Q: There has been a lot of integration and consolidation in the 3PL market space over the last five to six years and UPS certainly has been a part of that, having made numerous acquisitions. Can you talk about your views on this trend and the company's strategy on growth by acquisition?
Long: You are certainly right that this is a strong trend that shows no sign of abating. I believe a lot of folks in the shipper community-the folks that we serve-look at this with mixed feelings. But although this trend is creating larger companies and larger networks, there are a tremendous number of upsides. From my own perspective, having spent about 25 years of my career in the shipper's chair, I find it pretty interesting to look at what kind of leverage these changes are actually bringing to the shippers. What I mean by that is that neither UPS nor any of our competitors make strategic decisions to enter new markets unless there is a demand to do so from our customers. Without recognition of that demand and of the way our customers are pulling us to those new markets, the whole argument about whether or not aggregation and consolidation is good is probably a moot point. So, first, there is a demand. Given that, we can talk about the marketplace response and how that is good for shippers as well as where there might be challenges for them.
I will lay the groundwork by talking about UPS's strategy. To paraphrase our CEO, Mike Eskew, we believe we need to grow from our competencies and the traditional strengths of our business. The phrase that we have coined internally and that we use in management circles here is that we grow from "adjacentcy."
Our goal is to be the transportation provider that a customer can come to universally to move whatever he or she may be shipping, whether it is outbound or inbound, general freight or temperature controlled commodities-whatever the universe-we want to be able to give them a turnkey solution. So we begin with our core strengths: we are a global, very capable operator of transportation networks and we have a lot of experience designing and optimizing transportation operations on a global basis. With these as a foundation, our management team looks for places, for companies and for services that are not in our portfolio and where there are customer demands. Sometimes we may invent new products and achieve this growth organically. Other times we make selective acquisitions to fill in the gaps. The goal always is to offer our customers the services they want.
Q: And today, for almost every customer, that includes having global reach?
Long: Absolutely. Globalization is not going to go away in terms of how companies source and manufacture and sell. Today, with access to web- and internet-based communications, and great telecommunications, small companies can buy and sell anywhere in the world the same as large companies. So the demand for global service that four years ago was limited to top-tier manufacturers, wholesalers and retailers, is now as much in demand by small and mid-cap companies. And the service they need is just as complex. When you think about what you will need to do to serve your customer three or five or 10 years out, then you really have to incorporate global reach-you will see customers manufacturing in China with components made in Illinois and the final product going to Brazil.
Q: As supply chain complexity increases, does it become more important to customers to have a single point of contact-someone that acts as a 4PL?
Long: Yes and those providers need to be easy to work with and consistent throughout their network. If I may hark back to the "old days" of the late '70s for a moment, shippers then still had to compensate for regional differences in delivery performance around the U.S., as hard as that is to believe, so the things that drove shippers were familiarity, ease of use and consistency. That hasn't really changed except that we now talk about regions of the globe instead of regions of the U.S. We have to provide robust transportation networks that go more places, more often, with a high degree of consistency and a huge improvement in information visibility. That's what customers want-service that is easy to use with predictable performance.
And to the point of your question, the ability of a customer to tap into a provider like UPS, or one of our competitors, and get the whole portfolio at a single point dramatically reduces the shipper's back office complexity. That means that customers need fewer highly skilled people doing things that are not a core competency to their business. A traditional manufacturer would have a pretty robust traffic management group, distribution management group, and regulatory compliance people. Today, this manufacture has many choices available to either outsource that stuff completely or co-manage it. It can then put those people to work on whatever its core competency is.
Another advantage of outsourcing is consistency. One of the toughest things in today's business world is to manage performance in many different areas of the world, but UPS and our competitors can provide that consistency of service.
Last but not least, buying or building the infrastructure necessary to trade in the global network is very costly. Our industry is making the investments in communications infrastructure that will enable global businesses to truly manage inventory in the supply chain. That capability is fragmented today for even the best companies out there-don't let anyone kid you. I fully believe that it is the investment by the logistics and transportation industries that is going to support true emergence of collaboration. You can't collaborate if you can't communicate. And you have to communicate at a very detailed level to run a business. This industry, through its expansion, is clearly providing that kind of infrastructural linkage.
Q: What is the most challenging aspect of integrating acquisitions into a global company like UPS?
Long: The integration has to be seamless to the customer that is using the new, combined network. That's very important and certainly is a challenge. At UPS, we have initiatives under way all around the company, including on the marketing side, to make sure that customers can deal with only one person. In ancient history-maybe six months ago-they had to deal with three or four UPS contacts, but today they can do it with one person, any place in the world. That is something that our customers are saying they have to have. You know why? They don't have a big group to deal with us anymore. As our customers slim down, they want a few competent people talking to a few competent suppliers to get the job done. It doesn't matter how much of our portfolio the customer wants to use-whether it is just a brokerage service or a package service or the whole logistics operation-we have to be able to act like one company and we have to be able to do that every place in the world that customer does business. So when we integrate, we focus on a few key aspects. The first is that we manage by the numbers. That's our engineering heritage. So when we are trying to fill a gap in our portfolio, we look for best-in-class partners or acquisition targets.
Second-and this is what separates high performers from everyone else-we commit the resources to make sure that our people, our management teams and our systems are aligned.
So to say it a little bit tritely, it is the people, it is the process, and it is the technology-very much in that order.
And the one thing that I am very proud of is that UPS not only does acquisitions right, we do them quickly. We focus very hard on integrating all aspects of our new partners as quickly as we can.
Q: Is bigger always better in terms of economies of scale?
Long: Well, you don't go into an acquisition without expecting synergies, but the opportunities often go beyond a purely operational synergy. There also may be marketing synergies, as was the case when UPS made a strategic decision in early 2000 to enter the healthcare marketplace. We acquired a Canadian-based company called Livingston that had an established market presence in healthcare, which now is a global market for us and growing quite well. UPS had not been known as a healthcare service provider in the past, but we were really good at transportation. So we bought Livingston's competence in the processes and compliance required for healthcare distribution.
This is another example of taking our core strength and growing into an adjacent market.
Q: Are there other gaps in your portfolio that you are currently looking to fill?
Long: I believe that we are in the process of a major fill-out-putting another tool in the chest. The integration of Menlo Forwarding that we recently completed provided us with a management team and an operating team and systems capabilities that let us leapfrog into global heavy freight transportation. Again, we are very good with the smaller stuff, with the ground stuff, but our customers were telling us that they wanted us to have that same capability as a heavy freight transportation provider. So now we will extend and grow the entire UPS fleet to support heavy cargo as well as small cargo and most stuff in between.
Q: Which geographic areas are providing the faster growth for UPS?
Long: China is obviously a great market for pretty much the whole world and it certainly is a good market for us. We are not the overnight wonder there-we have been in China for more than a decade so we are beginning to enjoy 10-plus years of investment there. We also are the first non-Chinese transportation company to be allowed independent status as an operator, so that is a huge benefit. But we also are seeing growth in other markets as well.
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