Thursday, April 7, 2011

UPS Presentation: Albert Hur and Adam Jelenic

• United Parcel Service, Inc. (UPS) is a package delivery company that provides transportation, logistics, and financial services in the United States and internationally.
o It operates in three segments: U.S. Domestic Package, International Package, and Supply Chain & Freight
o In 2010, the company earned over $49.5 billion in revenue
o Some of their competitors include the United States Postal Service, FedEx Corporation, and Deutsche Post AG

• This presentation will demonstrate how UPS fits in each of the Four Quadrants of the Competing Values Framework, along with discussing UPS’ strengths and weaknesses for each quadrant.

• UPS’ application of the Green (Create) Quadrant attributes is clearly evident by its leaders’ ability to envision new breakthrough ventures in different market segments.
o In 2010, Scott Davis, UPS Chairman and Chief Executive Officer, launched UPS’ first global campaign: “I <3 Logistics”. 70% of UPS’ U.S. customers export to one country: Canada. Despite it never having been done before, Davis hopes to capture a large share of the cross-border trade market.
o In 2011, David Abney, UPS Chief Operating Officer, gave a speech to one thousand plus business leaders attending the Spirit of Innovation Awards, heralding the merits of innovation, and how it is a state of mind more than a state of place.
• UPS’ organizational culture is guided by the founder’s principle of “Constructive Dissatisfaction”
o Founder Jim Casey emphasized that no matter how successful the company became, management should never rest on its laurels. There is a strong emphasis on market adjacencies: markets that are near the core business, which UPS seeks to saturate.
o In its early years, UPS was mostly focused around delivering packages from department stores that customers could not easily transport home. However, as value started to migrate, it shifted its business strategy towards the B2B market, and spent two decades systematically winning state-by-state authorization to engage in intra-state package transportation.
• UPS is constantly seeking innovative ways to grow by never being content with just their core markets.
o UPS exploited a market adjacency by launching the Service Parts Logistics Initiative in 1995. This was an end-to-end solution that included actually repairing or replacing high-tech components in the field instead of just delivering equipment. UPS Service Parts Logistics now manages $1 billion in contracts with customers such as IBM, Hewlett-Packard, and GE.
o In 2008, UPS unveiled Cargo Finance: a business unit aimed at lending small customers working capital to keep their product orders flowing. In a climate where even financial companies were hesitant to give out loans, UPS was obviously willing to think outside the box and take on risk to boost customer demand.

• The Blue (Compete) Quadrant is demonstrated at UPS in terms of its leaders’ focus on customer satisfaction and acquiring companies that boost market share in adjacent industries.
o In 2009, UPS Chairman and Chief Executive Officer Scott Davis announced UPS’ intention to bolster its supply chain and freight-forwarding units by acquiring supply chain service-help and freight-forwarding companies in both emerging markets in China, India, and the Middle East, as well as the health-care industry.
o In 2011, CFO Kurt Kuehn participated in a panel discussion at MIT, where he emphasized the importance of challenging the revenue generating parts of the business in order to best meet customer needs. Some key quotes include: “Are they really meeting the needs of our customers? We have over two million customers we visit every day, so it is a huge cross section. So the paradigm we tried to get is, ‘How do we help our customers reduce cost during these tough times?’”
• Organizational culture focuses around internal promotions and ownership so that employees have a sense of urgency (fast change) and a vested interest in firm performance (profitability metrics).
o There is an active push for an ownership mindset for all employees. When UPS was privately held, its employees and retirees held a significant portion of shares. After its public offering in 1999, UPS continues the tradition of granting stock to employees as part of its Managers Incentive Plan. Today, more than 53% of FTEs own stock in the company.
o UPS Foundation President Ken Sternad: “50 to 80% of my personal wealth is in this company”.
• UPS’ investment in people and companies pays off in both loyal high-performers and increased market share due to strategic acquisitions.
o 68% of UPS’ full-time management employees started out in non-management positions and 78% of its vice-presidents started out in non-management positions. The company’s employees, retired employees, and families of founders own 40% of all shares outstanding. Employee-owners are listed as a distinct competitive advantage in UPS’ 10-K report.
o In 2005, UPS generated revenues of $42.6 billion from its deliveries. $6 billion of that revenue came from the supply chain solutions and freight businesses.

• The Red (Control) Quadrant is demonstrated at UPS through their leaders’ belief in the need for restructuring in the U.S. economy and improving productivity.
o In a November 15th, 2010 speech, UPS Chairman and CEO Scott Davis supported the U.S. economy going through a necessary restructuring. He believed that one specific factor that could boost exports from the U.S. is the overhaul of export controls. For example, U.S. businesses can’t export a certain type of heavy brake pad because of fears that it could be used on enemy tanks. However, this rule makes no sense, as the same brake pad technology is widely used for fire trucks and other non-military purposes.
o In a November 11th, 2010 speech, UPS Chief Operating Officer David Abney stated that most of the lost jobs in the U.S. did not go offshore, but disappeared. Many businesses needed fewer workers because of newer technologies. Businesses must invest in new equipment and processes to improve productivity (productivity efficiency) and to compete globally. Over time, businesses have swapped brawn for brains, a tradeoff that causes friction in the short-term, but boosts our productivity and standard of living in the long run.
• Organizational culture is demonstrated by UPS in their enforcement policy.
o At meetings, UPS employees still refer to the policy book, as they have for 90 years.
o UPS’ policy is to comply with all applicable laws, rules, and regulations, in all countries where they operate. The UPS Code of Business Conduct includes policies and procedures that prohibit UPS employees, and the people acting on their behalf, from engaging in unlawful activities, including violations of the U.S. Foreign Corrupt Practices Act and other applicable anti-bribery laws, rules, and regulations in various countries.
• Outcomes or the bottom-line value is demonstrated at UPS through their drive for better fuel economy efficiency.
o Over the ten-year period that ended in 2009, UPS increased the miles per gallon (MPG) of the delivery vehicles in the U.S. Domestic Package segment by 10%.
o UPS has set a new goal for the U.S. Domestic Package segment. They intend to push fuel economy up an additional 9%+ from 2009, which will equate to a 20% improvement by 2020 from the 2000 baseline.

• The Yellow (Collaborate) Quadrant leader’s values and behaviors are demonstrated at UPS through their leaders’ beliefs in contributing to the human spirit of its people and their belief in training and educating its employees.
o UPS Foundation President Ken Sternad believes that a company’s best contribution to a relief effort can be the human spirit of its people. For UPS, volunteers like UPSer Craig Arnold volunteered on the ground in Haiti as soon as the quake hit. So before the next disaster strikes, companies should consider matching financial contributions with their business expertise and the skills and passions of their people.
o From a March 2011 interview with UPS Chairman and CEO Scott Davis: UPS employees delivering packages and providing logistics services worldwide must be trained in the use of advanced communications devices, must have an appreciation for transportation logistics, must know a good deal of math and must know something about the world that helped produce the contents of the package. On top of all that, a little knowledge of psychology, sociology and human relations doesn't hurt, either. In short, those UPS employees have to be pretty well educated.
• Organizational culture is demonstrated at UPS through encouragement of mentorship and commitment to the community
o Many UPS employees at Worldport and other sorting locations are college students. UPS encourages mentors and recruiters from nearby colleges to visit and work with its employees, and it provides additional benefits and perks for college students.
o UPS has always operated from the belief that strong communities are essential to the long-term success of the company. UPS’ employees live in the cities, counties, provinces, states, territories and countries that they serve. The drivers visit countless neighborhoods where people live and work. UPS manages their business to make a positive difference in society both in the way they operate commercially and the way UPS gives back to their communities with money and volunteer time.
• Outcomes or bottom line value is demonstrated at UPS through investing in training and low turnover for full-time managers worldwide.
o UPS training sessions and corporate schools that expand employees “toolkits” are held all over the world for seasoned UPS executives and new employees alike. The company is so committed in this area that it spends more than $400 million annually on employee training and development.
o UPS reported a miniscule 8% turnover rate among full-time managers worldwide, including retirements.

• To the extent that your chosen organization is deficient in or exemplifies one or more of the Four Quadrants, please discuss how the organization could either successfully maintain its policies and procedures or improve upon them.
o Green (Create) Quadrant
 UPS’ “Creative Dissatisfaction” based culture allows the company to truly innovate when it comes to business initiatives that are outside the norm. Whether it is investing in emerging markets, offering financial services, or acquiring existing companies in adjacent markets, UPS is always pushing the edge in their industry and attempting to value migrate.
 UPS does not clearly focus on “pure science.” Its innovative practices focus primarily on new ventures and new markets, but there is very little R&D. Part of that is due to the nature of the business they are in. However, a more creative focus on basic science could allow them to gain a technological competitive edge in their logistics system without substantially affecting their already existing business model.
o Blue (Compete) Quadrant
 UPS does a good job of investing in market adjacencies, such as supply chain service-help and freight-forwarding, so they have a first-mover advantage against the competition. This has significantly increased operating efficiencies and profit margins in recent years.
 Relatively speaking, the Blue Quadrant does not appear to be as high a priority in UPS’ culture compared to the other quadrants. The emphasis is more on reliability, integrity, and innovation than profits. However, this is mitigated somewhat through employee initiatives like the Managers Incentive Plan, which transfers a lot of public ownership to employees and former employees. This creates a vested interest in maximizing shareholder value.
o Red (Control) Quadrant
 UPS is the strongest in this quadrant compared to the others. From supply chain process efficiency through policy enforcement, UPS seems be very effective in this quadrant.
 One area of improvement that UPS can focus on is their procedures. UPS should analyze some of their procedures with a focus on improving their flexibility (ex. Emergency customer pickups). When a Just-In-Time customer needs a shipment sooner than expected, UPS tells their customers that the truck containing the shipment cannot deviate from its delivery path. With no flexibility, the JIT customer could shut down their assembly line before receiving the shipment.
o Yellow (Collaborate) Quadrant
 UPS significantly invests in the training and development of its workforce, from the hourly employees, all the way to its executives.
 An area in which UPS could be more transparent with is its development plans for their employees. While the company invests in its employees, they may not have a concrete process for individual employee career development.

15 comments:

  1. I had never thought about the idea that the nature of UPS' business would require them to be red. They have to get packages from point A to point B as efficiently as possible, requiring a complex supply chain, as you stated. I also agree that it may be difficult for UPS to be strong in the green quadrant. I can't really think of how they can innovate and change a great deal on what they already do, other than refining their processes to ship packages more efficiently. I would be interested to know how UPS compares to FedEx in regards to their organizational culture.

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  2. Are there any stats on how many of the college students UPS converts to FTEs? If it's a decent number, that would really show the strength of their yellow tendencies.

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  3. According to the FedEx website, it states that FedEx was built upon innovation, and continues to play a major role in both the FedEx culture and business strategy. The company has a commitment to a creative, open culture that propels the development of ideas, products, and services that empowers their customers to grow their businesses.
    The one thing that I did not realize is that FedEx had a joint venture with the state and local government for the "Institute of Technology" at the University of Memphis. The high tech facility is utilized for advanced research, along with being used for think-tank sessions, corporate retreats, training, and national conferences. Also part of the Institute is the FedEx Center for Supply Chain Management, which was established as a strategic alliance between FedEx and the University of Memphis.

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  4. I find it interesting that they don't focus nearly as much on the Blue Quadrant. They have positioned themselves to have a distinctive competitive advantage, but will not focusing on the blue prove disastrous if more competition enters the market? If so, will that be detrimental to their culture due to their weakness in this area? I would assume looking at the market share and customer satisfaction ratio blue metrics would be an even more important aspect to look at as more competition comes into play.

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  5. Julie,

    I do not have the exact conversion rate of the college students who became FTEs. However, 54% of their full-time drivers started off as part-time employees; 68% of their full-time management staff were promoted from non-management positions; and 78% of their vice presidents started in non-management positions.

    UPS is surprisingly strong in the yellow quadrant, especially when it comes to training and development.

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  6. Great job! Well presented material for sure. I noticed UPS seems to have a mindset of promotions from within which is a great way for management to know and understand the business. My only questions or concern is if they do too much promotion from within will they suffer from groupthink. Or will their business ideas become stagnate, meaning people who work in the same culture for long periods of time tend to say this is just how we have done it for years.

    Also, this may be out their but with the continuing cost of logistics does UPS have concern for their future business? I know in the past UPS and USPS have combined certain shipping of parcels through ground and air. Is this something they will look to in the future to continue saving in this sector?

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  7. I think it is interesting that they focus little on the 'blue' quadrant. I wonder if this is because they don't view their competitors (USPS and FedEx) as big competition. With UPS's strong established supply chain and logistics it is difficult for the others to keep up. I think that UPS may be focusing on their other quadrants because they don't consider competition a big threat currently. I am curious to if/when this will change in the future. When you are the 'top' guy in the industry everyone is out to beat you so it is important for UPS to not lose sight of the compete quadrant.

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  8. I also agree that it could be dangerous to have little focus on the blue quadrant. It seems that their strong focus on yellow may not be the most cost efficient strategy. For example, the majority of drivers in FedEx's ground segment are independent contractors as opposed to employees, and they are paid based on output (although they receive no employer-provided benefits). It's very non-yellow, but it provides incentives for their drivers to be efficient in package delivery. Overall, FedEx delivery costs are said to be approximately $1.35 less per unit compared to UPS. While it's important to focus on the yellow quadrant, overlooking the blue (and perhaps red) could result in FedEx gaining ground on UPS.

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  9. I think a case could be made that UPS is blue even though they don't necessarily advertise it. The process for them to in-source repairs for tech companies is a pretty strategic move that builds business to business relationships and provides a good source of profits.

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  10. You mentioned that the company spends $400 million annually on employee training and development. You also mentioned that there are might not be a concrete process for individual employee career development. Were there any figures as to the percent of the $400 the company spends on training, and what percentage is devoted to employee development?

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  11. I really like that even being a mostly red company, UPS is still very employee centered. It can often be the case that extremely data driven companies can become stressful environments for employees and they generally have low morale. UPS seems to have found a good balance here. I also agree with David that given the nature of the business and all the other shipping companies out there, UPS must be pretty well versed in competition, even if it doesn't show as much as other aspects of the company.

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  12. I think the statistics regarding how many of UPS's high level management worked their way up as well as the low level of manager turnover is a strength because presumably they feel that there is ample opportunity for them to advance and grow with UPS. Prior to reading this I wouldn't have expected that UPS would have that great of retention.

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  13. Matt-Thank you! I think that in order to avoid groupthink, while it may be difficult to do/track, they need to make sure that they do not promote all "red" quadrant individuals and next to nothing for "yellow" quadrant individuals. A balance or close to good representation for each quadrant should reduce the likelihood of groupthink.
    I think UPS has already started showing concern for their future business. They seem to be more concerned with ground transportation, especially with investing in more trailers for their LTL service. Also, if I am not mistaken, at times they will combine certain shipping of parcels with Yellow Freight.

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  14. Greg-According to "Delivering the World: Sustainability at UPS 2009", UPS spent more than $350 million for employee training in 2009.

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  15. Heather, Jackie, and Lindsay,

    It's true there isn't much focus on the Compete Quadrant in UPS' organizational culture outside of profit-sharing incentives for management. However, as David mentioned, I would say UPS is still very bottom-line driven when it comes to business strategy.

    While the idea of Constructive Dissatisfaction is mostly Green, Blue also consists of investing in profitable ventures, and UPS has been very successful in doing so. In the last decade, they've captured a pretty sizable market share in international commerce by regularly making strategic acquisitions of freight-forwarding and supply-chain service companies in emerging markets, while also breaking into new industries like healthcare. Additionally, in-house projects like the Service Parts and Logistics initiative have been helping bolster operating profits for years.

    While their business model may be red ("tightest ship in the shipping business"), and their culture may be yellow (employee training & development), I would actually argue that their entire business strategy is mostly profit-driven, with leaders constantly on the move to capture market share in adjacent markets. They seem to be pretty heavily invested in value migration, seeing themselves as primarily a business involved in worldwide commerce and logistics, instead of merely package delivery like FedEx or the USPS. I would say that kind of corporate attitude is primarily Blue.

    - Albert

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