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Northwestern University

2004 Patterson Lecture: "Innovation in an Age of Globalization"

Michael L. Eskew
Chairman & CEO
United Parcel Service, Inc.

Thank you Justin, for that kind introduction, and good evening, everyone.

It’s great to be back in Chicago. Growing up in Indiana, I made my first trip here back in 1969. Through the eyes of a young Hoosier, Carl Sandburg’s “City of Big Shoulders” certainly lived up to its reputation. Since then, I’ve seen the world, and Chicago’s still a fascinating place.

It’s also an honor to participate in this important forum on the campus of this great university which has promoted so much forward-thinking over the years. And it’s especially rewarding to be here on the Golden Anniversary of the Transportation Center. Over the past 50 years, we’ve witnessed extraordinary advances in transportation and trade.

Northwestern and the Transportation Center have been at the epicenter of a lot of that innovation. In fact, I see a lot of parallels between UPS, Chicago and the Transportation Center. We grew up together. For a company like UPS, which has pretty big shoulders itself, Chicago is a place we can relate to - a place built on physical work - a city designed to move and connect commerce. Our brown trucks – we call them package cars, first rolled down Michigan Avenue and Dearborn Street back in 1940. Since 1940, UPS’s operations in Chicagoland and Northern Illinois have grown to include eight hub facilities employing over 23,000 employees and delivering nearly half a million packages a day.

Our Chicago operations play a critical role in our U.S. distribution network. Nationwide, at any given moment, more than 6% of the U.S. gross domestic product is in the care of the UPS system. And if it’s going any significant distance by ground – it’s practically guaranteed to go through Chicago by way of our 240-acre consolidated hub located down in Hodgkins. That hub is the single largest ground sorting facility in the UPS network. And it’s one of the largest facilities of its kind in the world. It sorts 1.6 million packages every day. It’s also extremely high-tech. A mixture of brawn and brains, just like Chicago itself. Yes, Chicago’s ties to UPS run deep and even extend to some of our traditions – one of which has roots in this city’s transportation history.

In our corporate headquarters, we have an original train bell used on the Chicago & Northwestern Railroad that was given to our founder. We ring the bell to signify major innovations, developments and expansions in our business. In fact, the last time we rang the bell was last year when we were awarded air rights to fly between the Philippines and Hong Kong.

Innovating, expanding our horizons connecting the world to commerce – those are values all of us here tonight share. And that’s really what I want to talk about this evening. Globalization and the need to reinvent ourselves to compete and prosper in the coming century.

Tonight’s forum is a perfect backdrop for such a discussion.A half century ago, when the Transportation Center was just getting started, American commerce was mostly local and regional, low-tech and commodity based. In 1954, when this center was founded, international trade made up less than one-tenth of the U.S. economy. Today, global trade accounts for nearly a quarter of our economy.

No one’s felt this impact more than our industry. Last year alone, the nation’s transportation system carried exports worth $731 billion dollars and imports valued at $1.1 trillion dollars. This global trade moved through 936,000 aircraft entries into the United States 215,000 maritime vessels. And 19 million vessel, truck and rail container entries. And talk about big shoulders. Last year, the transportation industry moved over 1.6 billion tons of international goods to and from the U.S. That’s 10 percent of the 16 billion tons of freight that moved on our nation’s transportation system. Suffice it to say, transportation is the bedrock of trade and one of the main foundations of our economy.\

In 2003, the transportation sector accounted for 11 percent of the U.S. GDP, and 11 million jobs. Without vibrant transport, commerce, and certainly international commerce can’t exist.

At the same time our industry needs international commerce to not only grow but to flourish. In fact, I would argue that our society and our future well-being as citizens of the world depends on healthy globalization. In the past few years, these kinds of views could get you in trouble in some circles. But despite all the disruption and all the rhetoric, the fact remains that globalization is inevitable.

The human desire to exchange with one another is as natural as sunlight. We could no more stop it, as we could stop our desire to breathe. We buy clothes from China, cars from Japan, perfume and wine from France, fruit from South America. Many of these imports come with lower costs and high quality. Most of them improve our standard of living.

In a poll conducted earlier this year by the Program on International Policy Attitudes, nearly three-fourths of Americans said they support the growth of international trade in principal. Of course, it’s not just Americans who feel this way. Since 1990, the value of global trade has increased 54 percent. Since 1970, it’s increased 22 fold.

At the same time, with globalization – as with any major shift in economic order come certain degrees of dislocation that we must all address.
These days we’re hearing a lot about the loss of American jobs to offshore outsourcing. To say the least it’s a hot button issue right now and I don’t wish to elevate what is in essence a political debate. But if you remember, 20 years ago we were hearing similar spirited arguments about the U.S. losing competitive ground to Japan. Some feared that we were on the verge of becoming a second-tier economic power. Well, that didn’t happen.

Today, we stand alone as the single most powerful trading nation accounting for 20 percent of world trade in goods and 16 percent in services. I like what Tom Peters says on the subject of dislocation and re-creation. He points out in his book, “Re-Imagine,” that between 1980 and 1998, America generated 29 million net new jobs.

Over the same time period, Europe, with a larger population, gained just 4 million new jobs. The reason why America created so many more new jobs, according to Peters, is because we had the “nerve to destroy” 44 million antiquated jobs and replace them with 73 million good new jobs. In essence, we did what America does best: we innovated. Innovation is what will ultimately quell the current debate about job losses. Creating new business models, new technologies, expanding into new markets, with higher value goods and services. That’s what innovation accomplishes. Losing jobs to outsourcing isn’t nearly the threat of losing jobs to more innovative competitors. The history of corporate America bears this out.

If you were to look at the Fortune 500 list from 50 years ago and compare it with today, you’ll see that 70 percent of those companies, 350 of them no longer exist. Now, do the same comparison with the 1980 Fortune 500. A full 200 don’t exist today. Most of these companies aren’t around because of one overriding fact: They failed to innovate and grow.

Fortunately, the transportation industry is on the forefront of the innovation movement. Always has been. The same industry that brought us the interstate highway system, supersonic aircraft, high-speed rail, fuel cell technologies and thousands of other innovations, is not afraid to reinvent itself along with the needs of commerce. And today, the transportation industry is blazing the path for one of the most significant business innovations of the early 21st century synchronized commerce.

Synchronized commerce is about coordinating the transport of goods, information and funds up and down the supply chain in order to better optimize demand and supply cycles. Synchronized commerce is also about synchronizing every aspect of the order management cycle with the customer in mind. From order-entry to fulfillment, billing, returns, claims and post-sale service. It’s an egalitarian revolution – with opportunities for both large and small providers.

One small company that is thriving is Jarrett Logistics Systems of Orville, Ohio. The young firm tripled revenue this past January, after more than tripling revenue in 2003. They’re adding new employees to keep up with the flood of companies that are outsourcing their supply chain needs. Here’s what the Wall Street Journal recently said about it: “These are precisely the types of value- added jobs the U.S. economy is supposed to create to replace manufacturing jobs that are leaving.”

We’ve also felt the impacts first-hand at UPS. Our Supply Chain Solutions subsidiary is one of our fastest-growing business segments. What was basically an idea just 8 years ago has grown into a $2 billion-dollar plus business. The infusion of new technologies, infrastructural improvements, global market deregulation and forward thinking in the transportation industry are driving synchronized commerce.

In the last two decades, because of enhanced supply chain practices, we’ve seen a 34 percent reduction in inventory to sales. That’s resulted in a $5 trillion dollar savings in inventory costs. In just the last five years alone, we’ve seen a 10 percent improvement in order-to-cash cycle times. We’ve seen productivity gains from IT investments, improved visibility, greater JIT and collaboration practices.

But we’ve just scratched the surface. To give you just one case in point this past January I spoke at a mass retail industry conference. The retail industry in this country represents about $1 trillion dollars in sales, or roughly 8 percent of our GDP. Forty percent of those retailers, however, have no supply chain strategy at all. That’s right, no supply chain strategy at all.

Here’s a real opportunity for the transportation industry to show one of its largest partners the path to innovation. As we look to move up the value chain by delivering innovative solutions that better help our customers compete we should all be thinking about five critical areas.

We need to think about strategies and solutions that help customers:

If we in the transportation industry can factor into any or ideally all of these areas then we will be providing real value through real innovation.
By the way, I believe these five areas are also the end-results of truly synchronized commerce. Let me give you a quick example of how one transportation company is providing synchronized commerce solutions that meet most if not all of these objectives for one small retailer.

The retailer is a small firm up in Montreal – Malis Henderson. For the past 50 years, they’ve been making bridal veils and headpieces, and selling them to bridal shops across Canada and the U.S.

It’s been a success story, with the exception of one significant problem. COD payments from U.S. customers typically take 30 days to land back in the company’s hands. Customs clearance processes and COD brokerage intermediaries are the main culprits. For Malis-Henderson that means slower cash flow, which has a way of curtailing capital expansion and other growth plans. But they found a solution to their problems. It involves a combination of customs clearance warehousing, fulfillment, distribution and COD direct payments.

Now, when American bridal shops place orders for the Canadian veils and headpieces and agree to pay for them COD a whole set of synchronized actions are unleashed. First, Malis-Henderson ships goods from Montreal to a customs-clearance warehouse located up in Champlain, New York.
By consolidating shipments, the warehouse is able to clear customs faster and expedite the movements of those goods into the U.S. Once the veils and headpieces reach the bridal shops, COD checks are given directly to a delivery driver.

Funds are then transferred directly into Malis-Henderson’s bank account. The result: Everyone’s happy. A 30-day cash cycle is flattened to about three days. Malis-Henderson managers spend less time finding, opening, posting and depositing COD checks and more time on critical customer service and business development needs.

Retailers say they feel more comfortable writing a check to Malis-Henderson than to a 3rd-party broker they don’t know. And finally, Malis-Henderson gets the holistic financial and shipping visibility it needs to run a growing multinational business successfully.
Now they are:

Goods, information and funds–synchronized for better results. At the end of the day, synchronized commerce, and synchronized transportation are sustainable business practices. They come with the promise of helping bring more people, from more countries, cultures and societies into the community of commerce.

As supply chains stretch across borders, what we’re seeing, in effect, is an economically beneficial division of labor. Henry Ford demonstrated the benefits of division of labor when he unveiled the world’s first automated conveyor belt at a new Model T plant in 1914.

Ford revolutionized the way cars were built. Before then, workers would come to the cars. Now, the cars would come to the workers. As Model T’s moved down the conveyor belt, workers would specialize in certain tasks. Some would put on wheels. Others would attach fenders. And on it went, each person doing what he did best. This efficient division of labor helped cut the time it took to turn out a Model T from 10 hours to 93 minutes. And the cost savings allowed Ford to cut the price of the car dramatically, making it affordable for the masses.

Global supply chains are like really long conveyor belts where workers in different countries contribute by doing specialized tasks faster, cheaper and more efficiently. Costs go down, prices go down, new products get developed, businesses grow, jobs are created, wealth is generated, and investment dollars are spread around the world.

Our job in the transportation industry is to keep this momentum moving right along with commerce itself. That’s going to require continued investments in technology in infrastructure in our people. It’s going to require unprecedented collaboration among all modes of transport. It’s going to require us to remain vigilant in helping stamp out obstacles that get in the way of free and fair trade. And most of all it’s going to require us to do what the Transportation Center has been promoting for the last half century. To innovate and lead with conviction.

If we do these things and we do them well, transportation and trade will set a course for unprecedented business and social opportunities in the coming years. What an extraordinary time to be part of this great industry.

Thank you so much for your time and attention this evening.

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