The Shipping Business

The shipping business, in particular UPS, has understood the supply-chain efficiency message, too. For many decades, the large shipping companies were mainly in the business of moving packages from one endpoint to another. As a result, they built up massive physical traffic networks, distribution centers, and service locations. In parallel, most large manufacturing companies had their own distribution centers and logistics operations. Distribution centers are arguably one of the most capital-intensive steps in an overall supply chain.

Observing the redundancy, UPS and other large shipping companies have been successful in teasing-out this costly, nondifferentiating, common denominator of all manufacturing companiesMuda as far as the paying end customer is concerned. UPS claims that they can take from 2 to 20 days out of a company's distribution process,^[5] which classifies this program as a revolutionary improvement and not merely an evolutionary 10 percent gain.

^[5] http://www.ups-scs.com/solutions/white_papers/wp_distribution_bypass.pdf.

As alluring as this efficiency gain sounds, getting there will require some effort. The manufacturer will typically need to know the final destination of a finished product as it rolls off its production line so that shipping information can be mated with the product at that timefar sooner in the process chain than many companies can presently accommodate. Thus, back-end IT systems have to be streamlined, and key front-end sales and customer databases need to be integrated with manufacturing process systems so that data is shared among all systems involved. (In general, data sharing is a key Inescapable Data capability.)

How Are the Shipping Companies Doing?

So, how are the shipping companies doing? Let's look at a simple metric: the stock values and trends of FedEx and UPS. FedEx stock has grown from $5 in 1995 to more than $85 in 2004, a nearly 20-times improvement in less than a decade, and at a very even, constant rate. UPS stock value has grown from $50 in 2000 to $75 in 2004a 50 percent increase in four of the toughest recessionary years.

For 2005, FedEx will increase capital investment to more than $2 billion because of strong demand.^[6] The emergence of online retailers (e-tailers) such as Amazon.com, drugstore.com, and many others, have driven the need for direct-to-consumer shipping. As successful as such stores have become, they are extremely dependent on their shipping vendors who link them with their customers. The shipping companies are also becoming more of a partner with the manufacturing companies by tying their own businesses systems closely together with their manufacturing customers.

^[6] http://www.thestreet.com/pf/stocks/transportation/10179573.html.

Moving goods across international borders is especially troublesome and adds significant time to product delivery, typically taking several months for a product to go from factory to store. UPS has launched a new service, called UPS Trade Direct, which takes an end-to-end approach to moving goods from factory, across international borders, and ultimately on to the retail store or customer. With UPS Trade Direct, packages are individually packed at the point of manufacture and then consolidated by UPS as a single freight through to customs for faster clearing. Then the consolidated shipment is broken back up (a process known as deconsolidation) once in the U.S., and then rapidly processed through UPS's extensive handling network. All throughout the process, individual packages are traceable by customers and suppliers. Although this might sound sensible and reasonable, it is a significant departure from how shipping usually occurs between countries and one that reduces elapsed shipping time from six weeks down to two or three in many cases.

It is also not hard to see how technologies like RFID will become essential to the shipping industry. When a box rolls off the manufacturing line and is tagged with product and customer information, the shipping company truly becomes the partner of the manufacturer, sharing production and information databases. The box is no longer faceless, with only a destination address. Rather, it is now part of an order, for a particular customer, likely coupled with other products and boxes, and routed and billed to the customer. Never does the box stall in motion or need rotation or alignment for a bar code scan. Never does it need to be opened and its contents visually inspected. It can even be returned by the customer directly through the shipping company with financial credits occurring automatically. GPS, RFID, and integrated computer systems sharing data enable revolutionary improvements in efficiency.