Editors Note: This article was taken from the Keynote Address at the 1999 Parcel Shipping & Distribution Expo & Conferences. It has been edited slightly for length considerations.
[My topic is] one of the major ideas youre addressing at this years conference. Actually, its more than an idea its a fundamental re-examination of the way we do business, of the way we connect with our customers, drive efficiencies throughout our organizations, pull our people and partners together and compete in a global marketplace.
Of course, Im referring to electronic commerce and the gigantic impact its having on the parcel shipping and supply chain management businesses.
Im going to make the argument that electronic commerce and its impact on the supply chain has elevated the work all of us perform as among the most strategic in business today.
In fact, we at UPS having been saying it for quite some time and well continue to say it loud and clear logistics management is the final competitive frontier for most businesses today. I dont mean its the last just that its perpetual. It will never go away.
We like to think of it as managing the accelerating speed of business. Not controlling it or driving it or slowing it down. But grabbing it by the throat, examining it and finding ways to make it work for us and our customers.
In many ways, its a lot like the work being done not too far from here at the Fermi National Accelerator Laboratory near Batavia. If youve ever been to the Fermilab, you know just how impressive that 7,000-acre facility is and the work theyre doing investigating the fundamental nature of matter and energy. Fermilab operates the worlds highest-energy particle accelerator. Imagine a machine, about four miles in circumference that accelerates atoms to nearly the speed of light and then forces them to collide. By recording what happens before, during and after the collisions, scientists from around the world are investigating how and why matter came to be and how and why it stays together. Their research has also led to the development of things like fiber optics, new computer circuitry and miniaturized data processing instruments. In fact, it was at Fermilabs European cousin, the Center for Energy and Particle Research, that the World Wide Web was born.
Accelerating matter, breaking it down into its smallest components, examining its fundamental nature and then bringing new innovations to market, sounds a lot like what were trying to do with electronic commerce right now, doesnt it?
Funny thing is, just a few months ago, when you talked about a fundamental shift in business models and the growing supremacy of the customer it sounded a little fanciful. Well, this might just be one instance where business events are moving faster than rhetoric.
From my vantage point, words like best, fastest, cheapest and most profound hardly seem adequate anymore to capture the implications of e-commerce. Whats happening and happening faster than many people expected is that a whole new business model is grabbing hold of the global economy. In the process, the flow of global commerce is being redirected and reshaped.
Today, more and more end customers are orchestrating the supply chain and pulling out what they need from manufacturers, suppliers and retailers.
When customers turn to e-commerce to get what they want, when push comes to pull so to speak, supply chains are transformed, new competitors appear out of nowhere and your market can disappear almost overnight.
Having said that, its somewhat alarming when you read reports like the one found in the September 6th issue of InternetWeek. A survey of Fortune 500 companies found that 65% of them had no overall e-commerce strategy and nearly one quarter said they lack even a basic business and implementation plan for e-commerce.
Which leads to my next point. In the digital age, there will be two kinds of companies: those that harness the power of e-commerce to thrive and those that get blown apart like those atoms at Fermilab by the new flow of global commerce.
Id like to propose three major changes in our approach to business that can ensure were all included in the first category of companies.
These are three strategies that many companies have already discovered to help them thrive in the era of e-commerce and customer supremacy. They are:
1. Move from push to pull
2. Focus on core competencies and outsource the rest
3. Throw caution to the wind
Moving From Push to Pull
The first strategy involves changing the direction of your supply chain moving from push to pull.
Were all very familiar with the old push model the supply chain starts with raw materials suppliers, who are connected to manufacturers, who are connected distributors, who are connected to end customers. While this model was great for the suppliers they got to set production levels, determine inventory and set price it wasnt always so good for the end customer, who had less say in the process.
Now, electronic commerce is turning the tables, handing ultimate power to the end customers. They can use their electronic connections to an online marketplace to compare prices, shop features, reach across geographies to a wider pool of possible vendors and connect directly with each member of the supply chain to pull out what they need, when they need it.
With the customer in the center of the supply chain instead of at the distant end of it maybe the more appropriate term for the new supply chain is supply circle. Whatever you call it supply chain or supply circle more and more business customers are adopting this model and reaping the economic benefits.
United Technologies Corp., for instance, used to spend months negotiating with dozens of vendors to supply printed circuit boards for its subsidiaries around the world. Last year, United Technologies decided to put the contract out on FreeMarkets OnLine, a Web site designed for the trading of industrial goods. Thirty-nine companies bid on the project, and the winners ended up slashing the cost of Uniteds estimated $24 million dollar contract by nearly half, to $14 million.
And youve probably heard about General Electrics Information Services Trading Network, where nearly two dozen big industrial firms receive bids from suppliers over the Web. GE itself buys a billion dollars a year in parts and supplies over the network, saving up to 20% on procurement costs.
Whats especially intriguing about the customer-centric, pull-oriented model is customers arent the only ones who can win. So can manufacturers, distributors and other upstream members of the supply chain.
Supply-chain members that are able to harness the power of e-commerce can slash inventory, cut costs, speed time-to-market and grab market share.
Today, some six million customers share data with UPS through electronic links. Last year, about half of our daily volume resulted from customers with electronic connections to UPS, up from about 24% in 1997. Considering that we handle about 6% of the
Focusing on Core Competencies
Now lets look at strategy #2: Focus on what you do best and outsource the rest.
As little as 20 years ago, the name of the business game was vertical integration. Companies sought to acquire or build from scratch capabilities spanning the entire production cycle, from materials sourcing to manufacturing to distribution and marketing. That was the only way they could guarantee quality control and properly manage the production cycle.
Today, in the new world of networked supply chains, it no longer pays to be a jack-of-all-trades. Theres always another company out there that can handle activities outside your core competencies faster, cheaper and better than you can.
Consider what the team of Ingram Micro and Solectron is doing for some major computer makers. Ingram, the PC industrys largest distributor of computer parts, and Solectron, a huge contract manufacturer of high-tech hardware, have recently teamed up to take over the job of building custom-made PCs for computer companies like Compaq and HP.
Compaq and HP will be connected to the two manufacturing partners by a Web-based system a system that will collect custom orders and slash the time it takes to get custom computers built and shipped. Meanwhile, Compaq and HP can concentrate on what they do best: engineering and marketing.
By the way, Ingrams innovative approach proves that distributors and middlemen arent necessarily washed up in an electronic economy. They can serve as an outsourcing partner.
Perhaps the biggest headache for companies involved in extended supply chains is logistics. There arent many companies out there whose core competencies include global logistics.
Maybe thats why spending on third-party logistics in the US alone reached $50 billion in 1997 and is expected to eclipse a trillion dollars by 2010.
Heres just one powerful example: A couple of years ago, IBM approached UPS World Wide Logistics subsidiary to manage its Storage System Divisions supply chain for the Asia-Pacific region. Prior to this, the IBM division had managed its own internal warehouse for hard-disc drives and outsourced the lanes of transportation to several carriers.
UPS opened a logistics center in Singapore exclusively for IBM in January 1998, and today we manage the whole process from picking up discs from different manufacturing plants to warehousing, order processing, delivery and then documenting the transactions.
According to IBM, consolidating the divisions logistics operations has cut cycle time by 60%. IBM was so impressed with the results in Asia-Pacific that theyve charged UPS with managing the storage divisions entire global
Moving from Cautious to Bold
Another thing many of these companies have in common is their adoption of strategy #3: Go from cautious to bold.
Prudence pays off in some lines of work, but in the trenches of e-commerce warfare, caution can kill you. This is Internet time were talking about. Where a month is more like a year.
Being the first to market with an electronic, customer-centric business model can mean the difference between thriving and barely surviving. You only have to look as far as Charles Schwab, Dell Computer, Amazon.com and Yahoo to see the wisdom of being first-to-market.
Let me humbly suggest that the evolution of my own company from cautious to bold provides another good example.
At UPS, we didnt come to handle more than half of all e-commerce-related shipments by hugging the status quo. Since 1986, we have spent $10 billion to virtually reinvent our company and lay an IT infrastructure that lets us connect electronically with 99% of all US companies and 96% of US residences.
If a giant, old-line, labor-intensive, set-in-its-ways company like UPS can evolve from cautious to bold, I know that any company can. After all, the price to be paid for caution in todays market is just too high.
E-commerce does not only involve the redirecting of the flow of global commerce, it also forces us to reverse long-held notions about how we do business.
We are not in control of our supply chains anymore our customers are
We should not try to be masters at everything just great at a few things
We are not rewarded for caution but rather punished by the market for inahttp://www.ups.comction
These are crazy, upside-down times. Great opportunity and great dislocation coexist. But unlike those atoms that are being smashed to bits at the speed of light over at Fermilab, our companies have the power to determine their own course through the business accelerator that is electronic commerce.
Chris Mahoney is senior vice president of Operations for United Parcel Service. He is responsible for UPS operations in the following five domestic regions: East, East Central, Midwest, North Central and Northeast. For more information about UPS, visit its Web site at www.ups.com.