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JULY 19, 2004
UPS's Eskew on "the Next Logical Step" How did the package deliverer decide to become Corporate America's supply-chain manager? The CEO explains CEO Michael L. Eskew's 32 years as a United Parcel Service (UPS ) employee and executive have perfectly mirrored the delivery giant's transformations over the past three decades. As a young engineer hired in Indianapolis, Eskew learned the package business from the ground up -- first, helping to design the flow of a new sorting hub and, in time, working on the legendary time-and-motion studies that were designed to make UPS drivers and package-sorters as efficient as possible. Years later, when UPS went international, Eskew that was on the team that helped launch the outfit in Germany. And when Big Brown decided to offer overnight express service, there was Eskew helping to negotiate the purchase of its first cargo jets. As Eskew rose into the upper echelons of UPS management, the Indiana native embraced a new vision: UPS would leverage its decades of experience managing its own global delivery network to serve as the traffic manager for Corporate America's sprawling distribution networks -- doing everything from scheduling the planes, trains, and ships on which goods move to owning and managing companies' distribution centers and warehouses. And if this meant additional volume for UPS's own trucks and planes, well, all the better. BusinessWeek Atlanta Bureau Chief Dean Foust recently spoke with Eskew about his efforts to transform UPS into a logistics company. Edited excerpts of their conversation follow: Q: Where did the idea to offer logistics services evolve from? A: In some instances, it was our clients. We had clients coming to us, saying: "We know you can move objects from Point A to Point B. We've seen you apply technology that's second-to-none. And if you can apply those things together, we'd really appreciate if you could give us one place to go for our commerce needs." So as much as anything else, it was customer-driven. Q: Someone once said that businesses are motivated largely by either fear or greed. What pushed you into offering supply-chain solutions? Were you worried that your core package business was maturing, and you had to diversify? Or that as a public company, you simply saw an opportunity to expand your profits faster by moving into logistics? A: I've never thought about it in those two terms. This company's DNA is to look to the next opportunity to serve customers, and you've seen that since 1907. You've seen the stories about how we've changed from a messenger company to a retail company for the stores, to a common carriage company, to an air company, to an international company, to a technology company. It just felt like this is the next logical step that we should take. The other part of this, as a partnership -- and we still think of this as a partnership, even though we've been a public company for five years -- what do we owe the partners in terms of growth for the next generation? So it was almost as if this is our time to make the next step. Q: Some analysts estimate that your supply-chain initiatives can provide up to 20% of future growth. Can it be that big? A: In the latest quarter, we had 12.6% supply-chain growth, year-to-year. The issue is: Nothing is standing still. International is growing a lot. Small-package [business] in the U.S. is growing a lot. And the thing is, we've tried not to make it look like these are three separate businesses. We've tried to make them think they're all one business. There may be supply-chain solutions that we provide to customers that really grow the package business a lot also. We've given guidance that by 2007 it could be an awfully significant part of our business, maybe as large as 15% of overall business. Q: I'm told that at a management retreat shortly after you became CEO in 2002, there was a bit of soul-searching about the company's future, but that you really sold the other executives on your belief that logistics was a big part of that future. What did you say at that retreat? A: The message was a challenge. Jim Casey's company was going to be 100 years old in 2007. I just said: This is our job, we've got to position it to where we need to be in 2007. Nothing happens overnight in a company like this -- and we have to start thinking about how we create solutions and not products, how we're going to do it and be responsive to customers. And how we're going to do it with the same precision and excellence in everything we do, like we do in the package business, where people trust us. How we're going to be able to integrate our technology into all parts of the business like we have in packages, and how we're going to be able to do that at a much quicker pace. And I said we're going to do these things, and we're going to have to grow to meet these needs. I think there were concerns. "Can we do that in just our core businesses? Do we need to go out and buy hotels? Do we need to go out and get in...publishing? Do we need to go out and do something different -- sell cars -- than we do today?" We had to convince ourselves that, "No, we can do this." Q: What made the staff nervous? Did you put out a growth rate that seemed too ambitious? A: I did my best at that meeting to stay away from numbers. I said, "I want to talk about capabilities and what we have to be able to build and what we'll be able to look like. I didn't want to frame it within a number because we made that mistake previously -- that we said we're going to be a company of this size, but we didn't put any of the process behind the numbers. So I described it verbally, we need to look like this. Now we quickly put numbers to it, because we just couldn't operate [without numbers]. It just isn't our nature. Q: You mentioned there was talk of "should we be in hotels or selling cars..." A: It was just that "this by itself won't get us where we want to go, maybe we need to do something totally different. Manufacturing or..." I don't think hotels were mentioned, I don't think cars were mentioned, but I think generally, manufacturing was mentioned. Maybe we need to be a manufacturer of some sort. Q: Meaning, what, to achieve or maintain a certain growth rate? A: Just to be able to do all the things we need to take this company to the next step. We need to do more than we're doing. And I think after a few days, and after thinking about how we could put this together, we convinced ourselves there were...sufficient growth opportunities in the supply-chain market. It was diversification vs. adjacency, and we were convinced that adjacencies would be sufficient. A lot of us looked at this and said "[customers] will never outsource their supply chain on the scale that they need to because they want to hold on to these things." But we were convinced that we could spend time with customers and explain why the supply chain was so strategic. It's a strategic issue for their cash-flow needs, from the time they receive an order to the time they get their cash, and all the money they have tied up in inventory. It's a strategic issue for market growth -- if you want to be able to grow your market into new territories, [your] supply chain is so important. If you want to be able to differentiate your products, the supply chain is critical for that. If you want to improve your customer service, your supply chain is so critical. And finally, improve your productivity by letting us do your supply chain where maybe you weren't so good at it. Q: Is there a risk to UPS, that if you get away from what you know best and do best, that you're getting away from your own core competency. Is there a risk, for instance, in UPS doing things like providing financing to customers? A: There were a couple of different dynamics in play: Globalization and this thing called "consumer pull" -- customers being able to go to the Internet and pull things through. And as they did, our shippers would not have this face-to-face relationship with their customers. And over time, that would inhibit global trade. So we thought if we could, knowing that we moved the goods and we had the information as to exactly when the goods changed hands, we could start to talk about how we play in the financial end. A lot of that was transactional based -- letters of credit, CODs where we collect the cash and deposit it in the customer's account -- that's how the thing got started. We've watched it carefully. We've downsized the debt on our balance sheet over the past couple of years to carefully watch how much risk we're willing to take and how much we're willing to originate. And for the most part, we've really tried to focus on things that are much more transactional in nature, that are not there for long, that are there for the cycle that the package is in our system. Q: Was there a moment or epiphany where you saw that supply chain is where the company was going? A: There [were] hundreds of moments. You look at it and say, "With our capabilities.... And with our people, with the way they think.... They know how to manage this network. They can manage a network that not only delivers packages but also moves cars to market, that manages containers over the ocean." I was at our annual conference this year in Florida in mid-March, and one of the new people -- I think it was from one of the acquisitions -- came up to me and said, "You've got to be so proud of what has happened over the last 10 years with this company." And I said, "It's like watching your kids grow up. I didn't even notice it." It happens day-by-day, and you don't realize your kid is now six-feet-tall. You don't realize we have all these capabilities because you don't focus so much on it. 
BW MALL
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