July 26 2006 11:17 AM

United Parcel Service raised $5.5 billion last fall with its record-setting initial public offering. The obvious question at the time was how UPS would spend its new-found fortune. No one expected the company to just sit on the cash, waiting for a rainy day. Well, UPS has finally given us a look at its acquisition strategy when it recently bought two logistics companies specializing in service and spare parts. And rumor has it that there will be many additional deals to follow over the next year.
The purchase of logistics companies signals UPS� push to become a major player in the rapidly growing business of service-and-parts logistics. UPS currently has over 250 warehouse and field-stocking locations in the United States and another 135 worldwide. So, as you can see, its reach isn�t simply in the US. In fact, one of the acquired companies is headquartered in Sydney, Australia and provides parts delivery to more than a dozen Asian countries. The other acquisition services Latin America and the Caribbean. This global emphasis complements UPS� purchase of a French service-parts company last December. Look for Big Brown to gobble up more European companies in the near future as it continues to fill in its global plan.
So why is UPS so interested in these companies? UPS knows the demand for service-parts logistics is growing rapidly worldwide as companies look for less expensive ways to get spare parts to their operations. Fewer companies are maintaining their own warehouse and repair operations in an effort to reduce operating expenses and focus management energy on their core businesses. So, UPS is seizing an opportunity to service the spare parts business of such industries as computer, telecommunications, semiconductor, medical and network equipment. This is being done with the direct intent of funneling parcel shipping through its global delivery network. This strategy will generate instant parcel volume to further fill UPS� air freighters and brown delivery vans. And the type of spare part business being pursued inherently requires expedited delivery that is high revenue and high profit for a carrier. It looks like a match made in heaven.
But don�t think that UPS is the only carrier that has its eye on this business. Others, most notably FedEx and DHL, are also aggressively pursuing this area of supply-chain management with logistics units of their own. They all are investing considerable management time and money to get a leg up on the competition. But all carriers face many ongoing challenges, such as technology interfaces between them and their trading partners. With short time windows for crucial deliveries, technological capabilities are always important. And there is the issue of global trade barriers, such as duties and tariffs, which makes cross-border servicing so difficult. So it appears that UPS, with its �cupboard full of cash,� has a decisive advantage over its competitors as it buys companies in countries all over the world. But only time will tell if its business plan is best.