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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.



[1] May 2003, US Airways Attaché magazine.