UPS Supply Chain Solutions Turns into a Winner
Atlanta, Georgia USA
December 9, 2003
By
Richard Armstrong
UPS Personnel:
Bob Stoffel, President
Lynnette McIntire, Director – Public Relations
UPS Supply Chain Solutions has turned the corner. It is very large, profitable and now a vital part of the UPS steamroller.
UPS SCS is now the largest U.S.-based 3PL. Morgan Stanley’s Jim Valentine estimates that FY 2003 net revenues were $2.16 billion. In addition, UPS SCS was profitable in every quarter of FY 2003.
While we (Armstrong) estimate growth for FY 2003 was about 6.8%, President Bob Stoffel anticipates that it could exceed 10% for FY 2004. Stoffel is a UPS veteran with a strong operations bent. He’s the right guy at the right time for UPS SCS and its 22,300 employees. He is also a realist who understands that his relatively new distribution and logistics business unit may not generate the kind of operating ratio that UPS’ mature package business can. Armstrong & Associates’ expects that UPS SCS should be able to generate EBITS of 8-10% within a few years. These EBITS will run 4-5% less than the transportation operations.
We maintain a detailed profile of UPS SCS in our “Who’s Who In Logistics?”, and the reader is invited to look there for a list of customers, rolling stock assets and other facts. For the time being, here are the other salient features from our visit in Atlanta and additional, recent research.
- UPS SCS revenues are split fairly evenly between international and domestic. About 90% of customers have integrated services.
i2 applications are the principle transportation design and execution tools. Manhattan’s Pkms is the in-house warehouse management system. However, SCS and its analysts use a large variety of other software programs including customer legacy systems as well as its own proprietary software. UPS-owned Roadnet and Mobilecast software (routing, scheduling and dispatching) are sold independently by UPS Logistics Technologies. - UPS is using activity-based costing to better understand pricing and margin variations by geography and vertical industry.
- Expect UPS to win its struggle with the FMC over tariff filing requirements for NVOCCs. UPS has strong lobbying capabilities and we believe it will get this change from congress if the FMC denies it. For its freight forwarding operations, it may become advantageous for UPS to charter its own container ships.
- Armstrong & Associates’ has concluded that European operations are profitable and cross selling of product lines is going well.
- Good customers are often mid-market companies who let UPS manage their whole supply chains. Customer density over facilities is improving. UPS SCS’ Louisville campus (2 million square feet) and its Elizabethtown facility are close to full capacity. The company also is completing a 400,000 square feet facility in Chicago next month.
- UPS SCS is responding to a few hundred requests for proposals per month. There are 12 people working on contracts and 80 supply chain management engineers.
- UPS SCS has a good recognition of competition and market opportunities by geography and product line.
- Supply chains are very different by verticals and each creates its own opportunities. UPS knows how to play in each vertical and has hired industry specialists for each.
If that list doesn’t impress the reader, it is important to remember that UPS Capital, consulting, mail innovations and the rest of the non-package division have related activities that are very beneficial to UPS SCS. These other non-package units do more than $786 million per year in revenue. More importantly, UPS now has $4 billion in cash that it needs to invest.
You can understand why we think Stoffel is the right guy, in the right place, at the right time.
Sources: A&A Primary Research, http://www.ups-scs.com/