Shrink-Wrap Your Way to Greatness

Good afternoon, everyone. It's great to be with you today.

I don't know about you, but recently I feel like I've been surrounded by the risk one associates with pirates.

• First, there were the pirates on Wall Street;
• Then, we've had pirates trying to board cruise ships and cargo vessels;
• A few days back, the Pittsburgh Pirates dampened a great start to the Braves' baseball season by taking a series from us;
• And... not too long ago, I even made a presentation to a Walt Disney Leadership Group in consultation with that most famous of all pirates - Captain Jack Sparrow.

Captain Sparrow repeated a favorite and timely question which I will ask you today... "do you have the courage to stay true in the face of danger and almost certain death?"

Now, here in Atlanta, we don't normally have the same degree of rewards and risks found in Captain Sparrow's world of the high seas.

But, we're close to a number of roadways that present their own form of reward, risk, and adventure.

For example...within a short drive of the hotel is quite a diversity of natural wonders that could be seen in a single day.

They include Stone Mountain Park's granite mountain to the East ...to Kennesaw Mountain's pink dogwoods to the Northwest...to the Georgia Aquarium, just a few blocks from here.

If you're a baseball fan, this is the first spring it's possible to see a Gwinnett Braves Triple A game in the afternoon and to catch an Atlanta Braves nightcap at Turner Field.

What a city!

But all that doesn't come without some risk.

On Atlanta's roadways, you'd better be prepared for bumper-to-bumper, or 75- mile-an-hour traffic, and sometimes, BOTH TOGETHER!

Atlanta's highways and byways have become a lot more congested and complex to navigate over the years.

And that's led to the evolution of Atlanta motorists who are as resilient as any on the planet.

Atlanta drivers are prepared for anything and everything - everyday!

Now, I know I might sound like a transportation guy who's become obsessed with traffic.

But Atlanta driving does provide a metaphor for three supply chain themes I want to discuss with you today.

They are three interconnected R's that I believe have quietly, but quickly moved to the top of the C-level priority list - reward...risk...and resilience.

Let's start with reward.

That's in scarce supply these days.

But for the sake of perspective, let's wind the clock back to a window of time not very long ago - 2005 to 2008.

Then, supply chains were extending and interconnecting across hemispheres.

They pried open growth opportunities in new markets. And they achieved efficiencies through low-cost sourcing.

Within those supply networks, a valuable link - world-class warehousing - was playing a key role in customizing products and moving goods to customers faster than ever.

It was the era of global outsourcing and in-sourcing specialization described in Tom Friedman's best-seller, "The World is Flat."

As supply chain practitioners in the midst of that - you've been in an industry at the vanguard of one of the biggest growth stories in world history.

In that three-year window, Gross World Product grew at an average five percent clip a year, or a total of $11 trillion dollars.

If that were a string of dollar bills laid end to end, it would make five round trips from earth to the sun, with a one-way trip left over!

Much of this economic growth took place in populous, developing nations where economic development was badly needed.

Some 500 million people moved from poverty to middle class by 2008 - a "greater good" result of supply chain innovation.

Then, all of a sudden, the tsunami of 2008 struck.

In contrast to the decade's middle years of relative calm, everything seemed to explode at once.

First, there were the quality assurance challenges in the toy recall at the beginning of the year.

Toys made in Asia had arrived at U.S. consumer markets with defects, blind-siding major brands.

By summer, we found ourselves in the midst of a heat wave of rising energy prices.

Crude oil exceeded $120 a barrel by July. And a gallon of gas at the pump cost over $4 dollars.

But we hadn't seen anything yet. Last fall, of course, the credit crunch hit.

Risk caught up with reward.

And as a result, many stretched and fairly rigid, inflexible supply chains began to snap.

Cynics have said 2008 was a great example of fair and balanced trade.

Asia began the year by sending America bad toys. And America ended it by returning bad dollars.

Others have called it the year of the "Perfect Supply Chain Storm."

Was it just bad luck?

Or, should it signal to us in the supply chain community that a new normal has arrived when it comes to risk and vulnerability to risk?

We decided to ask a group of senior executive and C-Level leaders those questions in a study UPS sponsored recently with the Economist Intelligence Unit.

The survey included online and face-to-face interview discussions with 350 senior executives who oversee worldwide supply chains.

Their collective view was that we had entered a period when business vulnerability to risk had greatly accelerated.

Four in 10 of the survey's senior executives said their supply chain expansion and increase in complexity had outpaced their ability to manage risk.

The executives agreed that many risks in a global era could not be anticipated - like geopolitical instability, terrorism, and natural disasters like yesterday's earthquake in Mexico, or the swine flu that we're all dealing with today.

But these executives also cited the need to manage a few they could see coming.

One is the increasing reputational risk and policy pressure to integrate environmental conservation measures across the supply chain.

I'll get back to this one momentarily.

Another must-do shared by the global leaders is insisting on high standards and metrics for risk mitigation among all their supply chain partners.

Just as we see standards emerging to ensure the transparency and integrity of global finance, the C-level leaders in our study predicted we'll see new standards.

They include higher levels of transparency and more accountability that extends down through all tiers of supply chains.

The biggest fear to these C-levels is inadequate B-plan contingencies should they get blind-sided.

So what can be done about it?

That's another area we explored in the Economist study.

It's my third discussion point - resilience.

The survey respondents confided that in recent years building-in resilience had taken a back seat to rapid growth and low-cost sourcing.

Only one in six said their company is prepared to deal with serious risk.

In the booming late 1990's, the management guru, Tom Peters, said, "You can't shrink to greatness,"

He reminded us you had to grow to be sustainable.

Of course, growth will never go out of style.

But resilience appears to be moving right along side it on the global leaders' priority list.

In fact, resilience may even serve as a new path to growth that retains customers and increases revenue.

As the participants in our Economist study suggested, you may be able to shrink-wrap your way to greatness... by creating a resilient... protective...pliable coating around your supply chain.

It's a strategic coating that would deal with and deflect risk through resources that achieve simplicity and flexibility.

The key question is "how?"

A starting point in the modern supply chain is narrowing key partnerships to best-in-class outsourcing specialists.

The senior executives in our study said they want to do business with really good and financially stable partners they can count on to help them mitigate risk.

That concern, by the way, is confirmed by a recent study that shows half of large U.S. buyers across industries are right now doing business with financially shaky global manufacturers.

Of course, solid, financially viable 3PLs are also the sort of good friends global supply chain leaders are looking for.

We all hear a lot of buzz about the direct-to-the-customer model that bypasses distribution centers.

We at UPS have even had a hand in creating some of it!

It can be an ideal solution, especially for high value merchandise.

But warehousing still plays a key role in many of today's supply chains.

When done well, warehousing improves logistics accuracy, inventory management and product customization.

In today's challenging times, logistics and warehouse outsourcing also strengthens companies' balance sheets. It takes fixed assets off the books, and improves return on asset ratios.

Look for risk management to also assume a more prominent role in customer expectations.

That leads me to another "how" question.

How can outsourcers like UPS and other 3PLs prepare themselves to become more resilient partners to work with?

At UPS, we start by asking, what does resiliency really look like through the customer's perspective?

We can boil it down to a simple sentence. It's the ability to deliver - through any and all conditions - whatever is promised.

It's not all that different in warehousing. Customers want orders filled, no excuses!

We have the benefit of seeing customer expectation from the perspective of both a transportation and warehousing company.

Our UPS Supply Chain Solutions unit operates more than 1,000 warehousing facilities in 120 countries.

That's a total capacity of about 38 million square feet - enough warehouse space to house the City of London!

The largest of those distribution centers - our three-million square foot campus in Louisville - is located near Worldport, our "all destinations" air hub.

Like similar facilities in Europe and Asia, it allows customers late cut-offs and fast distribution to regional markets throughout the U.S.

From our dual transportation and logistics view, one expectation we see is predictability.

For example, let's say hypothetically it takes 27 days for a customer's goods to travel from Asia ports to the West Coast, and then inland to U.S. market destinations.

Let's say port congestion on the West Coast is a risk factor for delays.

Then, let's say we can re-route from the West Coast ports to Southwest or Southeast ports like Houston or Savannah. And from there, we can transport by ground to the U.S. destinations.

Speaking hypothetically, let's say this takes 32 days.

Increasingly, customers are fine with the latter schedule if they can count on 32 days in their forecasts.

If we say 32 days and deliver in 32, that's much better than promising 27 and delivering in 29.

It's kind of like being the parent of a teenager and negotiating a curfew - if any of you have had that experience like I have.

You often don't mind extending the curfew for an hour or so if you can count on your kids to be home at the appointed hour.

Getting home early the teenager realizes - AND NOT THAT IT WOULD EVER HAPPEN! - is not nearly as significant an event on the plus side - as being late is on the negative side!

Predictability is a good thing in parent- teenager relations, and also in the supply chain.

Of course, visibility is also essential in a world-class, resilient supply chain.

Visibility played a key role in UPS taking over the assets and operation of two former Merck distribution centers - one in Reno and one here in Atlanta.

The pharmaceutical maker can now electronically track the flow of its supply chain from order to cash through UPS's transportation network.

For Merck and clients across industries, our warehouse management systems link to transportation management and visibility systems across different transportation modes.

That, in turn, simplifies invoice processing, collections, and replenishment.

For Merck, our two-site distribution center model provides resiliency against bad weather, or other unexpected events affecting one of the DCs.

And... we can also cost effectively ramp up our staffing to serve Merck at peak times during the flu vaccine seasons, and ramp down in less busier times.

Speaking of cost effectiveness, and as I alluded to earlier, another area of focus ahead that's top of mind for the Economist C-levels is green supply chain practices.

Of course, the policymaking debate behind global climate change remains highly charged.

Yet, when it comes to risk, it's difficult to ignore a recent conclusion reached by the MIT Joint Program on Science and Policy of Global Change.

The MIT scientists recently concluded that if we stick with business as usual in terms of carbon-dioxide emissions, by the year 2100 the average surface temperatures on earth will hit levels far beyond anything humans have ever experienced.

Politics aside, I don't think too many of us want to risk that sort of legacy for future generations in exchange for business as usual.

More immediately, green practices are fast becoming a new expectation of global supply chain leaders by a number of their key constituents, including their consumers and business customers.

In light of that, it's no surprise that nearly half our Economist survey senior executives plan to step up the integration of sustainable environmental and social practices throughout their supply chains.

It's no longer a matter of "if." It's a matter of "what" and "how."

The good news is that going green often means going lean.

At UPS, green practices have helped us eliminate waste, reduce costs, and manage risks.

For example, in the year 2000, we started an e-waste program for outmoded computers. The sales of materials from that program exceed the costs.

It's now a profit center.

In addition to recycling, a few notable areas in which UPS has embraced green practices across its transportation and warehousing operations include:

• Our ground and air network fleets;
• Our packaging;
• Our paper saving technologies like paperless invoicing;
• And, retrofitting existing buildings and designing new energy efficient ones.

UPS leads the industry in the number of alternate energy vehicles.

By year end, we'll have 2,200 alternate energy vehicles on the roads. They'll use several different technologies.

So far, our alternative-fuel fleet has logged nearly 200 million miles.

Whatever the source of fuel, all our package cars minimize their carbon footprint through our "no left turns" routing plan.

In 2007, we measured the impact of no left turns. Over the year, it saved us 30 million miles of driving and three-million gallons of gasoline.

It also reduced our carbon emission footprint by 32 thousand metric tons.

We've introduced similar fuel-saving steps into our air fleet, including continuous descent landings.

One thing that differentiates UPS from the competition is that we combine our air and ground fleets into a single, energy-efficient network model.

All air, international and ground packages are picked up by one vehicle instead of three in three separate networks.

How about buildings?

I know you had a session yesterday discussing solar power.

We introduced solar power at our Palm Springs facility.

Solar energy provides 70 percent of the facility's power use and has reduced carbon emissions by more than one-million pounds since its installation.

As many of you know, when it comes to green practices, the genius is often in the details.

To that end, we've launched a program called Decision Green to challenge our 425,000 employees to make decisions in their personal and work lives that reduce waste and conserve energy.

More than 9 in 10 of our employees say they're now weighing environmental considerations as a value they bring to their day-to-day work.

That leads me to a final point I want to make about resiliency.

So far, I've focused largely on what we expect supply chain evolution to look like from the Economist study point of view.

But what about our future - from all of our points of view - as outsourcing supply chain partners?

Here's a soul-searching question I think we'll need to continually ask of our organizations going forward.

Will we be able to pass what I call the 21st Century values test to be a resilient partner?

As it happens, the irony in a world in which supply chains get larger and more interconnected is that decision-making gets pushed down more and more to individuals.

In that climate, a culture of empowered people who do the right thing for the greater purpose is a must.

It's the requirement of self-governing accountability.

In the final analysis, what makes an organization resilient is having individuals who are motivated to do the right thing.

For example, earlier I talked about some of the visibility and flexibility advantages of UPS taking over Merck's warehousing.

Yet, the business nature of Merck and other pharmaceutical clients - also requires product quality assurance and strict regulatory compliance.

And the supply chain can become a life and death matter for an end-customer.

In that model, it's not about having employees who understand moving packages. It's about having employees who see beyond packages to the patients who are depending on them.

One global supply chain leader made the observation that being a resilient partner is a lot about having the right people in place, who will make the right decisions, and do the right things when a disruption occurs.

Organizations will be increasingly flatter going forward.

So developing and nurturing cultures that foster people to self-govern is going to be more crucial than ever.

So those are my three R's.

Reward. It will return.

We don't know exactly when. The U.S. Congressional Budget Office forecasted the Administration's stimulus efforts will generate four percent GDP growth in 2010 and 2011.

This recession was the first to engulf the planet. Recovery will likely be global-wide as well.

Risk. The way we manage it promises to look different entering the next business cycle.

In a complex world, the dynamics between the sometimes conflicting priorities of managing efficiency and risk will remain.

But we've probably reached a tipping point when it comes to balancing the two.

That's the fundamental takeaway from the senior global supply chain leaders who participated in our Economist research.

Will we be ready?

That's all about resilience.

To paraphrase the Marine Core, supply chains will engage a few good partners.

They will be called upon to play big roles in managing supply chain risk.

Successful transportation and warehousing managers will also be successful risk managers.

Valued outsourcing partners will win by bringing predictability, visibility, and sustainable practices into their own businesses.

They won't wait for instructions. They'll come to their clients with resiliency ideas.

They'll also develop a culture of values that empowers people at all levels to self-govern on behalf of the big picture.

In that way, resiliency becomes more than a good defense. It creates competitive advantage.

You can "shrink-wrap" your way to greatness!

Thanks so much for your attention. It's been a pleasure to be with you.