Supply Chain Solutions ‘next generation’ for UPS

In a wide ranging interview with US journal Business Week, UPS Chief Executive Mike Eskew has given an insight into the future strategy of the parcels to logistics giant. According to Eskew the logistics activities of UPS have become one of the fundamental pillars on which future growth will be based.

Although SCS presently accounts for just 6% of UPS total revenues, Eskew believes that by 2007 it could amount to as much as 15%. In the last financial quarter the logistics division saw growth of 12.6%. As well as supporting UPS’ growth, the adoption of logistics has been seen as a major cultural shift in the company. It is indicative of a change in focus from ‘products’, such a major part of its parcels business, to ‘solutions’.

Eskew also revealed that in 2002, soon after he took charge of the company, there were discussions on whether UPS should diversify into a completely different market to the parcels and logistics industry. It was suggested that a move into manufacturing might be a possible way in which it could take a step up to the position in which it wants to be in the next few years. However it was decided that there were sufficient opportunities in logistics to satisfy its immediate needs.

However increasing the company’s logistics revenue stream does bring with it more risks. Whereas margins on its parcels business are in the region of 15%, those in the contract logistics sector are much smaller, and in freight forwarding smaller still. Although the company does not break out its margins for its Supply Chain Solutions business, analysts have estimated that they could be in the region of 5%. Against this, UPS claims that one of the benefits of increasing its logistics presence is that it creates volumes for its parcels network. One estimate values this upside at $2billion in 2003 alone. The revenue can also be generated with much less capital employed than in the parcels division, which requires fleets of planes and trucks.