S w 907D02 UPS AND HP: VALUE CREATION THROUGH SUPPLY CHAIN PARTNERSHIPS Mark Lewis, Arun Rai, David Forquer and Dan Quinter wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2007, Ivey Management Services Version: (A) 2007-02-26 On March 23, 2004, Pat Grace, of UPS Supply Chain Solutions (UPS-SCS), and Mark Colaluca, of Hewlett Packard (HP), were leading their teams in a lively discussion during a quarterly business review. The meeting was at the Atlanta headquarters of UPS Supply Chain Solutions (UPS-SCS), a service organization of United Parcel Service (now UPS). These meetings were part of the overall strategy to manage their integral outsourcing partnership. On this particular day, the teams reviewed quarterly performance metrics pertaining to predetermined Service Level Agreements (SLAs) created at the beginning of the partnership. After a lengthy assessment of nearly 100 individual SLAs, both teams started to experience a tension that was uncharacteristic of previous meetings. To achieve more value from their partnership, both companies knew they must continue to improve the efficiency of existing supply chain operations, while exploring process innovations that might be strategically advantageous to HP. They knew that focusing solely on increasing the efficiency of existing processes, at the expense of discovering more effective alternatives, would be counterproductive over time. At one point, Grace stepped out of the conference room to receive a phone call. During his brief absence, Colaluca, who was responsible for worldwide partnerships in HP’s services group, offered his thoughts on the progress of the partnership and where he wanted it to go in the future: We have undoubtedly come a long way in a short period of time. Nevertheless, I am concerned that in the near future the partnership will hit a brick wall. Based on current practice, how much more efficient can we become? Colaluca wanted UPS to provide thought leadership by applying industry best practices — learned through their interactions with other customers — to HP operations. Furthermore, he wanted UPS to play a more proactive role in coordinating internal capabilities and in applying its extensive knowledge to further transform the supply chain at HP. Such change, he said, would continue to redefine HP’s supply chain — from a process that supported its business objectives to a strategic enabler that proactively helped the company create and capture new market opportunities. However, Colaluca questioned whether the current structure would enable or constrain the companies as they worked together. He wondered whether the Page 2 9B07D002 nature of the current structure actually perpetuated independent rather than interdependent thinking, thereby facilitating efficiency at the expense of effectiveness. In the midst of Colaluca’s comments, Grace re-entered the room. Having experienced a similar degree of uneasiness in the last several months, he realized past successes would do little to ensure the partnership transitioned from being good to being great. Nevertheless, Grace was also uniquely aware of the complexities associated with strategic outsourcing from the perspective of the service provider. Grace walked to the front of the room and began to discuss his concerns: At UPS we pride ourselves on accuracy and efficiency. We work every day to ensure our internal operations allow us to support our customers’ business objectives. Yet, in doing so, we face inherent tensions, which continuously challenges the effectiveness of our business model. In outsourcing businesses, what is best for one customer may not be best for another. As customer needs become more diverse, an outsourcing provider’s ability to deliver value through scale is often diminished. Moreover, a solution that was optimal yesterday may be suboptimal today, as optimization is relative to changing perspectives. Therefore, outsourcing providers face the difficult challenge of meeting many diverse and changing customer needs. Accordingly, Grace stepped back, looked over at his dedicated colleagues and asked: Despite having many customers, how do we ensure HP feels as though they are our only one as this partnership matures over time? How do we ensure our persistent focus on increasing operational efficiencies does not inhibit us from discovering innovative alternatives? BACKGROUND: THE INDUSTRY In fact, supply chain outsourcing services were a $100 billion industry; analysts expected the market would continue its substantial growth over the next decade. The reason was simple. Companies in volatile industries, such as automotive, consumer goods, electronics, chemicals, high technologies and pharmaceuticals, wanted to reduce supply chain costs and enhance operational flexibility, enabling them to quickly adapt to ever-changing market conditions. Consequently, more companies were seeking services from outsourcing providers. But for providers of supply chain services, these new opportunities did not come unchallenged. The evolutionary nature of individual customer relationships provided one of the most significant challenges for providers of outsourcing services. As any partnership matures, the customer firm will likely seek additional price reductions through volume discounts, even as new services are rendered. Entering the industry with enticing incentives, low-cost competitors posed further challenges. Such competition exerted added pricing pressures on incumbent providers. Geographic distribution also tested the capabilities of service providers as businesses were becoming increasingly complex and more global. In an industry experiencing ever more competition, such as supply chain outsourcing, profit margins dwindled, which, in turn, negatively affected service providers that were trying to remain competitive. To counteract these forces, service providers needed to develop business models that allowed them to create economies of scale, while simultaneously providing customized solutions for individual customers. The ability to achieve this balance would likely be negatively correlated with the degree of specialized Page 3 9B07D002 services necessary to create value within each individual business partnership. So, the leaders in supply chain outsourcing would be those firms that created adaptable business infrastructures. These infrastructures could be leveraged across multiple customers and efficiently customized within each relationship. Adaptable infrastructures allowed outsourcing providers to create economies of scale by leveraging advanced technologies to create digital linkages efficiently with customers. The results included an effective information flow between firms; modular process designs that facilitated more efficient customization; and reduction of redundancies by exploiting warehousing and distribution infrastructures across customer relationships. In addition to improving efficiency through scale economies, success would be defined by those firms that could satisfy escalating customer expectations with an integrated suite of service capabilities. But these capabilities needed to be successfully coordinated to dissuade customer firms from utilizing outsourcing strategies involving multiple service providers. BACKGROUND: UPS James E. Casey was only 19 years old when, in 1907, he founded the American Messenger Company with $100 in borrowed money. At the time, private messenger and delivery services were in high demand. Casey’s company delivered messages and small packages in the Seattle area — mainly by foot and bicycle. By 1919, the company had a new name — United Parcel Service (UPS) — and made its first expansion, into Oakland, California. Decades later, UPS, the world’s number one package delivery company, delivered more than 14 million packages a day in more than 200 countries and territories worldwide. Its ground transportation was handled by a fleet of more than 88,000 of its familiar brown vehicles. An additional air fleet numbered some 600 planes. But getting packages from point A to point B was not the only strength of UPS. The company leveraged its giant global delivery network to extend its core capabilities through specialized services, offering customer firms a wide range of solutions for their supply chain needs. For example, significant investments in information technology over the past decade enabled UPS’s core network to serve as the foundation for other service offerings, which could then be combined into an integrated supply chain solution. Equipped with a wealth of expertise in global distribution, in 1995, UPS extended this strength into the management of physical, financial and informational goods across the globe by forming what is now called UPS Supply Chain Solutions (UPS-SCS). UPS-SCS’s mission is to enable a process they term “synchronized commerce.” Developing these global capabilities through UPS-SCS was not a haphazard process of idea generation and marketing spin at UPS. Rather, it was a combination of both organic growth and external acquisitions since the company’s first days in Seattle. Key among these changes were the expansion of service offerings across the globe and the decision to build its own air cargo fleet in the early 1980s; substantial investments in information technology in the 1990s; changing to a publicly traded company in 1999; and the execution of various acquisitions, including Menlo Worldwide Forwarding and Overnite Transportation (now UPS Freight), over the past decade to expand service capabilities. The end result — UPS has evolved into a firm like no other. It is a company well suited for the synchronization of global commerce. As a champion and deep believer of UPS’s strategic initiatives, Chief Executive Officer (CEO) Michael L. Eskew articulates the company’s mission: Page 4 9B07D002 We believe the world of synchronized commerce, and its promise of bringing businesses, economies, cultures, and people closer together, will continue to create significant benefits for our customers, shareowners, and employees around the world. In 2003, UPS unveiled a new look, changing the company logo for the first time in more than 40 years. However, removing the signature small parcel with a bow was much more than a logo change. A new strategy would underscore the company’s expanded promise to provide customers with multiple solutions to their needs. The promise went beyond the company’s strength in package delivery to include harmonizing the flow of goods, information and funds across customers’ supply chains. UPS believed this dynamic new approach would enable its customers to evolve in new and necessary ways. It was also UPS’s vision for future growth. No other company could bring to the table the technology, global portfolio of services, industry expertise, reliability and trusted brand that UPS could deliver. The proven experience and coverage of UPS provided Global 500 and growing companies alike with flexible modes and scheduling, scalable design and resources, and global reach. UPS’s vast array of available services and industry solutions could be combined and leveraged by customers to create and sustain a competitive advantage. These services were organized along four functions (see Exhibit 1): 1. Supply Chain Design and Planning – Offers Fortune 1000 companies real-world strategic direction and counsel to help align supply chain operations with business strategies. 2. Logistics and Distribution Services – Another single-source solution to meet a company’s logistics and supply chain needs, from global distribution to logistics for post-sales service parts. 3. Transportation and Freight – One source, operating in more than 120 countries, with air, ocean, rail and road resources to meet individual customer needs. 4. International Trade Management – Customs-specific knowledge and expertise to help simplify the complexities of international trade management, from world-class customs brokerage to compliance consulting. BACKGROUND: HEWLETT PACKARD Hewlett Packard (HP) was not just any technology company. It was one of the largest global information technology (IT) companies in the world. Millions of people worldwide used HP technology every day. For example, HP software was responsible for identifying more than 100 million cell phone subscribers when they turn on their phones to make calls. HP also powered 100 of the world’s stock and commodity exchanges, including the New York Stock Exchange and 14 of the world’s largest trading markets. In response to emerging customer needs and changing market conditions, HP had built a portfolio unequaled in breadth and depth. HP technology now ranged from consumer handheld devices to some of the world’s largest and most powerful supercomputer installations. HP helped people apply technology in meaningful ways to their businesses, personal lives and communities. HP’s strength in IT services was demonstrated by the company’s tremendous worldwide breadth and depth in Managed Services, Consulting and Integration, and Customer Support. HP Services helped enterprise clients design, deploy and manage mission-critical IT environments in order to transform their businesses and derive measurable value from their IT investments. HP Services offered innovative technology and IT and business-management expertise to help clients develop effective IT services strategies. These actions ensured uninterrupted business operations and an agile infrastructure. Page 5 9B07D002 An annual investment in research and development totaling nearly US$4 billion fueled the invention of products, services, solutions and new technologies, so HP could better serve customers and penetrate new markets. HP was also highly innovative, producing approximately 11 patents a day worldwide. In addition, HP Labs provided a central research focus for the company by inventing new technologies that changed markets and created business opportunities. The HP strategy was simple: offer hi-tech and low-cost products, services and solutions, and deliver the best customer experience. No other company had the combination of portfolio, people and expertise to deliver on all three. On May 3, 2002, HP completed the largest and one of the most successful mergers in hi-tech history. HP’s acquisition of its rival Compaq Computer Corporation (another customer of UPS) created a leading global provider of products, technologies, solutions and services for consumers and business. Working with both companies prior to the merger made UPS particularly valuable to the integration process as UPS had indepth knowledge of both companies’ preexisting processes. HP’s inventory now spanned IT infrastructure, personal computing and access devices, global services, and imaging and printing. The merger forged a dynamic team of 150,000 employees in more than 170 countries. Revenues reached US$79.9 billion for the fiscal year ending October 31, 2004. The integration of interfirm systems and processes, however, was an enormous task even before the merger, and it became a greater issue after its completion. Consequently, a merger of this magnitude created immediate integration challenges for HP, and integrating successfully would play a significant role in determining the future value of this strategic merger. HP responded by looking to its business partners to assist in merging the two previous competitors into one large, innovative, and dynamic hi-tech organization. DISCOVERING VALUE THROUGH SUPPLY CHAIN OUTSOURCING In recent decades, the hi-tech industry had exemplified an environment in which companies pursued both unprecedented efficiency and effectiveness. Companies always had to balance the costs and benefits of these potentially opposing pursuits. However, survival in the hi-tech industry depended on it: new entrants to the market could pursue both low-cost and high-quality differentiation strategies by leveraging advanced technologies to create models more suitable for the current business environment. Such technologies enabled firms to extend their communicative reach, not only with employees and customers, but with suppliers and business partners, too. As a result of these new competitive dynamics, more well-established companies, such as HP, were examining their own adaptive capabilities to ensure that their historically founded processes wouldn’t hinder their ability to respond to ever-changing realities in the industry. In plain English, they needed to make sure the capabilities that had created and sustained their competitive advantage didn’t prevent them from capturing new market opportunities. HP’s response to this environment was to seek assistance from an expert business partner — UPS — a decision both crucial and strategic. This response resulted in the co-creation of some key business objectives for HP: short- and long-term outsourcing strategies; a structure to coordinate boundary-spanning operational processes and a culture that leveraged the unique attributes of both companies. Page 6 9B07D002 Partnership Strategy By nature, the hi-tech industry was a hypercompetitive environment where explosions in technical innovations perpetuated atypical industry volatility. Consequently, low-cost differentiation strategies were often not sufficient to create and sustain competitive advantage. So, HP needed to combine efficient operational processes with continuous product and service innovations. To continue production of innovative technologies, HP needed to adapt its complex web of transformational processes quickly. The solution was to outsource previously non-core processes, which were regarded as core capabilities by partner organizations. Non-core — support-oriented — processes now were considered strategically outsourced capabilities. This strategic transition allowed HP to focus on what it best while simultaneously benefiting from what its business partners did best. Although HP still faced the challenge of balancing efficiency and effectiveness, the company narrowed its strategic focus through strategic outsourcing. Shrinking the scope of processes managed internally, HP effectively simplified existing operational processes by reducing variety. The resulting effect — a reallocation of resources to more strategic initiatives. Colaluca said HP decided to pursue such a transformational strategy by creating an inter-enterprise services supply chain by focusing and investing in our core competencies while creating a business network that leverages our strategic partners’ world-class capabilities. Leveraging strategic supply chain services meant HP could focus on technological innovations rather than breakthroughs in logistics and transportation — all important aspects of the hi-tech industry. Although costs for managing external partnerships would increase under the new initiatives, the management team believed potential benefits of strategic outsourcing would surely outweigh costs associated with maintaining the status quo. To achieve its vision of unrivaled supply chain capabilities, HP needed first to find the right strategic business partners for both short- and long-term objectives. The company immediately needed to enhance operational efficiencies and achieve early gains with strategic partners to build a relational foundation that would support future plans. The company wanted a partner that could help realize an end-to-end global supply chain system that was agile and responsive. HP needed a company with which it could effectively work to develop this vision, but it needed a partner that already possessed — and was willing to continually develop — superior logistic and supply chain capabilities. Wayne Martin, responsible for HP’s end-to-end supply chain and engineering efforts in the Americas, described it this way: Initially, when we thought about what our business should look like in the future by outsourcing logistics, it wasn’t well received and we knew from a technology standpoint what we needed to have in place to make this successful. Most companies were not even scratching the surface of where we wanted to go with our business. So clearly we were one of the first few companies to step up and embrace outsourcing in a big way and in a positive way. We needed a partner that would come onsite and to help us get there. We needed a partnership and not a vendorship. Entering into a partnership of this nature was risky. Not only would HP lose some control over existing processes currently executed within the organization, but it would need to trust that this new partner could uphold HP’s well-known commitment to customer satisfaction. Before signing an outsourcing contract, the management team from HP invested significant time and effort in considering which company would most Page 7 9B07D002 likely make a true partner, rather than just a vendor. According to Martin, “We thought about it a lot because we wanted a long term partnership. We thought about this for the future.” After deciding that UPS had the desired capabilities, the companies entered into a lengthy negotiation process. Because of the inherent complexity of the partnership, negotiations were particularly intense. After many days of intense negotiation, the partnership came to life when a three-year contract was signed. The outcome provided an important foundation on which the partnership could begin and develop. Exhibit 2 lists the high-level scope of services agreed upon during the negotiation process. These agreements were not only important for coordinating initial processes in the partnership, but the leaders of both firms realized these agreements could also play a crucial role in how the partnership matured over time. For example, both firms understood that continuous renegotiations of contracts could become resource intensive; allocating funds to such endeavors would not be in the best interest of either company. Therefore, the contracts were designed as governance mechanisms to align objectives and protect against opportunistic behavior, while acknowledging the importance of trust and creating a win-win partnering philosophy. Contracts built on a foundation of trust and mutual gain guaranteed that operational adjustments needed over time would not require extensive renegotiation and contractual expansion. Moreover, opportunities for gain sharing and adaptive pricing mechanisms were put in place to ensure both firms could profit from the partnership. Partnership Structure Even as the ink dried on the signed contracts, both firms recognized their work had only just begun. UPS and HP began the arduous process of coordinating interfirm processes, despite their being separated spatially, temporally and organizationally. UPS and HP had to design structures necessary for the coordination of these efforts; the contractual agreements acted as structuring tools. They agreed on a combination of performance metrics that focused on measuring the partnership’s success in meeting both financial and service-oriented targets. Teams within and across each firm were structured to define individual roles and reporting responsibilities. The companies developed a performance-oriented target for their partnership. A financial metric by which success could be evaluated aimed at a 12 per cent reduction in spending for HP over the three-year contract period. Because overall spend was largely dependent on the amount of services rendered (number of transactions performed) by UPS, a formula adjustable for volume fluctuations was needed. This metric would provide a real measure of how well the partnership was meeting its targets over time. Strategies for defining and measuring transactions, and accounting for costs, had been key to ensuring the metrics guided behavior that supported achievement of the partnership’s highest goal — decreasing spend by 12 per cent. If these strategies guided behavior that reflected only individual unit spend, rather than total spend to the organization, such metrics could lead to suboptimal outcomes for the partnership. UPS and HP decided that unit costs should be utilized to measure volume and account for shifts over time, and each function should develop two unit metrics jointly (HP and UPS) as the means to account for volume fluctuations. They defined units at the function level: e.g., Call Center, Field Stocking Locations and Courier/NFO. They came up with a formula for determining that function in the baseline year (2002), established by total spend divided by total number of transactions. In addition to the higher level goal of reducing overall spend by 12 per cent, the companies negotiated and agreed upon some 100 individual service-oriented targets (see Exhibit 3 for further discussion on estimating cost and price ratios). Page 8 9B07D002 To manage and execute interdependent activities successfully, targeted outcomes needed to be determined by both organizations. Measuring the effectiveness of a particular activity or framing and guiding improvements without targets was not possible. For UPS and HP, the service level agreements (SLAs) became a core mechanism for coordinating interfirm activities, managing the partnership and facilitating continuous improvement and innovation. According to Cindy Kueffner of UPS: SLAs drive us to behave in such a way as to ensure that we don’t just meet our targets, but that we surpass them. They force us to look at processes and procedures, and get more into the details. We trend them, and look at every aspect of every angle and really just analyze them because we know that they are critical to the success of the relationship. Partnership Culture The pairing of HP’s well-known collaborative culture, which facilitated innovation and cooperation, with the equally celebrated UPS culture, which cultivated high performance and operational excellence, created an interesting foundation for partnership. When problems arose at UPS, they were not only acknowledged and expected to be fixed quickly but, according to Pat Grace, they were identified, measured and tracked continuously until they were eliminated. Problems that were not tracked and measured were problems that never got fixed, he says. Since the earliest days of the UPS-HP partnership, the operational execution of interfirm systems and processes had continuously improved. Both companies carefully aligned their expectations and transcended any ambiguities caused by separate terminologies, different task executions and dissimilar systems for supporting their interactions. Martin said it wasn’t simple, but trust was key: We have developed a very strong relationship over time. But, it wasn’t easy at first. But over time we came to trust each other, to respect each other’s ideas and opinions. In addition to integrating the cultures of UPS and HP, HP went through an extensive integration after acquiring Compaq. When HP acquired the company in 2002, Compaq immediately repositioned itself in an already competitive industry. In order to capitalize on the value Compaq offered, HP needed to merge the companies’ operational processes to reduce needless duplication costs. While both companies needed to leverage their individual heritages, they also needed to move forward as an entity. What was known as HP Blue and HP Red (representing what was previously Compaq) soon became HP Purple. HP’s Wayne Martin said mixing the two became an opportunity for development and growth. Perhaps unexpectedly, the companies came together in rather short time. According to Martin, “I would say within six months or so, we started to come together more as a purple environment.” A Snapshot of the Current Global Engagement From transportation and freight to logistics and supply chain re-engineering, HP needed a strategic business partner in order to continuously discover innovative ways to support and conduct its global business. Choosing UPS as a strategic business partner was a core component of HP’s overall strategy for improving its competitiveness. Whether by air, rail, water, or road, the companies were utilizing all resource capabilities at their disposal to ensure HP customers experienced high-quality service. The movement of goods throughout Asia and into the United States demonstrated how UPS was helping HP synchronize global operations. Page 9 9B07D002 After the acquisition of Compaq, UPS assisted HP in merging the so-called Red and Blue operations in Asia to eliminate redundancies. They worked with HP original design manufacturers (ODM) throughout Asia to coordinate the flow of materials. As a result, they established relationships with subcontractors and provided management expertise to coordinate movement of goods throughout Asia. Among other accomplishments, UPS set up a central parts distribution center in Tokyo and 15 stocking locations around the country to provide the timely movement of parts throughout the country. In addition, UPS had a warehousing facility at Pudong Airport in Shanghai, where finished notebook computers were pooled prior to export. In addition, this operation had documentation facilities and acted as a freight forwarder out of China. Duty rates, customs clearance and entry processes differed from country to country, and could significantly challenge companies such as HP that wanted to compete in the international market. Tariff classifications, value declaration and duty management could escalate coordination costs for individual organizations. But that was where UPS excelled: it had the necessary expertise and capabilities to manage international complexities successfully. Staying on top of constantly changing international rules and regulations, UPS provided a vital service, allowing customers such as HP to deal with the exogenous forces that could challenge their competitiveness. For example, UPS managed international returns through its free trade zone (FTZ) in Louisville, Kentucky. Working throughout Asia in more of a 4PL model, a logistics strategy whereby service providers manage supply chain processes while remaining carrier neutral, UPS had most of the notebook computers arrive at a centralized warehousing and distribution facility in Chicago, although Los Angeles, Atlanta, Dallas and New York offered four additional destinations. From there, UPS coordinated with customs, retrieved in bulk and coordinated with some of HP’s largest customers (e.g. Circuit City and Best Buy) before closing the order. UPS provided visibility of the entire process with Flex Global View, a proprietary event management and visibility tool that allowed an integrated perspective of each customer’s supply chain. The services provided for HP in Asia were just one example of how UPS capabilities could assist in enhancing customer competitiveness. Nevertheless, because UPS had many customers, they faced difficult challenges resulting from the diversity of customer requirements. To remain a leader in the supply chain outsourcing industry, UPS had three core business objectives: (1) to enhance business-to-business (B2B) connectivity, thereby creating flexible IT and process infrastructures that could be used across numerous customer relationships; (2) to successfully coordinate an array of distinct internal service capabilities so customer firms could leverage the benefit of one-stop shopping and (3) to facilitate the creation of cooperative business relationships that could provide the necessary foundation from which firms would be willing and able to share strategic information. Thus far, the UPS relationship with HP exemplified some of the challenges and triumphs UPS faced while pursuing its objectives and developing leadership status in the supply chain outsourcing industry. OBJECTIVE ONE: TO DEVELOP B2B READINESS With an eye on remaining competitive in the outsourcing industry, UPS realized the importance of developing a business model that allowed the creation of economies of scale while simultaneously creating customized value for individual customers. The creation of an adaptable business infrastructure would facilitate more effective customization within each business relationship. A core component of the adaptable infrastructure was facilitating rapid integration of customers’ IT and procedural systems, thereby being ready to meet the diverse needs of customers. Page 10 9B07D002 For example, although UPS could service multiple customers running SAP, UPS didn’t need to use customized functionality created for one customer for another customer running on the same platform. Business process heterogeneity would likely reduce the reusability of application codes across multiple relationships. Although the term “IT-ready” could represent the ability to create digital connections quickly between firms, it could also be used to express the importance of ensuring that connections were always up and capable of transmitting the electronic flow of information between organizations. UPS’s Laurie Johnson, the chief information officer (CIO) for UPS-SCS, discussed the importance of connection and continuity: IT readiness means you have to have an infrastructure in place that allows for the provider to, without hesitation, bring on new customer volume. So, you have to have a network in place that is adaptable, you have to have a data center in place that is robust, and that, from my standpoint, has the best recovery built in and has the business continuity capabilities set around it. The challenge for UPS in becoming B2B-ready came from both internal and external perspectives. Reflecting on challenges outside the firm, Johnson explained: B2B readiness means, in my opinion as a provider, having standards, having them documented, having them able to be communicated to the customers, as well as anybody up or down that chain when it gets down to actually making the connectivity happen. For instance, in the case of supply chain outsourcing, UPS might have an order management system; a warehouse management system; a visibility solution or brokerage, transportation and small package systems all representing components of a total solution for any one of their customers. In order to be ITready in this situation, Johnson said, “You’re going to have to have some defined framework or mechanism to move data from one system to another in order to be considered IT-ready.” UPS still hoped to reach the point at which core offerings could meet 85 per cent of customer needs, but they faced an ongoing challenge: balancing their desire to shape operational and technological standards within the supply chain outsourcing industry with the need to respond effectively to customer needs that might not align neatly with existing and emerging standards and capabilities. Johnson characterized the relationship by saying, “Believe it or not, there’s a very maturing view of the marketplace and our particular positioning within it.” OBJECTIVE TWO: TO COORDINATE INTERNAL CAPABILITIES UPS realized that successful firms in the supply chain outsourcing industry needed to satisfy a full range of customer needs by offering an integrated suite of service capabilities. This activity needed to be successfully coordinated within each firm to dissuade customers from seeking outsourcing strategies made up of many individual service providers. From transportation and freight, to consulting, logistics, international trade and UPS Capital, which addressed the financing needs of UPS customers, UPS had a massive inventory of service capabilities for its customers (see Exhibit 1). However, each one of these competencies represents a disparate silo of organizational knowledge. As such, individuals working within such distinct areas could be unfamiliar with the capabilities existing in other parts of the organization. Therefore, when UPS customers inquired into the company’s capabilities, they could have interacted with different individuals in separate parts of the organization. Thus, as John Haack, vice-president of sales and marketing for UPS-SCS now tasked with integrating the global sales force and enhancing their go-tomarket strategy, said: Page 11 9B07D002 My wife and I were watching the Sunday morning news and a UPS commercial that communicated our global supply chain capabilities came on the television. She looked over at me and asked if we could really do that stuff. My reaction was interesting because I said, you know, what is funny is that operationally and execution-wise we can do all that stuff. Where we’re struggling is how do we present that to the customer base in the market? How do we walk the customers through all of our capabilities? It’s challenging. UPS and its executive team have realized the importance of internal coordination — as challenging as it may be — to compete in the competitive supply chain industry. They have worked to improve internal coordination capabilities by reducing subunit orientations that perpetuate parochialism. In a bid to break down functional silos that were inhibiting internal collaboration, UPS began an internal rebranding campaign in 2001. The campaign focused on changing the way UPS employees thought about the company. No longer did they work within a specialized group as part of the world’s largest package deliverer. UPS was now a leader in global commerce. To become a global leader, they had to think differently, they had to act differently, but it took time. As Haack said: One reason it took so long to begin improving internal coordination was simply because the organization was not ready. But the rebranding was extremely powerful internally to get people to quit thinking just inside of their own space. Improving the sales personnel’s awareness of UPS’s broad range of service offerings was vital for supporting their work in aligning customers’ requirements to UPS capabilities. Additionally, to move the sales organization further, Haack recognized the need to develop deeper managerial understanding of current and future business opportunities. He began to search for effective business intelligence solutions that would assist the management team in understanding the state of their business. After working for 12 months to build a solution that would enable Haack and his team to look across business segments and deepen their awareness, a data warehousing and business intelligence solution was in place and operational. According to Haack, “I now have the ability to look across the enterprise and see the revenue pieces and the way they break up within and between customers.” Although information inside the organization played a crucial role in connecting individuals and coordinating interdependencies, external information was equally important. In large part, the effectiveness of UPS was dependent upon the ability to understand customers’ businesses and the idiosyncrasies that distinguished them from their competitors. Therefore, the ability to gather, organize and interpret customer information contributed mightily to UPS’s capability to transform its customers’ supply chains. For this reason, facilitating information sharing was another key business objective for UPS. OBJECTIVE THREE: STRATEGIC INFORMATION SHARING Creating a context in which customers were comfortable sharing strategic information was critical for UPS as the firm sought to transform customer supply chains. For UPS to effectively leverage its extensive global delivery network — and the leading-edge IT infrastructure and institutionalized knowledge that enabled it — the company needed to develop a deep understanding of its customers’ businesses. UPS needed to understand existing business processes as well as become aware of the future strategic direction of the customers’ organizations. This future awareness enabled UPS to enhance its internal reactive capabilities, thereby allowing the company to alter quickly its existing processes when customers experienced the need to change some part of their business model. Moreover, by sharing crucial information with UPS, customers could look towards UPS to make the transition from simply being a vendor to being a knowledgeable strategic business partner. Page 12 9B07D002 Obviously, information sharing was critical in helping customers to the greatest extent possible. Nevertheless, gaining the customer’s trust was no easy task. A crucial aspect of building the necessary trust was in assuring customers that the information they did share was secure at UPS. BACK IN THE ATLANTA BOARDROOM: KNOCKING DOWN THAT WALL Leaving the room after a productive conversation with his team, Grace continued to replay Colaluca’s comments. He couldn’t help but share his concern, as it had been on his mind for some time. Happy with their early success but always wanting to improve, Grace felt it was time to take the partnership to the next level. Instead of leaving the room, he quietly walked back to the front of the room where his team was still working diligently. The individual conversations come to a halt as Grace turned to the side of the table where his team was sitting. Calmly, he said: Friends, being good is fun, but being the best is a whole lot better. We have the infrastructure like no other, the depth and breadth of knowledge others wish for, and the passion which demands that we learn today so that we will be better tomorrow. But, to do things better tomorrow than we did today, we must think differently tomorrow than we do today. First, current segmentation strategies were likely preventing UPS sales and solutions personnel from developing a true understanding of customer supply chain operations and then applying UPS’s capabilities to individual solutions. Second, Grace knew the biggest challenge for UPS was to ensure it would continue to create customer value, and to do so profitably. And finally, Grace recognized that taking UPS’s customer relationships to a higher level meant doing a better job of earning customer trust. This step would allow UPS to develop a better understanding of how to apply its capabilities with more strategic customer information to further transform their supply chains. Although opportunities for UPS were enormous, the challenges were equally as massive. Thus far, the relationship between UPS and HP had been a model for outsourcing success. The pairing of HP’s wellknown collaborative culture, which facilitated innovation and cooperation, with the equally celebrated culture of UPS, which cultivated high performance and operational excellence, had streamlined supply chain operations. Operational efficiencies were continually being enhanced, while guided by predefined performance metrics that evaluated service quality. Leaders of both firms realized, though, that past success had no lifetime warranty. In an aggregate sense, the service levels obtained were yet to reflect perfection. Yet, many were consistently achieving a superior result, which placed the UPS-HP partnership in a unique position as the companies sought to create future value. The companies could use the momentum their accomplishments had created to catapult this strategic partnership into the future. Nevertheless, how were they going to do it? Despite having many customers, how could UPS ensure its customers felt as though they were UPS’s only customers as the partnerships matured over time? How could UPS ensure that its persistent focus on increasing operational efficiencies did not inhibit the discovery of innovative alternatives for customers? Mark Lewis is a PhD candidate working with Dr. Arun Rai in the Center for Process Innovation at the Robinson College of Business at Georgia State University. David Forquer is the Director of Executive Education at Georgia State University and Dan Quinter is a Director of Marketing and Sales Training at UPS. Page 13 9B07D002 Exhibit 1 UPS SERVICES OVERVIEW Source: UPS corporate presentation, 2004. EXHIBIT 2 Scope of Services Agreed Upon by HP and UPS • • • • • • Courier / NFO (next flight out) Field Stocking Locations (FSL) — United States and Canada Information Technology (IT) — for scoped services Request Fulfillment — call centers/help-desks Reverse Logistics — defective warehousing, free trade zone Package Transportation — domestic and international, hold for pick-up Source: HP corporate presentation, 2004. Page 14 9B07D002 EXHIBIT 3 Estimating Cost and Price Ratios When estimating cost and price ratios, the partnership must consider different volume levels and how expenses relate to volume fluctuations. Additionally, a distinction between fixed and variable costs must be made and considered in relation to projected fluctuations. Thus, fixed expenses — depreciation, top management salaries, property taxes, and insurance — must be distinguished from those expenses that would stay fixed within 20% to 30% increments of an expected operating volume. This may be the difference between requiring a second or third shift or overtime pay for an hourly employee. In addition, costs considered truly variable, such as labels and packaging, must also be added to such an analysis. After these numbers have been established, the actual expenses can be compared to the budgeted numbers to calculate spending and volume variances. In order for the partnership to achieve their goal of 12% a year cost reduction, it will have to consider the fixed cost/volume relationship and the variable cost. SLAs also vary in their level of specificity and are often tightly connected in an integral hierarchy of interdependent service-oriented objectives. These objectives act as rules for guiding and coordinating individual behavior and are often used to design team structures and reporting relationships. A particular manager, for example, might be responsible for overseeing a group of SLAs and leading a team of individuals, each responsible for ensuring the partnership meets specific objectives. A participant in the quarterly business review suggested how SLAs actually guide different types of behavior by altering individual perspectives: “A lot depends on what level the person is looking at the SLA. You might be looking at a high group level of ten together. Instead, you may be looking at a level down as a result of your specified job role.” Another participant reiterated this interdependent nature of the SLAs: “You can’t just look at an SLA in isolation. You have to look at how they will roll up or down from other SLAs.” SLAs may be useful mechanisms from yet another perspective: they provide a framework for evaluating service quality and partnership performance. They act as triggers that motivate process innovations; establishing standards of appropriateness, they are useful for judging the suitability of a particular outcome. When performance targets fall below a particular threshold, organizations are inclined to search for potentially innovative alternatives that may lead to improved performance in later periods. Rex Butler from UPS-SCS said, “I think in trying to achieve the SLAs, they can end up driving innovation. For example, for our ground courier performance standpoint, we had to reengineer and redesign what we did and how we did it to get the SLA higher.” Source: UPS – HP quarterly business review, 2004.


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