavily in expanding its facilities around
the world to handle future growth. For
example, completed in September 2002, UPS’s 4 million square feet ‘Worldport’
facility in Louisville, Kentucky, has the capacity to handle 304,000 packages
per hour – that equates to a staggering 84 packages per second. Three hundred
million dollars more were spent developing an Asian regional hub in the
Philippines. Other domestic facilities are located in Philadelphia (PA), Dallas
(TX), Ontario (CA), Rockford (IL), Columbia (SC), Newark (NJ), and Hartford
(CT).
The revenue at
UPS has been increasing steadily, year after year.
UPS makes regular appearances in ‘America’s Most
Admired’ companies and was recently named ‘Most Innovative Company’ by American
Business Awards. In fiscal year 2002, UPS’s revenue topped $31 billion. Most
companies that grow on the scale of UPS end up mired in structural bureaucracy
that stymies innovation. But, UPS is definitely not one of the pack – instead of being satisfied with the status
quo, in the mid 90s, UPS decided to take bold initiatives. The latest, and most
visible of which, are a logo change and the renaming of more than 3,000 Mail
Box Etc. stores to UPS Stores.
After testing
of the UPS Store name, business revenue increased 70 percent. The new shield
log is depicted on all UPS transport vehicles, airplanes, stores and paraphernalia.
Bigger is
better
As
explained by Norman Black, Spokesperson and National Manager of Media Relations
at UPS, there were two major worldwide trends that inspired UPS’s latest transformation.
They were (and continue to be): the ubiquitous spread of the Internet with
resultant demand for product customization, and the globalization of markets
due to the breaking down of national boundaries.
Black says that UPS recognized the need for new
business entities to facilitate global commerce. With its own fleet of
airplanes, worldwide reputation for excellence, and expertise in getting things
moved from point A to point B, UPS deemed itself perfectly positioned to take
advantage of this new opportunity. The company leveraged its core competencies
– being a medium for product and information delivery – and developed a new
‘charter’ whereby it would become a facilitator in the worldwide flow of goods,
information and money.
Mike Eskew, Chairman and CEO of UPS, probably
summarized this transformation process best in a speech he recently gave to
industry pundits, by saying:
“Brown is on the move!”
What can Brown
do for you?
The
supply chain of a company refers to the progress of materials, information and
finances as they travel from supplier, through manufacturer, and eventually to
the end user. In business terms, logistics refers to the process of planning,
implementing, and controlling the efficient flow of goods, services and
information through the supply chain. Management of the supply chain depends on
sophisticated software and computer integration to help companies improve
product time-to-market, reduce costs, better manage resources, and plan for
future needs.
Obviously, an integral part of these processes is
the transportation of goods. However, UPS had to acquire new business prowess
if it were to realize its newly defined strategy. And so, after going public in
1999, the company acquired 27 other companies – one of which was a large, regional
bank – now called UPS Capital Corporation.
Rather than
just a parcel delivery service, UPS is now comprised of numerous strategic business
units that enable the company to better facilitate global commerce.
One of the strategic business units (SBU) UPS established
is called UPS Supply Chain Solutions. This SBU is broken down into the UPS
Logistics Group, UPS Capital, UPS Freight Services, UPS Mail Innovations, and
UPS Consulting. As
a consequence of its bold moves, UPS now has 360,000 employees worldwide.
An integral part of the supply chain service added
by UPS depends on its own fleet of airplanes.
Fleet planning
Although
roughly two thirds of UPS’s current fleet of airplanes includes versions of the
B727, B747 and DC-8, Scot Roby, long-range planner for UPS, claims that 93% of
its fleet are already Stage 4 compliant. UPS has kept ahead of noise and
emission standards, he says, by retrofitting its older technology airplanes
with environment- friendly engines. Only the B747s, fitted with P&W JT-9s
do not meet Stage 4 noise level requirements.
The B727-100s are fitted with Rolls Royce Tay 651-52
engines. According to Rolls Royce, this engine is the quietest in its class and
has very low emission levels. It also provides increased maximum takeoff
thrust, compared to the original P&W JT8, and better climb/cruise
performance. The Tay is a two-shaft, high-bypass engine with an advanced,
high-pressure turbine section that provides "good propulsive efficiency
and low noise generation."
The CFM56-2 engine, fitted to UPS’s DC-8s, is the
result of a fifty-fifty collaboration between GE Aircraft Engines in the U.S.,
and Snecma Moteurs of France. One of the most widely used engines in the world
today, the CFM family of engines provides rugged performance while maintaining
low emissions and noise levels.
Even though maintenance costs and reliability issues
are going to eventually dictate that older type airplanes must be replaced,
Roby claims that UPS has no current, definitive plans for any retirements. He
says that the older airplanes, such as the DC-8s, are operated only on
low-utilization, domestic routes and are, therefore, suitable for the task. This
means that UPS will expand its fleet steadily as it continues to add MD11s and
A300-600s.
UPS operates a
mixed fleet of new and old technology airplanes. With exception of the B747s,
all aircraft are Stage 4 compliant. The older technology aircraft are used on
lower utilization routes.
Table 1 is an overview of UPS’s current fleet and
the routes on which they are currently operated. Eventually, the MD11s will take over all international routes
from the B747s which will then be relegated to domestic, coast-to-coast routes.
The MD11s are supplied, and converted, by Boeing – the full complement being
scheduled for delivery by 2005.
When asked
why UPS chose the MD11 instead of the B747-400, Roby replied that the MD11 was
better suited for UPS’s small-package, lower-density requirements. This was
also the reason that UPS did not commit itself to the A380 like its competitor,
Fedex. While being smaller than the B747, the MD11 can transport payloads of
about 190,000 lb. up to 3,800nm (7,038km). However, he explained, UPS reviews
its fleet requirement decisions constantly and may change its mind if future
market conditions warrant such a move. According to one industry expert, the
contract UPS signed with Airbus for the A300-600s permits A380 substitution if
that need should arise.
So clearly UPS has hedged its bets.
Boeing estimates that wide-body freighters will grow
from a current 39% of the world’s freighter fleet to nearly 60% over the next
twenty years. But, by far, the biggest growth area, according to Boeing, will
be in the medium, wide-body fleet. This part of the market will more than
triple in the same period. Certainly, UPS’s future purchase options appear to
reflect this trend.
These pie
charts from Boeing depict the forecast change in widebody freighter in the next
18 years.
However, this raised an interesting question in my
mind: Has UPS any plans to expand the heavy freight market? After all, one of
its Supply Chain Management group of companies is UPS Freight Services. This SBU
offers intermodal, end-to-end freight management solutions to customers
worldwide. Services include freight
forwarding, customs brokerage, trade consulting and finance. Although guarded
in his reply, Roby says that UPS is always looking ahead to market
requirements, however, currently there are no plans to expand heavy freight
transport.
The A300-600s, purchased new from Airbus, are
modified to suit UPS’s needs perfectly. An additional container can be carried
on the main deck and a wider lower-deck door allows UPS to cross-utilize its
standard containers. The excellent operating economics of the A300-600 allows
UPS the flexibility of using the type in virtually any of its markets
worldwide. The full complement of A300-600s is planned to be in service by
2012.
Markets
UPS
maintains fleet flexibility by selling off excess capacity during low demand
periods and by sub-contracting and/or leasing other aircraft during periods of
high demand. UPS also has formed partnerships with regional ground delivery
providers, such as Sinotrans in Asia, and Challenge Air Cargo in South America.
Thanks to
UPS’s facility in the Philippines and hard-fought-for China routes, annual
growth in Asian markets has reportedly averaged around 14 percent. The current
crises of SARS (Severe Acute Respiratory Syndrome) and war in the Middle East
have done little to curb demand, according to Black. While UPS currently operates
6 routes to China – 4 from Ontario, CA, and 2 from Newark, NJ – the company has
applied for a total of 18 routes through Hong Kong. Even though the world
economy seems somewhat stalled at the moment, the savvy market expansion plans
initiated earlier at UPS have more than compensated for global economic anemia.
In fact, the real growth at UPS is likely to come
from its Supply Chain Management services. According to Lynette McIntire,
spokesperson for the Supply Chain Management division at UPS, annual growth to
date in this division has been around 30 percent. However, she says, much of
that growth has come from new company acquisitions. In the future UPS expects
around 15% growth in Supply Chain Management.
But, UPS’s market visions go even further. One of
the companies it acquired enabled UPS to develop new technology that may, one
day, lead to delay-free air traffic.
Clearing the
clog
In 1985,
driven by the need to improve its package tracking system, UPS bought a small
technology company based in Oregon. Engineers at the firm had been designing
avionics systems to compete with expensive products from main suppliers, such
as Honeywell. UPS managers nurtured the engineers’ talent. As a result, the
company, now renamed UPS Aviation Technologies, was awarded a contract from an airfreight
consortium in the late 90s to develop an Automatic Dependent
Surveillance-Broadcast (ADS-B) system that would become the standard for
transport airplanes.
Integrated with existing TCAS systems, and supported
by ATC ground units, the ADS-B system utilizes separate onboard computers, GPS
systems, and software to more accurately map the relative position of other
aircraft in the vicinity. The system transmits to other airplanes', position
(latitude and longitude), altitude, velocity, trajectory, aircraft ID, and
other information, up to a range of 200nm. While TCAS provides close-in
collision avoidance, the ADS-B system provides much broader situational
awareness.
The CDTI
indicator depicts TCAS and ADS-B traffic along with weather and navigational
data. In the future, accurate moving map displays of airport surface areas may
reduce the number of runway incursions.
The ground station data link is used by ATC to transmit data concerning aircraft in the area that are not fitted with TCAS, ADS-B, or both.
The primary display unit is the Cockpit Display of
Traffic Information Indicator (CDTI). This indicator is certified to display
TCAS, close proximity traffic, as well as ADS-B traffic symbols. An ADS-B
ground station unit enables ATC to uplink information on aircraft in the
vicinity that are not equipped with ADS-B or TCAS, thereby providing UPS pilots
with complete traffic information. The CDTI is capable of overlaying weather
radar information, terrain information, along with navigation data. In the
future, highly accurate moving surface map displays of all traffic relative to
active runways will be displayed on the CDTI. NASA studies imply that a
significant reduction in runway incursions can be expected from this
enhancement.
The CDTI will
provide pilots with complete situational awareness of other traffic and may
lead to the acceptance of Free Flight.
First to gain FAA approval, the system developed by
UPS Aviation Technologies was initially fitted to 190 small, commercial
airplanes and tested in Alaskan Airspace. The Alaska Capstone Technology
demonstration was successful and led the FAA to agree to system installation in
the Air Transportation market. UPS is currently
well under way installing the ADS-B system on its entire fleet of B-767s and
B-757s. As explained by Leon Johnson, Employment Relations Officer, Flight
Operations, “The ADS-B system will give pilots excellent spatial orientation
and a complete awareness of other traffic.”
Currently, the FAA and UPS are working together to
develop procedures to improve airport traffic flow efficiency UPS’s busiest hub
– Louisville. One immediate advantage of ADS-B success may be the elimination
of increased separation requirements between aircraft in bad weather. Obviously
any improvement in efficiency UPS can gain from the incorporation of this
technology will aid in holding costs down. UPS executives anticipate that
installation of the ADS-B system on all 107 of its B-757 & B-767 fleet will
immediately increase throughput at Louisville by 6%, and may eventually
increase capacity by as much as 20 percent.
It is widely believed that ADS-B is a key element in
the development of Free Flight – the ability of aircraft to deviate from current
high altitude routes in order to maximize fuel efficiency. However, while talks
are in progress with international regulatory bodies, no standards for the
adoption of Free Flight have yet been established.
Even though UPS has spent around $30 million
developing its ADS-B system, and approximately $100,000 for each aircraft
installation, it hopes to reap the benefits of cross-industry sales. If the
testing in Louisville proves successful, and recent data leans in that
direction, adoption of the technology at other airports, and by other airlines,
could more than offset research and development costs.
Back to the
future
The recent
change in UPS’s shield logo is the first in over 40 years. In 2002, UPS
launched its most ambitious advertising campaign in its history. Its catch
phrase, What can Brown do for you?
was meant to encapsulate what UPS now had to offer businesses. The word ‘brown’
was used instead of ‘UPS’ because, as one executive reportedly claimed, “At UPS
brown is more than a color – it’s a tangible asset that people associate with
all the things that are good to our brand[1].”
Even though brown may seem an unexciting color to
most people, its original choice by one of UPS’s founders, Charlie Soderstrom,
was drawn from elegant Pullman rail carriages of the period. Many years later
UPS has kept its founders’ color selection. Now, the color brown subconsciously
reinforces the concept, in employees and consumers, that the UPS’s commitment
to its core services remains unchanged. Furthermore, every time a television
show, such as the Drew Cary Show, or King of Queens, lampoons UPS’s color
selection they unwittingly provide the company with free advertising.
As a result, I expect UPS will likely remain ‘Brown’
for years to come.
Summing it up
Boeing
claims that more than 70% of the anticipated additional 2,531 global freighters
by 2021 will come from modified passenger and combi planes. Since around 120 of
UPS’s current fleet are converted aircraft, it stands to reason that the
company will be keeping its eye on suitable high-technology aircraft on the
market. After all, conversions take little time at all and used aircraft are a
lot cheaper.
It seems logical to me that UPS might eventually
expand aggressively into heavy freight haulage simply because they are
optimally leveraged to make the move. It would mean purchasing more large
aircraft, but there are currently quite a few wide-body airplanes on the market
today – B747-400s, for example. KLM and one or two other operators have
successfully converted B747-300s into cargo airplanes, so the extended upper
deck does not create a barrier to conversion. And, of course, UPS also has the
A380 option up its sleeve.
As national borders continue to break down trade
between countries will grow exponentially. Engineers and scientists are also
working on the next generation Internet, which promises to vastly hasten the
transfer of data.
With the world poised on the edge of political
unrest, it seems the ball could drop on either side of the fence. Either
terrorism will proliferate and the world will plunge into one regional war
after another, or good sense will prevail and economic freedoms will expand.
Let’s hope the latter scenario proves correct.
However, no matter what happens, it seems that the
‘freight dogs’ might have a brighter future than most. That is, if they can
emulate UPS and transform themselves into facilitators of global commerce.