Fast Company

Surprise Package

Surprise! It's those dudes in brown. UPS's new supply-chain arm lets
companies outsource everything from cell-phone repairs to customer call
centers. And yes, they do deliver.

From: Issue 79 | February 2004, Page 62 By: Chuck Salter Illustrations by:
Simon Pemberton

technically speaking, it's on the wrong side of the fence surrounding
Louisville International Airport. And it's across the street. But close
enough. This is prime real estate for companies, as advantageous as rail
position at Churchill Downs. The closer they are to the airport, the closer
they are to customers. Got a last-minute order? Not a problem. Throw it on
a plane.

Naturally, UPS has a sprawling campus here. No surprise there. But what is
surprising is what the world's largest delivery company is doing for
customers inside the six unmarked, off-white monolithic buildings.

April Bell, who used to load packages for UPS, works in an emergency room
for electronics in Building One. Her specialty is repairing printers. A few
desks over, Jason Bennett is diagnosing digital projectors. Other
technicians are rescuing faulty laptops and cell phones. In another
building, Shana Phillips, who used to drive a UPS truck, is supervising
distribution of sports apparel.

Her team puts shirts and jackets on hangers, attaches labels, rearranges
cartons of basketball shoes by size or style. And in yet another building,
UPS is packaging Nikon digital cameras with a CD-ROM, camera strap, and
operating instructions.

Where are the brown trucks? The snappy brown uniforms? Not here. This is a
little-known subsidiary of the giant delivery company. It goes by the
unwieldy name of UPS Supply Chain Solutions, and it performs what are, for
UPS, some very peculiar functions--everything from fixing busted
electronics to answering customer phone calls to issuing corporate credit
cards. Although SCS, as it is sometimes referred to in company shorthand,
is largely invisible--which suits many of its customers just fine--it
represents the company's aggressive play for new business and deeper, more
lucrative relationships with companies. For those companies, it offers ways
to become faster, more efficient, more competitive.

UPS is tapping into a powerful trend. For years, Peter Drucker and other
management gurus have argued that companies are better off focusing on the
front office and leaving the back office and similar functions to someone
else who specializes in those areas. In other words, find a company whose
front office is your back office. By offering to take on many of the
various tasks known as the "supply chain"--which can encompass every step
in producing a product or service and getting it to customers--UPS is
trying to be that company.

Unlike the outsourcing of manufacturing, which has caused a massive
migration of American jobs overseas, much outsourced supply-chain work
stays in the United States, or wherever the customers are. The idea is to
make the chain shorter and simpler, not longer, so that companies can
operate quickly and efficiently. The best way to do that is to have raw
materials, finished products, and repair technicians close to the people
who need them. Or, if that's not feasible because the customers are spread
out, then close to the next best thing: the end of the runway.

United Parcel Service Inc. still gets the vast majority of its annual
revenue--$31 billion in 2002--the old-fashioned way, by picking up and
dropping off boxes of stuff. With $2.5 billion in annual revenue in 2002,
SCS represents just 8% of the company's total business. But UPS CEO Mike
Eskew is gambling that these sophisticated behind-the-scenes services will
be the company's next big moneymaker. SCS is now UPS's fastest-growing
division. It has more than 750 locations worldwide, and UPS has acquired 19
companies, including a bank, in an effort to beef up its offerings. There's
no question that the demand for outsourcing supply-chain services is
growing. In his annual surveys of large American manufacturers,
Northeastern University professor Bob Lieb reports that 82% used
third-party logistics providers last year, up from 38% in 1991, the first
year of the survey.

What's not as clear is how big the supply-chain market is. Eskew estimates
it's $3 billion, all told, globally. But there's little agreement on just
what the supply-chain industry is. It used to be called "distribution," and
then "logistics"; the term "supply chain" caught on in the mid-1990s. But
what does that mean?

Mention accounting, marketing, or manufacturing, and everyone generally
agrees what they involve. The supply chain, in theory, can encompass almost
everything a company does.

And that's just what makes the business so attractive to UPS. Its
industrial engineers who design solutions for companies look at the entire
life cycle of a product. "We've been talking all along about looking at
this from a holistic point of view," says SCS president Bob Stoffel, "not
just here's your warehouse group, your planning group, your distribution
group, and your technology group." To SCS, those groups are linked--part of
a chain.

In addition to the transportation providers that move raw materials and
products where they need to be, when they need to be there, there's the
bank that lends the money to buy the raw materials, the company that
supplies the suppliers, the call-center outfit that processes orders, the
warehouse workers who find the items, the technicians who repair products,
and the supplier that provides parts for those repairs. Instead of hiring
multiple providers with multiple computer systems, SCS tells potential
customers, hire one company so that everything is integrated from the start.

In some ways, what SCS does for companies--balancing many variables,
weighing risks, making trade-offs--is not that different from what UPS has
been doing for years on the package side. The same type of systems that
enable the company to track a shipment through its global delivery network
can be used to help companies track materials and goods through a global
supply chain. Several thousand UPS industrial engineers have solved all
sorts of complex problems in creating one of the most efficient
transportation networks in the world. Who better, asks Stoffel, to unravel
supply-chain problems and design smart solutions?

SCS IS ALL OVER THE MAP. Not just in the things it does for companies, but
where it does them. In Singapore, it operates one of the most automated
warehouses in the world. In Germany, it installed 6-ton X-ray machines in
hospitals. In Paris, it repairs cash registers for McDonald's. It even used
to tune guitars in Europe for Fender.

Louisville, however, houses the largest concentration of projects. The
proximity to Worldport, UPS's largest air hub, located across the street at
the airport, makes the SCS campus a logical distribution center for
customers. In five years, it has grown from one warehouse to six,
encompassing more than 2 million square feet, the equivalent of nearly 35
football fields.

The place has a top-secret feel to it. An ID badge or escort is required to
get past the small unobtrusive UPS sign at the security gate. Just inside
each building, there's another guard or two, a metal detector, and bag
checks for arriving and departing employees and guests alike. Companies
store high-value inventory here, from digital cameras to best-selling
basketball shoes. They don't want anything to go walking.

The supply chain can mean almost anything a company does--and that means
almost anything is fair game for outsourcing. Inside the tech center, some
companies insist on anonymity, and SCS officials are adamant about honoring
their privacy. No one except for authorized technicians wearing bright-blue
lanyards is allowed in one particular work area. The customer is concerned
about protecting its technology from so many other companies, including
competitors, also having work done here. It monitors the busy repair bench
via dedicated security cameras.

Bright yellow signs indicate where various components get re-paired:
monitors, laptops, printers. New arrivals sit stacked on rolling carts near
the appropriate aisle, tagged with a service form describing each patient's
ailment.

"LED flickering," one says. "System board damaged." "Bad DVD." And one that
sounds particularly ominous: "Hold for customer abuse. Spillage and corrosion."

Brown dons blue here. That is, the staff wear blue antistatic lab coats.
The pace is typical UPS brisk. Hunched over workbenches with magnifying
glasses or seated at computer terminals running diagnostic tests,
technicians work under a "time stamp," an estimated deadline assigned to
each job.

The tech center is an impressive operation. The only things missing,
really, are the companies that design and sell these products. But who
needs them? When a customer sends in his laptop for repairs, he can have
UPS pick it up, fix it, and return it--usually in less time and at less
cost than the outfit whose name is on the machine ever could. How? The
machine comes directly to UPS, so there's less transportation. And because
every imaginable part is stored in the warehouse, there's no wait. UPS
technicians have often been trained by the customer, so they know the
latest techniques; there's less chance that the product will be returned
shortly for a second repair or that it will get accidentally damaged.
Ultimately, companies crunch the numbers and conclude that hiring UPS is
cheaper than staffing and running their own facilities.

It's hard to imagine a more efficient, no-hassle arrangement. The delivery
company doubles as the repair company. Brilliant. Repairs, in fact, are
called "reverse logistics": Instead of sending a product out, the product
comes back.

When people find out what he does at UPS, says one technician, "it blows
their minds."

Often, UPS must overcome customers' justifiable reservations about
entrusting their products to an outsider. Last year, Infocus Corp., a
digital-projector company, decided to hire SCS to run its supply
chain--"the whole damn thing," says Kyle Ranson, president and chief
operating officer. "It passed the logic test."

With an increasing number of competitors breathing down its neck and profit
margins shrinking amid constant demand for better, smaller projectors,
InFocus needed to focus on developing new products. Ranson says it was also
eager for more "velocity," getting parts and products in and out of
inventory faster and holding less inventory, period. It couldn't afford to
wait, and SCS already had the answers.

InFocus had no problem imagining UPS picking products and parts out of
inventory and coordinating shipments. But repairs? SCS had never fixed
digital projectors.

"We were excited about their willingness to get up to speed, but we
wondered, Do they have the personnel to repair one of these things?" says
Ranson.

Enter Jason Bennett, a 23-year-old lead technician at SCS. Bennett can do
it all--laptops, printers, in-vehicle monitoring system, and now digital
projectors. Last fall, he and two team members traveled to InFocus
headquarters in Oregon to learn about the machines. They attended classes
and performed repairs alongside InFocus engineers. "I saw what they were
doing, and I know we can do better," Bennett says. "This is my baby."

Back in Louisville, he began designing the training program and repair
process for SCS technicians, including a step-by-step worksheet.

So far, InFocus is pleased with the repairs. In fact, says Ranson, it's
thinking about offering a new warranty in which customers would pay extra
for a two-day turnaround, instead of the standard five to seven days. But
there's no denying the risk in putting a major chunk of your operation in
someone else's hands.

That's why the handoff took InFocus six months. "When you're outsourcing
the entire logistics of your business, it's something that has to be 100%
dependable," says Ranson. "They [SCS] can't say, 'Sorry, it didn't work
today' or your business shuts down."

Much of SCS's work occurs behind the scenes, so this arm of UPS is largely
invisible to the public. Call Nike to ask a question or order shoes, for
example, and you might get a Nike employee in Beaverton, Oregon. Or you
might end up talking to someone in an SCS call center in Las Vegas. You
won't know the difference; you're not supposed to. The handoff of this
particular bit of the supply chain wasn't quite seamless, though. The UPS
phone reps were a tad too formal for Nike at first, so the team flew up to
Beaverton for training and exposure to the laid-back Nike way. "We want the
sale, but if that's not what a customer is calling about, that's okay,"
says Ann Mullaly, director of consumer services for Nike.

ONE OF THE ATTRACTIONS of SCS is that it allows small companies to have a
big-league supply chain. Take AND 1, a sports-apparel company based outside
Philadelphia. Despite its modest size ($175 million in revenue in 2002), it
has logistics experts around the globe, the latest inventory tracking
technology, and two state-of-the-art warehouses in California and Kentucky.
That's because SCS's resources are AND 1's resources, which is what
persuaded AND 1's chief operating officer, Christina Houlahan, to give SCS
her entire supply chain. "I compete on how rapidly I get our product out
the door of the manufacturer and in the store," she says. "I'm at war with
Nike."

The last skirmish was in November. The drop date for the company's latest
shoe, the Rise Mid, was November 5. The shoe was scheduled to go on sale
that morning across the country. TV ads featuring the Phoenix Suns' Stephon
Marbury would air later in the day. If UPS didn't get thousands of cartons
of the Rise Mid from manufacturers overseas to retailers in time, there was
going to be hell to pay.

SCS didn't drop the ball. At the warehouse in Louisville, employees scanned
the bar codes on incoming merchandise and compared it to what AND 1 had
requested from the manufacturer. Then they tailored the orders to meet the
requests of various retailers. Some require that shoes of the same size go
in the same carton. Others require labels in a precise location on a box,
so they can be easily scanned at the retailer's distribution center.

Without SCS, AND 1 would have shot an air ball the week after the Rise came
out. Foot Locker, its biggest customer, called for more shoes. Ordinarily,
AND 1 doesn't make extra inventory. The SCS team checked the computer
system anyway and discovered a canceled shipment to another retailer. The
software pinpointed the shoes' location in the warehouse, and SCS rushed
them directly to hundreds of Foot Locker stores around the country.

AND 1 won the battle. The Rise became a best-seller. While design obviously
had a lot to do with its success, Houlahan insists that a fast, reliable,
coordinated supply chain was every bit as important. In that sense, AND 1,
which outsources everything but its design, sales, and marketing, has the
ideal partner in SCS. "We can't put stuff in boxes better than someone who
does it for a living," says Houlahan. "It would be a nightmare for us to
hire and manage a staff of pickers and packers--whoa ."

But not for UPS. One company's nightmare is just another opportunity to
deliver.

Chuck Salter ([log in to unmask] ) is a Fast Company senior writer.


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