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Author: Jeanne Ross, MIT Sloan School, and Will Draper, Paul Kang, Seth Schuler,
Ozge Gozum, and Jessica Tolle, McKinsey & Co., Inc.
Abstract: Nearing its 100th anniversary, United Parcel Service was the world's largest package
delivery company. Senior management had adopted a strategy of enabling global commerce and
was growing through both extensions of its core business and expansion into adjacent businesses.
In pursuing growth, UPS examined the fit between new business opportunities and its core
competencies. UPS counted its highly standardized and scalable information processing capability
among its core competencies, but many acquisition opportunities did not require the scale of UPS
core business. Thus, as UPS diversified, it pursued alternative organizational structures and
considered new IT architectures to meet the needs of its new businesses.
This case examines the strategic, organizational, and technical issues UPS was addressing in early
2002. In particular, it describes the opportunities associated with two new business lines: logistics
and capital. These new businesses were characteristic of both the opportunities and challenges
UPS would encounter as it attempted to deliver on its enabling global commerce strategy.
36 Pages
Massachusetts Institute of Technology
Sloan School of Management
During the 1990s, United Parcel Service (UPS) company1 and by Forbes magazine as Company
grew from a $14 billion package delivery of the Year.2 UPSs information technology unit,
company to a $30 billion global enterprise which was the recipient of the Computerworld
offering international shipping, logistics, Smithsonian Award in 1991 and 1997, earned
financial, and related services. UPS management the firm a place among Red Herrings 100 Most
adopted a strategy of enabling global Important Companies in 2000 and PCWeeks
commerce which combined the physical Fast-Track 100. MITs Sloan School gave UPS a
movement of goods with the movement of Clicks-and-Mortar award in April 2000,
information and capital. As it entered the 21st calling it the most advanced company in
century, the firm planned to drive deeper into its integrating physical and online business
customers supply chains. practices.
Out of every dollar spent on logistics, six Increasingly UPS was reaping the benefits of IT
cents is spent on moving small packages. The capabilities that generated efficiencies in the firms
other 94 cents is the other part of the supply core operations and created opportunities for new
chain. Its fulfillment, its warehousing and adjacent lines of business. Eskew intended to
its the cost of the goods. So we have been further leverage the firms
moving into the other 94 cents.
Mike Eskew, Vice Chairman
and incoming CEO 1 Fortune, The world's most admired companies, 01
October 2000.
2 Barron, Kelly, Logistics in Brown, Forbes, 10
In 2000 UPS was named by Fortune magazine
as both Americas and the Worlds Most January 2000. According to Barron, UPS used to be a
trucking company with technology. Now its a
Admired mail, package and freight delivery technology company with trucks.
This case was prepared by Dr. Jeanne W. Ross of the Center for Information Systems Research at the MIT
Sloan School of Management and Will Draper, Paul Kang, Seth Schuler, Ozge Gozum, and Jessica Tolle from
McKinsey Business Technology Office. This case is for the purpose of management education, rather than
illustrating or endorsing any particular management practice. The authors would like to gratefully acknowledge
the cooperation of United Parcel Services in completing and publishing this case. This case may be reproduced
free of charge for educational purposes provided the copyright statement appears on the copy.
Founded as American Messenger Company in The UPS growth strategy incorporated both
1907 by James E. Casey, the firm initially growth in its core small package delivery
provided local messenger and delivery services business and entry into new markets. Both
in Seattle, Washington. By 2001, UPS grew to efforts leveraged existing UPS competencies and
become the worlds largest integrated package external acquisitions and alliances.
delivery company. The companys 359,000
employees delivered an average of 13.6 million In the core business, UPS expanded its existing
packages a day sent by 1.8 million shippers to 7 product and customer service offerings.
million consignees. Approximately 200,000 Extensions to the core included offering existing
delivery vehicle drivers and package handlers U.S.-based services to a new geography or the
were unionized, and the company also employed introduction of new services such as Guaranteed
significant temporary labor to respond to Ground. External extensions to the core included
seasonal variability in package volume. The alliances with SAP and Oracle to include UPS
delivery network included 1,748 operating functionality in their software packages and the
facilities, 152,500 delivery vehicles (package acquisitions of Mail Boxes Etc. to provide
cars, vans, tractor-trailers) and 238 aircraft 4,400 retail locations to sell UPS services.
(Exhibit 2).
Until the mid-1990s, UPSs additions to its
In fiscal year 2001, revenues reached $30.6 product portfolio consisted largely of time-in-
billion with operating income of $4 billion transit based extensions, customer service
(Exhibit 3A and 3B). UPS was responsible for improvements and development of the Web
handling nearly 6% of the U.S. Gross Domestic channel. These additions were supported by
Product. Although the U.S. was its dominant our internal technology and information.
market, UPS delivered 1.2 million packages a Joe Pyne, SVP
day across more than 200 countries and of Corporate Development
territories. It was capable of reaching nearly
90% of the Earths population. Throughout the UPS moved into what management called
1990s, UPS diversified into related businesses, adjacent businesses which led to the creation
but small package delivery still represented 95% of subsidiaries. Through its strategy and
of revenues at the end of the decade. corporate development organizations, UPS
piloted small-scale initiatives. Those that proved
UPS employed the worlds largest staff of successful were developed into subsidiary units.
industrial engineers, who studied each step of Jack Duffy, Senior Vice President of Strategy,
the package delivery process to increase the summarized the approach to subsidiary
efficiency of its operations. For example, they businesses.
measured each drivers route, taking into
account miles driven, traffic lights and walking There are some very simple principles in
distance from vehicle to delivery location to strategy. Clearly were thinking about
optimize routes. In the 1960s, engineers opportunities and the first factor is the market
pioneered development of a hub and spoke size. If it is attractive, is it adjacent and
system, in which regional sorting facilities complementary to our core business? And is
(hubs) acted as package exchange points, it consistent with our strategy to enable
expediting regional service and enabling global commerce? And to that degree, if an
redirection of packages. Many hubs were initiative doesnt meet all three criteria, it
designed to sort tens of thousands of packages gets excluded from consideration quickly.
per hour for delivery to operating centers, where
SVP,
Transport & International Corporate
Engineering Marketing
COO
Thomas Kenneth
Weidemeyer Moderow Beystehner Wallace
Calvin Christopher
Darden Mahoney
Customer
Service Air Hub
applications
Data Centers
PDA/Mobile
Customer
Hub/Center
Business
Vehicles
Internal Ex ternal
Source UPS
Source: UPS
2001 Expedited flat mail delivery service via pre -sort before
Ma il injection into USPS priority mail service RMX , Mail2000 -- 2001
Innovations
2001 W eb -based shipping solutions enabling managemen t
and monitoring of multi-carrier, mul ti-destination iShip -- 2001
iShip
shipments
Source: UPS
First International Bank funding for Domestic financing Government guaranteed lending through SBA, USDA,
smaller businesses Export financing and EX-IM Bank lending programs
Import financing
Glenlake Insurance provides Credit Insurance Loss protection, reduce risk from receivables
insurance solutions related to business Flexible Parcel Insurance Customized loss and damage coverage with UPS
operations and shipments Excess Value Insurance Additional protection on UPS shipments
COD Secure Reduced risk related top COD collections for customer
Global Trade Finance financing for Export Receivables Helps protect customers doing business internationally
companies wanting to grow globally Service Online automated L/Cs that reduce the tedious process of
with minimum risk Import and Export protecting international transactions
Letters of Credit
Card Transaction Solutions Business credit cards, Better way to manage cash flow, secure accurate
including: T&E, Fleet, business reports and control business expenses
Procurement, etc.
Equipment Leasing for securing Different types of leasing Leasing of telecom systems, warehouse machinery,
equipment options available and other business equipment
COD Enhancement expedites COD Automatic Expedites payment of COD funds, which are deposited
remittances from shipments directly into the customer bank account
2001
15 M ainfra mes
1992 19 ,400 M IPS
6 Mainframes 906 m idrange servers
1200* M IPS 245 ,000 PCs
1985 300 m inico mputers 135 ,000 wo rkstations
1 Main fra m e 39,500 PCs 2 ,700 LA Ns
118 IS FTEs 600 LANs 91 ,000 D IADs
77,400 D IADs 2 data centers
1 data center 176 Terabyte da ta
4.1 Terabyte data 5 ,000 IS FTEs
2000 IS FTEs
EXHIBIT 8
LOGISTICS SERVICES ACROSS SUPPLY CHAIN PROCESSES
Outbound
Transportation
Reverse
Production
Source: McKinsey
Degree of
Historical Concentration
Growth Operating Share of top 5
Total = $179 b (CAGR)** Margin players
Third Party Logistics Services
Air freight/Express/ Value-added warehouse/ distribution
Ground parcel Freight consolidation
62 6 8% 81% Inventory management
Bar coding, private labeling
Pick and pack
Order fulfillment
Third Party Logistics 31 21 7%3 29% Returns management
(3PL)***
Dedicated contract carriage
Private fleet outsourcing
TL trucking Truck leasing
(domestic intercity) 63 6% 13% US-based logistic solutions with
international operations
LTL trucking International freight forwarding
(domestic intercity) Domestic transportation management
(National/regional) 23 4% / 9% 95% / 63% Shipper network optimization
Rate negotiation and contracting
2000 Software
* Excluding rail, private trucking, local for-hire trucking, specialized trucking, water, & pipeline transportation
** CAGR dates vary by segment, representing the past 3-5 years.
***Net revenue is net of purchased transportation
Source:Colography, Armstrong & Associates, S&P, McKinsey T&LS Practice Analysis
Efficient movement of goods: Optimization of product flow within a supply chain to minimize
inventories, stock outs and obsolescence
Improved design of supply chain: Optimization of overall supply chain configuration, including
third party transportation contracts, to minimize cost and maximize quality and performance
Such efficiencies require new capabilities including end-to-end visibility of the supply chain, from raw
materials to their customers inventory. With such visibility, firms accelerate delivery of goods to
intermediate and final markets by providing new capabilities like available-to-promise, cross-docking,
These new capabilities allow organizations to optimize product, information, and capital flows, thus
reducing numerous logistics costs, e.g., transportation, obsolescence, and inventory holding costs.
FedEx offered logistics services beginning in 1989 with its spare-parts logistics unit. The
company made a significant investment in the logistics business in 1998 by acquiring and
integrating Caliber Systems order management, customer service, fulfillment, and part-
sequencing solutions with FedExs transportation capabilities.
Deutsche Post (DP) entered the logistics market in 1998 by acquiring leading logistics providers
Danzas and AEI. In conjunction with DPs global air, sea, rail, and freight networks, Danzas
provided end-to-end, supply chain solutions including order processing, physical-flow analysis
and financial services. For example, Danzas designed and managed the material flow for 350
European suppliers for GM Opel in Thailand to reduce inventory and consolidate shipping.
Logistics management firms entered the market with information-based third-party logistics
services such as supply chain design and management, order management, warehousing services, and
customer service. 3PL companies arranged for integration of multiple asset intensive transportation
and warehousing service providers.
Exel provided end-to-end supply chain services but owned few assets. The company targeted
specific industries, e.g. retail, consumer goods, and chemicals with customized solutions. For
example, Exel provided inbound services, warehouse management, pick-and-pack, and
transportation services for Smith & Nephew, a leading European healthcare provider, improving
fill rates and reducing shipping costs.
Li & Fung focused on managing the supply chain for high-volume, time-sensitive consumer
goods, especially garments. Company services included product development, raw material
sourcing, production planning and management, quality assurance, export documentation, and
shipping consolidation.
System integrators in conjunction with leading software companies provided the logistics value
chain applications and the integration platform to enable information flow between trade partners
along the chain.
Accenture brought together business-process solutions, system integration, and supply chain
expertise for its clients. Accenture integrated its skills in procurement/sourcing, transportation,
inventory management, distribution and supply chain planning with its knowledge of supply
chain software (e.g., SAP, i2, Ariba) to deliver customer-specific solutions. In addition,
Appendix B
Commercial Financial Services
Market Overview
While logistics services aid the movement of goods along the supply chain, commercial financial services
facilitate the flow of funds. In 1999, U.S. commercial banking transaction volume totaled $3.8 trillion,
with commercial lending and asset finance accounting for $1.6 trillion of the total.10 Commercial lending
and asset finance products span all segments of the order-to-cash process, as well as offer strategic
financing during business expansion or downturns. Two large product categories include:
Global trade finance, including letters of credit and escrow services, facilitates international
business by allowing a financial institution to act as an intermediary, promising to pay a seller on
behalf of a buyer. Global trade finance products mitigate transaction risk for buyers and sellers, as
well as protect against country risks for both buyer and seller.
Distribution finance, including asset-backed lending and factoring, provides working-capital
financing and receivables-management services. These products enable more efficient use of cash
flow by freeing up cash from inventory or accounts receivables.
Competitors
While many large banks provide commercial lending and asset-finance products, there are non-banking
financial institutions that specialize in this area, applying industry expertise to offer customized solutions.
In 2001, CIT Group and Heller Financial, two of the largest non-bank financial institutions, were
acquired, thus consolidating the industry:
CIT Group, a subsidiary of Tyco International and renamed Tyco Capital after the 2001 acquisition,
offered finance solutions to capital-intensive business such as airlines, transportation and media
companies. Their clients included British Airways, Delta, Avaya, Agilent, and Dell. Tyco Capital
offered financing for business restructuring and expansion such as leasing and mortgages, in addition
to asset based lending and factoring.
Heller Financial, a 2,500-person firm acquired by GE Capital, offered financial services to SMEs,
leasing services to large customers, and industry-focused solutions to real estate and healthcare
businesses. Heller worked with a large network of other financial institutions internationally for
coverage for global customers. Its clients included Amazon, Iomega, Echelon, Singapore Airlines and
Continental Airlines.
10 Syndicated loans ($1 trillion) and deposit accounts ($1.2 trillion) are the other two components.
The IT unit provided another layer of Johnson was originally from the finance
governance. In addition to formalizing the department. She took her first IT role in the
project prioritization and budgeting processes,
Mail Innovations
UPS Consulting
Freight Forwarding
Forwarding
Mail Innovations
Logistics
UPS Consulting
Freight
Capital
Logistics
Capital
Cus tomer channe ls: Cust omer data queried Sa m e - da y or next-day p ickup
Ca ll center, V R U , W eb, Pac ka ge PLD ass igned sc hedule updated
Sh ipping clients, retail D ispatch schedule updated D river map upda ted
location, or 3 rd parties Package data prel oa de d to Sa m e - da y info upl oaded to D I AD
center
Package pick-up O rig ination center process O rig ination hub sort
Some pa cka ge s scanned Package scanned PLD upda ted via di me nsional
Pac ka ge s c onsoli date d into Conso lidated unit scanned Package scanned
trucks, igloos, airplanes Custom s pr oce sse s D ispatch sche dule updated
Ex ternal tag of com p leted as needed
consolidated unit scanned Package data prel oa de d to Package loaded to vehicle s
Packages transported to d istribu tion cen ters as deter m ined b y pre - load
destination hub
Destination delivery De livery information capture Transaction process
Package delivered to final Package scanned Data updated
destination Cus tome r signature recorde d B illing initiated
D elivery re -scheduled in D IAD info upl oaded Cust omer a cc ounti ng/ or de r
case of absent recipient Value added se rvice s syste m s upda ted
processes, e.g., C .O.D Cust omer alerts sent
PLD upda ted w ith destination
T racking info, e.g., residen tia l vs.
Packages are tracked via comme rcial
IVR, call center, VRU,
W eb, shipping clients
Source: UPS
EXH IBIT 2
T E C H N O L O G Y IN N O V A T IONS TI MEL INE
API w ith
on UPS .com
custo m s
1992 1993
ISPS o p t io n s
1989 1990 1991 1994 1995 1996 1997 1998 1999 2 000
International
ship me n t
processing system
UPS .com Interactive
W earable
W eb based Scanner Vo ice
custo me r R esponse
service SAP API
Peop leSoft
API
On line Too ls
PLD MaxiShip W indward Te leShip 6 on line tools includ ing
File for ma t 2D symbo lo g y 2 nd data center for Sm a rt Phone track ing, rate selection,
and sortation density remo te management term inal for info rmation
applications small
custo me rs
Systems
Business Create accurate Op tim ize Prov ide cu stom ers Reduce in v en to ry Redu ce cost
objectives
forecasts m anufactu ring accurate info M inim ize On- tim e, correct
De lay W IP to production Reduce lead ti m es obsolescence quantity delivery
finished goods schedules B ypass wareh o u ses M anage seasonality Increase delivery
conversion M inim ize W IP P rovide vendor frequency
and ra w m aterial m anaged in v en tory M inim ize d am ag e
inventory
Supp ly -cha in Integration w ith Pre -scheduling of Accepting orders, Inventory Rou te and m ode
Source: M cKinsey