2. 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
3. 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
4. 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
5. 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
6. 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
7. 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
8. 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
9. 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,
10. 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
11. 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
12. 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
13. 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.
