Out Of the Box

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Since 1996, UPS has built — and filled--2 million sq. ft. of warehouse space right outside the fence at Louisville International Airport. That expansion, combined with UPS's impressive technology (750,000 packages move through another Louisville facility every night), has helped persuade hundreds of new customers to sign on. "The key advantage for UPS is that they are an operations company," says Clancy. "Their whole culture is about operational execution." The TV shopping network HSN was using six different companies to get its products to buyers before it signed on with UPS in November 2003. "We wanted to improve the customer experience," says HSN executive vice president Mark Ethier, who says UPS has done just that with reliability and speed. Package delivery time has been cut by two days on average. How much money is HSN saving? Ethier laughs. "We didn't do this to save money on shipping, and we're not," he says. "But the customers are pleased."

At the same time, UPS's supply-chain expansion is not without risks. The profitability of that business today, with operating margins of roughly 5%, is well below that of UPS's core small-package delivery, at 14%. CEO Eskew's bet is that margins will widen as the business grows — and, perhaps more important, that supply-chain operations will enable UPS to draw in and retain customers for its traditional shipping business. Just last month UPS reported strong earnings for the supply-chain group, which saw a 10% increase in revenue, to $591 million, in the third quarter of 2004.

While FedEx CEO Fred Smith has publicly expressed doubt that margins in the nontransportation side of the business can be improved enough to make it worthwhile for the long haul, Eskew's UPS is forging ahead. The company is spending more than $100 million on an ad campaign (with the awkward slogan "Synchronizing commerce") and has even changed its hallowed corporate charter to reflect the new mind-set: "For 93 years UPS wanted to be 'the best package-delivery company in the world,'" notes UPS spokesman Norman Black. "But now our purpose is to 'enable global commerce.'"

The supply-chain group's distinct operations account for just 6% of UPS revenues, though UPS executives say they expect it to grow to several billion dollars' worth by 2007. Much of that growth will come from overseas, mainly China. Last quarter, in fact, UPS's export volume in China grew 129% over the previous three-month period. "The globe is shrinking," says Kurt Kuehn, UPS senior vice president for worldwide sales. "Companies of any size have to be able to manage global enterprises. That's UPS's core competency."

In the meantime, Harold Erickson is on the job. He spent much of his 22 years in the military organizing and shipping vital supplies like ammo and armor to thousands of soldiers all over the world. Though he recognizes that his current shipments for UPS clearly don't have that life-or-death urgency, Erickson knows what the customer expects. That's why UPS has an on-time delivery rate that's better than 99% for Royal Canin's upscale pet food. Erickson admits, "I was surprised that UPS did this sort of thing." If Eskew has his way, people won't be surprised much longer.