UPS bets logistics business will be growth engine
United Parcel Service Inc. is betting its logistics group will be a major growth engine as it benefits from companies expanding abroad.
The company, known for its brown uniforms and trucks, has been expanding beyond its package delivery roots into logistics, using its network to help shippers navigate customs, manage traffic flows, reduce inventory to free up cash, warehouse parts and revamp distribution networks.
“More customers are global or global sourcing,” said Bob Stoffel, senior vice president of UPS Supply Chain Group, at a recent press briefing. “They want someone to manage it (the traffic).”
The company’s logistics business, which has grown to USD2.1 billion, or about 6 percent of total UPS revenue, is one of three prongs in the UPS growth strategy, Chief Executive Michael Eskew said at the briefing.
The logistics group, which is profitable, has been running neck-and-neck with the international business as the fastest growth engine at UPS. The U.S. package business, the third prong, is seeing competition from FedEx Corp. and more recently Deutsche Post AG’s DHL.
“Companies see the logistics area a bit like manufacturing and see an opportunity by going down the outsourcing route to leave logistics operations to experts,” said Henry Rooke, director of logistics for Lucent Technologies Inc.’s, which has partnered with UPS primarily in Europe and Asia.
National Semiconductor Corp. cut logistics costs by as much as 20 percent after UPS built a centralized logistics center that handles 95 percent of the chipmaker’s shipments and which UPS runs.
UPS also helped a division of Toshiba Corp. more easily meet its repair turnaround for laptops.
In the past, customers shipped the company broken laptops and Toshiba repaired them in the Midwest, pulling parts from another facility. Now UPS technicians fix laptops dropped off by Toshiba customers at UPS stores and shipped to the UPS facility in Louisville. The laptops are fixed with parts that are stored there and then shipped off on UPS aircraft parked at its nearby hub.
“Our main goals in the project were to reduce cost and increase customer satisfaction … It’s several million dollars per year in reduction of inventory, repair expense and logistics expense,” said Joe Karcher, director of service supply chain for Toshiba America Information System’s digital products division.
Karcher said Toshiba is now contemplating creating a similar operation in Latin America.
In the logistics business, UPS rivals include Exel Plc (EXL.L: Quote, Profile, Research) and DHL. Top executives at FedEx, which has a smaller logistics business and has not made the same push as UPS, have said contract logistics is fundamentally a low-margin business.
They have also questioned the premise that logistics operations drive more profitable small shipments. But UPS executives insist logistics have indeed contributed to the small package business, but declined to say how much.
“We are seeing mid-single digit margins and are targeting 10 percent in the long-term,” Stoffel added. “Asset light and low margins isn’t a bad thing.”
Logistics comes with risks, but Robert W. Baird analyst Jon Langenfeld said UPS can probably manage it.
“Given their track record in terms of deploying capital, I think they will get great returns out of the business and it will serve to feed their package volume,” he added.
