After A U Turn, Ups Really Delivers

Back in 1990, Big Yellow was thinking about firing Big Brown. Executives at Eastman Kodak Co. were intent on cutting the number of package carriers they used, and United Parcel Service Inc.'s bad attitude had placed it on the endangered list. "Every time we'd ask them about special services or discounts, I'd hear back the same thing: 'It's not in our best interest,'" says Terrance M. Golomb, Kodak's manager of worldwide transportation services. "Well, that's not what I was hearing from their competitors."

Nowadays, Golomb is hearing a different tune from UPS. Responding to his complaints, UPS placed a full-time service representative at Kodak's Rochester (N.Y.) headquarters. The package carrier is showing Kodak ways to cut its shipping bills. Even more astounding, UPS is offering Kodak discounts on big-volume shipments. "It's an entirely different company," says Golomb. Instead of firing UPS, he upped Kodak's business by 15%, to 50,000 packages a week.

Golomb isn't the only customer to feel the effects of what UPS insiders call the velvet revolution at the Atlanta-based company. After losing business to such aggressive competitors as Federal Express Corp. and Roadway Package System, UPS Chief Executive Kent C. "Oz" Nelson has been overhauling the way the world's largest package carrier does business. Gone is the we-know-what's-best-for-you imperiousness that was UPS's hallmark for decades. In its place, UPS stresses customer satisfaction. Flexible pickup and delivery times and customized shipment plans are available to corporate clients. UPS also offers discount prices to volume shippers (table).

RESIDENTIAL RETREAT. What's more, the company, whose ubiquitous chocolate-brown trucks symbolized its dominance of the package industry in the early 1980s, has spent roughly $2 billion in the past two years on new technology to keep up-to-the-minute tabs on shipments. And the transformation doesn't end there. In hopes of capturing more of the higher-margin commercial business, UPS is doing what would have been unthinkable a few years ago: It's moving away from the residential deliveries that had been its bread and butter. So far, the strategy has produced clear improvements. Some analysts reckon that net income at the employee-owned company should rise 4% this year, to about $800 million, on an 8% revenue increase, to $17.9 billion. That may not sound great. But it's quite an accomplishment considering that UPS's core business, ground-based package delivery, has been flat for three years, while rivals have been increasing their market share. "It's awesome, given their size, that they grow as fast as they do," says transportation analyst Paul R. Schlesinger of Donaldson, Lufkin & Jenrette Securities Corp.

Performing this kind of open-heart surgery on a company entails a good bit of risk. By emphasizing corporate shipments over home deliveries, UPS has lost business from catalog retailers. The company acknowledges that its volume of shipments from such retailers is off by 100,000 packages a day. And the new efforts at home have come at a time when UPS management has been struggling to fix the company's money-losing overseas operations. A recessionary slowdown, particularly in Germany, is restraining the growth of package volumes. Altogether, UPS has lost $1 billion from its overseas operations since 1988.

Still, Nelson, 55, says he had little choice but to change what customers perceived to be UPS's aloof and rigid style. Rivals had been cherry-picking many of UPS's best customers. Roadway Package System, the Pittsburgh-based unit of Roadway Services Inc., was particularly successful, thanks to such tactics as volume price breaks and innovations in tracing and billing technologies.

By 1990, with UPS's profit margins sliding toward 4% from nearly 7% in 1988, Nelson decided to act. A graduate of Ball State University who joined UPS as a salesman in Indiana in 1959, Nelson ordered a sweeping examination of UPS's business methods. He appointed four senior executives--marketing chief John W. Alden, international head Donald W. Layden, engineering guru Charles L. Schaffer, and Chief Financial Officer Edwin A. Jacoby--to conduct an intensive review of UPS's flaws and determine how to respond better to its rivals.

PAINFUL CHANGE. The first step was to beef up Alden's marketing staff at UPS headquarters, to reach out to customers. For years, the marketing team had consisted of just seven people--too few to handle questions from both existing and potential customers. By 1992, the staff had increased to 175 and was handling 6,000 corporate inquiries a year. Next came face-to-face interviews with 25,000 customers to find out what services and products they needed. One result: In February, UPS began offering a three-day guaranteed-delivery service. Aimed at customers who want assured but not necessarily fast delivery, it costs 20% less than second-day delivery.

UPS also invested heavily in new technology. To help trace shipments, drivers now carry a computer clipboard that digitizes the signature of the person receiving the package. And in February, drivers began transmitting real-time tracking information from their trucks to central computers using cellular-phone technology.

One element of UPS's new strategy has proven particularly wrenching: the decision to stress corporate business, even though home deliveries had been key to UPS's business since it was founded in 1907. But executives had to face facts: Delivering a pallet-load of VCRs to a single store is far more profitable than delivering one of those VCRs to a rural home. To underscore this point, UPS abandoned its single-pricing formula in 1991. "We'd always prided ourselves on saying your grandmother paid the same price General Motors did," recalls Nelson. Now, GM gets a break; Granny doesn't. UPS has raised residential delivery rates an average of 11.4% a year since 1991. By comparison, commercial rates have grown only 3.4% a year.

The higher residential rates have many catalog retailers in an uproar. Some have taken their business elsewhere. Lillian Vernon Corp. in New Rochelle, N.Y., a catalog merchant that sells moderately priced gifts, has reduced its reliance on UPS from 86% of shipments two years ago to 53% today.

Overall, however, UPS's new pricing flexibility seems to be paying off. UPS has even attracted new business from some catalog merchants. This spring, Lands' End Inc. in Dodgeville, Wis., switched its overnight-air contract from industry leader Federal Express to UPS, as part of a larger negotiated ground-and-air agreement that held a rate increase down. "We're not counting on UPS making any mistakes," says FedEx Chief Financial Officer Alan B. Graf Jr. "We'll have to stay creative to keep our lead."

So far, the headquarters-driven overhaul of the corporate culture has met little resistance from managers and supervisors in the field. Retraining helped. More than 500 managers were sent to Michigan State University's business school in East Lansing for week-long seminars, in which professors coached employees to think in terms of customer service. A more compelling reason for executive compliance was UPS's compensation plan. Each year, 15% of UPS's pretax profit is used to buy company stock that is distributed to entry-level supervisors on up. "We have 25,000 owner-managers who have virtually every cent they own invested in stock of this company," says Nelson. "They knew that if we didn't change, somebody would, and there'd go your life savings."

There's no public market for UPS shares, but based on what it pays to buy back shares from those retiring or quitting, the value of stock has risen at a compound annual rate of 23.1% in the past 10 years. That's meant quite a nest-egg for some. Nelson himself owns 356,853 shares, worth $6.6 million.

DRIVER DRAMA. The new culture hasn't done much to improve sometimes rocky relations with the Teamsters, which represents 165,000 drivers and package sorters. Teamsters President Ronald Carey has long complained of the way UPS treats his members. For instance, some drivers are told to make 15 deliveries or pickups an hour, no matter what the traffic conditions. Carey doesn't rule out the possibility of a strike when the union's contract expires on July 31.

It will also take more than a customer-friendly attitude to help UPS's ailing business overseas. Package volumes keep rising in Europe, but the growth hasn't been strong enough to pay back UPS for the heavy up-front costs of building a network of offices and warehouses. There are some encouraging signs, though: UPS recently signed a contract with GM Europe to provide just-in-time delivery of auto parts.

And there's no question that UPS is now in far better shape to deal with the tough market at home. In an era better known for FedExing than for UPSing, UPS may never again reign supreme as it did a decade ago. Nearly every contender is stressing customer service and offering big discounts. Still, the freight industry is expanding. Shipment volume is growing by 14% a year in the U.S., says Colography Group, a market researcher. As long as it can keep its customers satisfied, there will be plenty of room for Big Brown to grow.

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