AIR DELIVERY AND FREIGHT

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AIR DELIVERY AND FREIGHT Powered By Docstoc
					The Consulting Business in
 United Parcel Service Inc.


            Vito Colombo


     Strategic and Financial Analysis
Under the supervision of Dr. Kenneth Hatten
Table of Contents

Introduction .................................................................................................................................................... 3
    Organization of the Paper ......................................................................................................................... 3
    Opening Statement .................................................................................................................................... 3

UPS Financial Statement Segmentation: UPS Consulting ................................................................. 4
    UPS Bank .................................................................................................................................................... 4
      Income Statement.................................................................................................................................. 4
      Balance Sheet ........................................................................................................................................ 5
    UPS Airline .................................................................................................................................................. 5
      Balance Sheet ........................................................................................................................................ 5
      Income Statement.................................................................................................................................. 7
    UPS Trucking .............................................................................................................................................. 7
      Income Statement.................................................................................................................................. 7
      Balance Sheet ........................................................................................................................................ 8
    Using Ratios to Build UPS Consulting..................................................................................................... 9
      DuPont Analysis ..................................................................................................................................... 9
      Balance Sheet and Income Statement ............................................................................................. 10

Conclusion .................................................................................................................................................... 12

List of Sources............................................................................................................................................. 13

Appendix - Strategic Environment ......................................................................................................... 15
    Market Overview ....................................................................................................................................... 15
    Porter’s Five Forces ................................................................................................................................. 16
      Rivalry.................................................................................................................................................... 16
      Threat of Substitutes ........................................................................................................................... 16
      Buyer Power ......................................................................................................................................... 17
      Supplier Power ..................................................................................................................................... 17
      New Entrants ........................................................................................................................................ 17
    Functional Analysis .................................................................................................................................. 18
      United Parcel Service, Inc. ................................................................................................................. 18
      Federal Express Corporation ............................................................................................................. 20

Exhibits .......................................................................................................................................................... 23
    Fully loaded Functional Analysis charts ................................................................................................ 23
Introduction


Organization of the Paper

      This paper focuses on the segmentation of United Parcel Service, Inc.
(UPS) as if it were four distinct businesses:
                         1) UPS Bank
                         2) UPS Airline
                         3) UPS Trucking
                         4) UPS Consulting

      The paper also includes missing analysis from the Phase I paper in an
appendix called “Strategic Environment” and ends with exhibits to support the
Functional Analysis in the Appendix.

      The final section is a list of sources used in the analysis. The course
concepts and resource material used in class are also an integral part of the paper
and are not listed as sources but it is assumed that the concepts such as the
Functional Analysis model and the method of segmenting businesses using lateral
processes need no further citation.


Opening Statement

        Currently, UPS is segmented on US Domestic Package, International
Package and Non-package and does not highlight areas of profitability in a way
that allows comparisons between UPS and companies in related industries, such
as airlines.

      This paper proves that UPS’ maintains a dominant position in the industry
through their extremely profitable consulting services, thus raising their ROE of
20% well above the industry average of 10%.

        The paper begins with UPS Bank because it is the only segment with
reported net income and simplified balance sheet. The analysis moves to UPS
Airline because aircraft make up a large component of Fixed Assets and allows us
to quickly move to UPS Trucking.

       After UPS Trucking is segmented out of UPS, what is left is UPS
Consulting, activity that includes the Supply Chain business and consulting
services found through out UPS’ different business segments.
UPS Financial Statement Segmentation: UPS Consulting

        Within UPS, there are several different companies possible by segmenting
the financial statements. I decided that the company with one of the largest
airlines in the world contains a highly profitable airline. I also know that UPS
recently acquired a Connecticut bank for the purposes of making trade credits and
other financing arrangements for its clients, so I felt that the financials could also
shed a bank.

      Remaining was UPS’ profitable trucking business and one last company.
That one last company is where UPS’ future profitability lies. I call it UPS
Consulting at the risk of confusing the reader with the already segmented Supply
Chain consulting business. I want to prove that it is the Consulting business,
defined as that part of the business where fixed assets are not employed in
generating profits, that is driving UPS’ very high returns.

       In my analysis, I will prove that the consulting business, spread out across
UPS’ business segments, is responsible for producing $2.4 billion in profits on
$4.0 billion in sales, with a ROE of almost 50%, versus UPS’ ROE of 20%.


UPS Bank
      I began by first segmenting the bank. Formerly known as First International
Bank, UPS Capital is a Connecticut bank and must report to the CT Department of
Banking, which is where I found Total Asset, Total Equity and Net Income data. I
used these three data as the basis of my balance sheet and income statement.

Income Statement
        I determined that Interest Expense and a higher than normal Provision for
Loan Losses would be the reason for the Net Loss. It is apparent from the net
loss, the purpose of UPS Capital is to attract new overseas business, not to
compete with other commercial finance companies in the business.

                               Comm Fin - UPS
                                                       2004
                               Inc on Earning Assets        40
                               Interest Expense            (51)
                               Gross Int Margin            (11)
                               Prov for Loan Losses         (5)
                               Net Interest Margin         (16)
                               Other Income                 60
                               Other Expenses              (45)
                               Income Tax                    0
                               Net Income               (0.306)
                            Figure 1 - UPS Bank Income Statement
Balance Sheet
        The balance sheet, with a reported $502 million in assets and $171 million
in Stockholders’ Equity, was laid out with the assumption that the receivables
would be held at an equal or lower interest rate than the payables in order to
maintain a net margin loss of $11 million. In keeping with the relative structure of
First International Bank’s last reported balance sheet in 2000, I came up with the
following balance sheet:

                            2004                                    2004
Cash & Mkt Securities           89      Current Liab                   380
AR
Fin Rec                         500
Inventory                         0
Other CA
Current Assets                  589
LT Investments                          LT Debt                         20
PPE                                 8   Deferred LT Liab                 0
Goodwill                                Stockholders' Equity           200
Total Assets                    600
Figure 2 - UPS Bank Balance Sheet



UPS Airline
      The next task was to do the same for the Airline part of the remaining UPS
businesses. I began the process with some key clues.
             The Next Day fleet is one of the largest airlines in the world and it is
              extremely profitable because of the higher margins in Next Day
              package delivery.
             In 2003, the UPS Trucking did $20.3 billion in revenues, which was
              about less than two-thirds of the total revenue for UPS (Commercial
              Carrier Journal, August 2003, p.36 from Lazich 2004).


Balance Sheet
      After reviewing the Property, Plant and Equipment footnote and the Long
Term Debt footnote, I was able to do the following.
    Note 8 (vi): LT Debt and Commitments   Note 4: Property, Plant and Equipment
                                                                 UPS
                                                                Totals     Airline    Truck
    Aircraft              1795             Vehicles                3,784                3,784
    less: Accum Depr       257             Aircraft              11,590     11,590
                          1538             Land                      760        304      456
                                           Bldg                    2,164        866    1,298
    Avg Life               6.98            LI                      2,347     2,347
                                           Plant                   4,641               4,641
                                           Tech Eq                 1,596               1,596
                                           leased eq                  57         57
                                           Construction              539        539
                                                                 27,478     15,703    11,775
                                           Less Accum Depr       13,505      2,248    11,257
                                                                            13,454       519
   Figure 3 - Getting to Airline PP&E

         First, I was able to allocate the PP&E to Airline and Trucking. I assigned
$15.7 billion of the $27 billion to the Airline according to Figure 2 above. In Note 8
(vi) of the 2004 footnotes, I found the average life of the aircraft fleet to be about 7
years. I divided that number into $15.7 billion to get an approximate Accumulated
Depreciation for the Airline of $2.2 billion, leaving the Airline with $13.5 billion in
PP&E. The remaining PP&E and Accumulated Depreciation resulted in a very low
Net PP&E number for Trucking.

        Next was finding a comparable airline to use as a guide in creating the UPS
Airline. This airline needed to be highly profitable and enough assets to measure
up against the size of UPS Airline. Based on these criteria I chose Southwest
Airlines, with Fixed Assets of almost $9 billion and a Profit Margin of 5%, higher
than the industry average of 3%.

                                  2004                                      2004
Cash & Mkt Securities              3,364   Current Liab                      3,430
AR                                   383
Fin Rec                                0
Inventory                            871
Other CA                              83
Current Assets                     4,701
LT Investments                             LT Debt                            2,722
PPE                               13,454   Deferred LT Liab                   3,156
Goodwill                                   Stockholders' Equity               8,846
Total Assets                      18,155
Figure 4 - UPS Airline Balance Sheet
Income Statement
        I based the Net Income of UPS Airline on a 6% ROE to mirror Southwest
Airlines. This produced a Net Income of over $500 million and Sales of $10.6
billion when applying a 5% Profit Margin.

      I then applied some of the same percentages of Southwest’s common sized
income statement for 2004 to produce the Income Statement for UPS Airline.
                                                 2004
                       Sales                     10,615
                       Cost of Revenue            (7,219)
                       GM                          3,397
                       Oper Exp                   (2,419)
                       Oper Income                   978
                       Other Inc / Exp                60
                       Interest Expense             (212)
                       Income Tax                   (299)
                       Net Income                    531
                         Figure 5 – UPS Airline Income Statement

UPS Trucking
      Getting to UPS Trucking is easier at this point, because the remaining UPS
business is going to lose the remaining Fixed Assets to UPS Trucking as well as
the majority of the Sales.

        To use a comparable trucking company to help create the financials, I used
Yellow/Roadway. After Yellow Transportation and Roadway Express merged,
they became the second largest trucking company, bumping FedEx Ground down
to third. Because of their merger, I expect UPS Trucking to have a slight
advantage over Yellow’s Asset Turnover of 1.87.

Income Statement
       I went to work on the Revenue. By allocating the revenue based on
platform instead of business unit, I was able to use Item 7 of the MD&A and come
to a Revenue number of about $22 billion.
               Revenues
               US Domestic Package:
               Next Day Air             6,040
               Ground                  17,409
               Deferred                 3,161        Truck Transport
                                       26,610        US Domestic Ground       17,409
                                                     Deferred                  3,161
               International Package                 Intl Package: Domestic    1,346
               Export                   4,944                                 21,916
               Domestic                 1,346
               Cargo                      472
                                        6,762
               Figure 6 - Getting to Truck Transport Revenues
       I felt that UPS Trucking would have a higher ROE than Yellow/Roadway so
I locked its ROE at 18% versus Yellow’s 15%. With a Profit Margin hovering
around 2%, I was able to estimate a Net Income of about $450 million. The rest of
the income statement was modeled after Yellow.
                                                      2004
                             Sales                    21,916
                             Cost of Revenue         (15,999)
                             GM                         5,917
                             Oper Exp                  (5,041)
                             Oper Income                  877
                             Other Inc / Exp              (65)
                             Interest Expense            (142)
                             Income Tax                  (242)
                             Net Income                   452
                           Figure 7 - UPS Trucking Income Statement



Balance Sheet
       I took the target ROE of 18% and the Net Income of $452 million to back
into a Stockholders’ Equity of about $2.5 billion. Modeling the capital structure
after Yellow’s allowed me to come to a Total Assets number of $7.5 billion by
dividing 33% into $2.5 billion. I found that this put UPS Trucking’s Asset Turnover
Ratio substantially higher than Yellow’s, 2.92 vs. 1.87. I explain this with a low
PP&E that drove Total Assets down and higher sales on UPS Trucking’s books.

      I also assumed that a low employee turnover rate would cause most of the
Deferred LT Liabilities (i.e. pension obligations) to be assigned to Trucking. This
had the affect of lowering Current Liabilities by a huge amount and giving UPS
Trucking a superior liquidity position to its two closest ground competitors.

                                    2004                                  2004
         Cash & Mkt Securities         232      Current Liabilities          155
         Accounts Receivable         2,177
         Fin Rec                         0
         Inventory                       0
         Other CA                      174
         Current Assets              2,903
         LT Investments                         LT Debt                      834
         PPE                            519     Deferred LT Liab           4,000
         Goodwill                     4,078     SE                         2,511
         Total Assets                 7,500
        Figure 8 - UPS Trucking Balance Sheet
Using Ratios to Build UPS Consulting
      Once the financials were created for these three companies, the next step
was to create the DuPont format ROE and compare them to industry and
competitive ratios.

      The three companies with competitors are:
      UPS Airline         Southwest Airlines
      UPS Trucking        Yellow/Roadway
      UPS Bank            First International Bank


DuPont Analysis
      Here are their ratios for comparison:
                              ROE = PM             x   ATO    x   Lvg

                              3,333    3,333   36,582   33,026
       UPS Inc.                     =        x        x
                             16,384   36,582   33,026   16,384

                              20.3%         9.1%       1.11       2.02
       Industry               10.4%         3.0%       1.94       1.79

                              531          531     10,615   18,155
       UPS Airline                    =          x        x
                             8,846        10,615   18,155    8,846

                               6.0%         5.0%       0.58       2.05
       Southwest               5.7%         4.8%       0.58       2.05

                              452          452     21,916   7,500
       UPS Trucking                   =          x        x
                             2,511        21,916    7,500   2,511

                              18.0%         2.1%       2.92       2.99
       Yellow/Roadway         15.2%         2.7%       1.87       2.99

                               (0)         (0)          40        600
       UPS Bank                       =            x          x
                              200          40          600        200

                              -0.2%        -0.8%       0.07       3.00
       First International     0.1%        31.7%       5.52       0.03
Balance Sheet and Income Statement
       In order for UPS to reach a ROE of 20%, considering the segment ROEs
shown here, requires a fourth company with an enormous ROE. Instead of trying
recreate a consulting firm using Accenture as a model, I decided to back into a
DuPont analysis first, using the numbers in above chart.

       For example, I recreated Net Income using the number given in the
calculation for the Profit Margin.

ProfitConsulting = ProfitUPS – ProfitA – ProfitT – ProfitB = 3,333-531-452-0 = 2,351

      Doing that for all the components of ROE resulted in the following ratios.
Accenture was used for comparison.

                              2,351        2,351        4,011       6,771
       UPS Consulting                  =            x           x
                              4,827        4,011        6,771       4,827

                               48.7%       58.6%         0.59        1.40
       Accenture               55.4%        5.5%         1.91        5.28

        The ROE for Accenture and UPS Consulting are very close suggesting that
the analysis is on track. I went ahead and created the financial statements for
UPS Consulting using Accenture as the common sized model. The red lettering
signifies numbers that came directly from the analysis above.

                                    2004
       Sales                          4,011
       Cost of Revenue               (2,005)
       GM                             2,005
       Oper Exp                        (201)
       Oper Income                    1,805
       Other Inc / Exp                1,625
       Interest Expense                  (2)
       Income Tax                    (1,241)
       Net Income                     2,351
       Figure 9 - UPS Consulting Income Statement

       Other Income is blue to show that it was a plug to make the Income
Statement work and reveals a flaw in my analysis. With more time on the financial
analysis for the first three companies, this plug could be reduced to a more
reasonable amount.

      It is useful to note that the Supply Chain Revenue number in the 2004
annual report is $2.3 billion, considerably less than the $4 billion I show as an all
inclusive revenue number for UPS’ consulting activities, suggesting that $2 billion
of revenue in the other as-reported segments are from logistics consulting and not
delivering packages.
                                  2004                                  2004
        Cash & Mkt Securities       1,878 Current Liabilities            1,060
        Accounts Receivable         2,440
        Fin Rec                       350
        Inventory                       0
        Other CA                      385
        Current Assets              5,053
        LT Investments                     LT Debt                          20
        PPE                                Deferred LT Liab                884
        Other Assets                1,717 Stockholders' Equity           4,827
        Total Assets                6,771
      Figure 10 - UPS Consulting Balance Sheet

       The items of note in the balance sheet are the high asset numbers for what
is basically a service business. I adjusted the Deferred LT Liability upwards from
Accenture’s 26% of Total Assets to reflect UPS’ low turnover rate and high
pension obligations. Other Assets is a plug to make this balance sheet work and
again reveals the limitations of my hypothesis.
Conclusion

        With the view of four distinct businesses instead of operating business
units, this paper explains how UPS generates higher than average return on equity
and maintains a dominate position in airfreight.

      The UPS Consulting business, which includes Supply Chain but also the
consulting work in other areas of UPS, is a huge source of profitability for UPS,
generating profit margins of nearly 60% and returns of nearly 50% on equity.

       It’s important to realize that being one of the largest airlines in the world
makes for a capital intensive enterprise. High margin businesses like consulting
help increase a companies overall return on assets.

       It is also important to understand that if four similar companies were to team
up in a joint venture to replicate UPS they would not be able to replicate UPS’
returns because UPS is so highly integrated and functions as one company. This
integration has allowed them to achieve significant cost reductions and helped
achieved high margins.
List of Sources

Connecticut Department of Banking, “Bank Assets, Capital, and Income”,
Connecticut Department of Banking website,
http://www.ct.gov/dob/cwp/view.asp?a=2227&q=296910&dobNAV_GID=1660 , accessed
November 2005

Federal Express Corp. 2005 Annual Report. Memphis, 2005.

Federal Express Corp. 2000 Annual Report. Memphis, 2000.

Federal Express Corp. 2002 Annual Report. Memphis, 2002.

Foust, Dean. “The Ground War at FedEx, “ Business Week, November 28, 2005,
pp. 42-43.

Lazich, Robert S., ed., World Market Share Reporter 2001-2002 Farmington Hills:
Gale Group, 2001.

Lazich, Robert S., ed., Market Share Reporter 2005 Farmington Hills: Gale Group,
2004.

Mergent Online, Accessed December 2005 for the Income Statement and Balance
Sheet for First International Bancorp.

Nordmann, Michael. The Logistics World. (Transport Intelligence Ltd. London,
2005).

Stickney, Clyde P., Paul R. Brown, and James M. Wahlen, Financial Reporting
and Statement Analysis, Fifth Edition. Mason, OH: Thomson, 2004

United Parcels Service, Inc. 2004 Annual Report. Atlanta, 2005.

United Parcels Service, Inc. 2001 Annual Report. Atlanta, 2002.

United Parcels Service, Inc. 2002 Annual Report. Atlanta, 2003.

US Department of State. “Open Skies Agreement Highlights.” US Department of
State website. http://www.state.gov/e/eb/rls/fs/208.htm, accessed November
2005.

Valentine, James. Air Freight and Surface Transportation. (Morgan Stanley Equity
Research, December 4, 2005).
West, Andrew. Industry Surveys Transportation: Commercial. (Standard & Poor's,
February 10, 2005).

Yahoo! Finance, Accessed December 2005 for the Income Statement and
Balance Sheet for Southwest Airlines and Yellow Roadway.
Appendix - Strategic Environment

      The strategic environment will include an understanding of the air freight
and ground delivery business, including market size, major players and how UPS
and FedEx fits in the market.

       I will include Porter’s Five Forces to describe the forces affecting Air
Freight, a Functional Analysis to identify business strategies of both companies,
and a Functions and Processes matrix to identify Competencies and Capabilities.


Market Overview
        The industry that encompasses air freight and ground delivery is the
commercial freight distribution industry and is composed of Trucking, Railroad,
Pipeline, Water and Air Freight. In 2003, this industry did $702 billion in sales
(West, 2005). The industry data is from 2003 because this is the latest year any of
the research material used in this paper went to. While there have been material
changes in the industry, specifically concerning increasing demand and DHL’s
entry in the US domestic market, the dynamics of the segment still make the data
relevant and useful in this paper.

       The industry segment that this paper will focus on is air freight delivery, a
large segment dominated by UPS and FedEx, the number one and number two
industry leaders. Last year, these two companies made over $60 billion in sales
alone.
       Leading Package Delivery Firms, 2003

        US Domestic                        Worldwide
        DHL               40.0%            FedEx            44.0%
        FedEx             19.0%            UPS              26.0%
        UPS               15.0%            Airborne         20.0%
        TNT               12.0%            US Postal Service 6.0%
        Express Mail       1.0%            DHL               3.0%
        Airborne           1.0%            Other             1.0%
        Other              6.0%
Figure 11 - Source: Wall Street Journal, Oct 6, 2003, p A14 from Goldman Sachs.

       Air freight delivery companies receive small and medium sized packages,
take them to distribution centers. It is there that the packages are consolidated
and distributed into airplanes which are then flown to destination distribution
centers where the process is reversed and the packages delivered to addressees.
Competitors that distinguish themselves successfully manage the integration
between air and ground distributions while increasing package volumes to
maintain a low cost per package.


Porter’s Five Forces
        The purpose of this section is to describe the state of the industry using
Porter’s Five Forces model. The industry has been able to pass the cost of energy
in the form of fuel surcharges and price increases to their customers. New
entrants into the US domestic market are finding it difficult to find traction.
                                               New Entrants
                                                  Low       Open Skies is
                                                              making it easy to
                                                              enter the market

                                Highly
                                consolidated
                                industry
           Labor problems.              Rivalry

           Capacity Suppliers                                                Customers
           constraints. Low                                                  High
                                                                                  Low switching costs
           Fuel Costs.                                                            but
                                                                                  customers too small to have
                                                                                  any individual advantage.




                                                Substitutes
                                                   High       There are no real
                                                              substitutes for air freight.
Figure 12 Air Freight Industry

Rivalry
        Figure 1 illustrates how high the industry is consolidated and we still see a
lot of mergers, specifically FedEx with SmartPost & Kinko’s and UPS with
Messenger Service Stolica, Menlo and completing the last of UPS Yamato. This
consolidation and high concentration serves to reduce competition for UPS and
FedEx as it turns the industry in a monopolistic one.

      What keeps the competitive rivalry high is low switching costs for their
customers, a fact DHL learned when their performance suffered from a September
hub consolidation. Customers wasted no time and brought their business to UPS
and DHL, and some that were interviewed said that they may not return to DHL.
Those who did most likely demanded discounts (Valentine, 2005).


Threat of Substitutes
     There is currently no substitution for sending packages. Even if
manufacturers put a factory within a few hours from their customers, there is no
substituting the channel. Currently, UPS and FedEx are making themselves even
more integrated with the expansion of their Supply Chain businesses.

Buyer Power
        The air freight industry is supplying an increasing portion of the economy’s
supply chain infrastructure, decreasing buyer power. Buyers are highly
fragmented. With the exception of large customers like Amazon.com and catalog
retailers, most customers do not have a large percentage any one company’s
revenues.


Supplier Power
        Labor unions pose a threat to profitability in this industry. Pilots and drivers
are both applying pressure to increase wages. In some companies, union workers
are without a contract, such as UPS pilots (UPS 2004) and if not addressed could
result in a reoccurrence of the 1997 Teamster strike. FedEx is also susceptible to
challenges of its power with a class action lawsuit that could convert its Ground
drivers from contractors to employees.

       The government is also reducing the industry’s capacity with a new rule
from the Federal Motor Carrier Safety Administration of the US Department
Transportation. This new rule says a driver can be behind the wheel for 11 hours
instead of 10 hours, but that same driver must take off 10 hours between shifts
instead of 8 hours. This change reduces work hours per day from 14 hours to 15
hours and will cost the industry over $1 billion (Standard & Poor’s, 2005).


New Entrants
       A significant barrier to entry is regulated air carriers and the reduction of this
barrier through the Open-Skies program managed by the US Dept of
Transportation. Beginning in 1992 with Netherlands, the Open Skies program
creates a free market for aviation services, notably air freight companies (US Dept
of State, 2005).

        It was in 1996 that the US and Germany agreed to an Open Skies
agreement for what was called a 7th Freedom All-Cargo Rights. What this means
is that an airline of one country, say DHL of Germany, can operate cargo services
between the US and any other country without having to use Germany as a hub.
This agreement substantially reduces the barrier to entry for UPS and FedEx,
while also opening up new markets for them.

     The one glaring issue for US air freight companies is that places like
Germany and Pakistan aren’t the most desirable air freight markets for US
companies, but the reverse is definitely not true as well funded companies like
DHL now have the largest air freight market open to them. Countries like Taiwan
and Korea have Open Skies agreements with the US but do not have 7 th Freedom
All-Cargo Rights, which keeps these markets protected from UPS and FedEx.


Functional Analysis
United Parcel Service, Inc.
       Marketing
       OBJECTIVE: Provide a complete logistics infrastructure to businesses of
any size.

      UPS is targeting a global market of producers and consumers, while
making a move to become the supply chain integrator of choice in ecommerce.
They offer Express, Ground, Freight, and Supply Chain services common to
market participants at this level, plus offering supplementary financial services
such Letter of Credit and credit card operations through UPS Capital.

       UPS offers products and services that are state of the art in logistics, which
include the use of bar codes and RFID, high speed package routing systems, and
consulting services.

        UPS charges package prices that are in alignment with the industry and is
willing to raise prices alongside FedEx. It has been able to charge fuel surcharges
successfully.

       A sales force is maintained to reach business customers and producers
crucial to UPS’ mission in expanding its role in logistics to become the supply
chain integrator of choice.

        There are 150,000 different places to access UPS, worldwide. Customers
can reach them by phone, web, retail outlets, customer service centers,
distribution centers and any of the drivers will pick up packages. This level of
reach to customers is necessary if UPS expects to gain market share from FedEx.

      Operations / Technology
      OBJECTIVE: Highly integrated operations support product offerings to offer
low cost delivery operations.

      UPS is seeking to integrate into freight with larger haul trucks and it is
adding capacity in Asia and Europe with acquisitions of Sinotrans, a Chinese joint
venture and Stolica, a Polish parcel and express company.

       UPS is the 11th largest airline world, with nearly 600 planes, 15 airport hubs
worldwide and 900 airports served. Connecting these airports hubs to customers
are 1,750 distribution facilities that sort packages into 90,000 trucks for deliveries
to the home, office, and 72,000 retail outlets. All this requires the integration of air,
ground, logistics and trade financing that UPS maintains is a key competitive
strength.

        The work is labor intensive but is also aided with advances in high speed
sorting machines guided with RFID and bar code technology. UPS has developed
high technology solutions to problems of reducing costs and errors. Integrating
this internal functionality with a front end connectivity to customers allows them to
maintain an advantage over their competitors. This company’s operations relies
on their industrial engineers to develop new ways of control and efficiency.
Currently, UPS is heavily focused on reducing cost by having larger trucks make
fewer trips, a savings program that will reduce fuel cost by $1 million a month and
further linking itself with their e-commerce customers.

      Human Resources
      OBJECTIVE: A high sense of culture and esprit, stock participation plan,
and promotion opportunities contributes to a low turnover rate of employees.

       The company is managed from a highly centralized Management
Committee organized along for the most part in to functions as opposed to
business units. There are business unit presidents in the Management Committee
but only to the extent that the business unit is organized at a global or firm wide
level.

       UPS is the nation's 3rd largest employer with nearly 400,000 employees
worldwide. Recruitment starts with part time work for undergrads that lead to full
time offers. Nearly all of the managers started this way with UPS and this has
insulated the firm in the past. The firm is now opening the doors to more lateral
hires and the changes are reflected in the make up of the Management
Committee, which is slowly promoting professionals who did not start their career
with UPS.

       Finance
       OBJECTIVE: Highly liquid company has been investing at a faster rate than
returning cash to investors, which are for most employees.

       The company is highly liquid with 1 ½ times the cash necessary to cover
current liabilities. UPS increased its dividends at 20% per year for the past five
years with an even higher growth in the rate it has been buying back stock, at 47%
over the same period.

        The firm has been paying down debt over the last five years while steadily
increased Fixed Assets and Working Capital, in line with developing the
infrastructure to support the latest in logistics technology and their customers’
push towards JIT manufacturing. Over the past five years, Working capital has
increased 24% per year.

        The firm’s capital structure is in line with a company that has been run by
traditional long time employees. 50% of the capital structure is equity with the
remaining sources of capital split between current liabilities at 20% and long term
debt at 14%.

       The company is investing its cash in to Working Capital. The evidence
there is a 28% growth rate in cash versus a 14% rate for Retained Earnings, which
is experiencing a decelerating growth rate for the past five years.
               Provide a complete logistics          Highly integrated operations support High sense of culture and esprit      Highly liquid company has been
               infrastructure to a businesses of any product offerings to offer low cost  contributed by low turnover rate,     investing at a faster rate than
   OBJECTIVE   size                                  delivery operations                  stock participation plan, promotion   returning cash to investors, which
                                                                                          opps                                  are for most employees.




     ORDER
 ACQUISITION


                                                                                                                                                                     Consistently deliver
                                                                                                                                                                     packages meeting
 FULFILLMENT                                                                                                                                                         customers
                                                                                                                                                                     expectations on
                                                                                                                                                                     timing and handling


  POST SALES
     SERVICE




  CREDIT AND
 COLLECTIONS




NEW PRODUCT
DEVELOPMENT


                                                    Highly integrated operations
                                                    support product offerings to offer
                                                    low cost delivery operations

Figure 13 - Capabilities and Competencies

       The result of the analysis is that UPS is able to satisfy Fulfillment by
consistently meeting customers’ expectations on timing and handling by
concentrating on their Operations/Technology initiatives that created a wholly
integrated supply chain available to businesses in nearly any industry.


Federal Express Corporation
      Marketing
      OBJECTIVE: Heavy promotion to attract the small business customer that
has operations and/or customers far away..

       FedEx similarly provides many of the same services as UPS. They offer
Express, Ground, Freight and Supply Chain services under the FedEx brand. In
addition to these, FedEx is pushing hard into retail business services with FedEx
Kinko’s. FedEx is considered the innovative leader in logistics, offering a broad
range of logistics services.
       FedEx is the industry’s price leader, always willing to raise prices first and
has also been successful in passing along changes in fuel prices with fuel
surcharges.

       Heavy advertisement in multiple media keeps customer share of mind
strong for FedEx. FedEx is working hard to maintain its lead in US domestic
packages by seeking smaller customers in retail outlets like Kinko’s and the local
US Post Office. Branding important to collective strategy because FedEx operates
so independently among the business units that a strong brand is what connects
them to each other.

       FedEx is attempting to add new features and products to its traditional
service by collaborating with Microsoft on a feature called “File, Print, FedEx
Kinko's” that allows documents to be sent to Kinko’s for printing directly from a
customer’s PC.

       Operations / Technology
       OBJECTIVE: Independent business units operate under one brand.

        FedEx also has an impressive air and ground fleets with an extensive
distribution system. However, FedEx is not as integrated as UPS. In fact, FedEx
is making a huge investment in 2006 that will use information technology to
integrate all the disparate business units into one logistic system.

      Human Resources
      OBJECTIVE: Employees are rewarded and organized along business unit
performance - "Collective independence"

        The management of this company is segmented to its business unit in a
portfolio management approach where FedEx provides oversight and technology
expertise to the main operating divisions. Performance is measured at the
business unit level.

       FedEx has about 200,000 employees. Express van drivers are part of that
number but Ground drivers are not. FedEx is undergoing labor strife because of
how Ground drivers, former RPS drivers, are reacting to FedEx’s tight
management control. There are two class action lawsuits pending on the issue of
whether or not these drivers are employees or independent contractors and the
results may adversely affect FedEx’s returns.

      Finance
      OBJECTIVE: FDX is reinvesting cash to integrate their collectively
independent businesses into one unit.
       FedEx has increased its debt in the past year by 66% and seems to be
increasing investments in Fixed Assets while putting a strain on Working Capital.
At almost five times Working Capital, Current Liability divided in quarters is large
enough to pose serious issues over the next year. Over the past five years,
FedEx’s worsening quick ratio is pointing to trouble ahead. FedEx’s quick ratio
went from 0.90 to 0.86 in five years, a -1.2% compounded annual decline.

       FedEx’s capital structure reveals its appetite for debt, thus increasing its
riskiness: 47% Equity, 23% Curr Liablities, and 12% LT Debt.

      FedEx is growing Cash (98% over five years) faster than Retained Earnings
and Stockholders’ Equity (both at 13% CAGR), another indication that the
company’s investments are being funded by debt instead of operations.
                         MARKETING                 OPERATIONS / TECHNOLOGY                           HR                          FINANCE
                Heavy promotion to attract the     Independent business units operate Employees are rewarded and      FDX is reinvesting cash to
                small business customer that has   under one brand.                   organized along business unit   integrate their collectively
   OBJECTIVE    operations and/or customers far                                       performance - "Collective       independent businesses into one
                away.                                                                 independence"                   unit.



                                                                                                                                                        Maintain several
                                                                                                                                                        channels to make it
      ORDER
                                                                                                                                                        easy for retail
  ACQUISITION
                                                                                                                                                        customers to use
                                                                                                                                                        FedEx

                                                                                                                                                        Consistently deliver
                                                                                                                                                        packages to meet
  FULFILLMENT                                                                                                                                           customers
                                                                                                                                                        expectations on timing
                                                                                                                                                        and handling


  POST SALES
     SERVICE



  CREDIT AND
 COLLECTIONS



 NEW PRODUCT
 DEVELOPMENT



                                                                                      Independent units of FedEx
                Strong promotion campaign                                             share the same customers
                to attract small business                                             so a high level of control is
                customers to re-win their                                             needed to maintain
                business                                                              consistent and uniform
                                                                                      standards.


Figure 14 - Capabilities and Competencies

       What Figure 4 describes is a lack of focus on FedEx’s part. FedEx’s
marketing campaign supports the Order Acquisition effort and has kept it dominate
in the US domestic market. Unfortunately, it is also spending an enormous
amount of energy trying to maintain strict control over its “collective independent”
business units and this is beginning to show signs of strain in the form of the class
action suits by disgruntled Ground drivers.
Exhibits

Fully loaded Functional Analysis charts
                            MARKETING                 OPERATIONS / TECHNOLOGY                                  HR                                   FINANCE

               Market                               Scope of Opers                           Structure                                Source of funds
                                                    seeking to integrate into larger haul
               World                                trucks in freight                        The company is run centralized           on avg net reduction of debt over time
               air freight consolidator             and in adding capacity in Asia           with Mgmt Committee organized
               supply chain / internet retailer     Functions                                along functions not business units       deployment of funds

                                                    ~600 airplanes 11th largest airline world                                         hgh dividend growth 20 % over 3 years
               Product                              1000 distribution facilities              Nation's 3rd largest employer           high stock buyback growth 47%
               Express / Ground                     UPS Stores
                                                    Integrated air, ground, logistics and
               Freight / Supply Chain               trade financing
                                                                                                                                      The company has steadily increased FA
               Suppl: Financial services                                                                                              and WC
                                                                                                                                      over the past five years for a CAGR of
                                                                                                                                      9% and 24%
                                                                                                                                      Incr in WC are at a high rate. This
                                                                                                                                      year's increae compare to the cagr over
               HI tech pdts                         Type of process                                                                   5 is 41% to 24%
               broad range of logistic svs          Process type                                                                      Cash is over 1.5 x that of CL
                                                    Breakeven Volume
                                                    Ops leverage                                                                      50% equity, 20% CL, 14% LTD
               Price                                contribution margin
               in line with industry
               fuel surcharges                      Capital/labor intensity
               will raise prices when FDX does
                                                    Development                                                                       growth
               Promotion                            Process is key to survival                                                        Cash is growing at 28% vs 14% for RE
               Sales force to reach business                                                                                          The company is investing its cash into
               customers                            Hi tech risk level                                                                WC
               and producers                        industrial engineering driven            human resources
                                                                                             Recruitment starts with PT work during
                                                                                             undergrad years
                                                    operations contrl                        Welfare to Work partnership
                                                    heavily focused on reducing costs        employee-owners 90%+
                                                                                             Promote from within beginning with
                                                    larger trucks reduces # of trips         undergrad hires in the loading dock
                                                                                             Many managers have spent their entire
               Placement                            saving program for vehicle fuel          careers at UPS
                                                    heavy investment in IT links between
               Retail, inside sales, consult,       itself and e-commerce customers
               direct                               the drivers have low skillsets
                                                    the other employees have higher skills
                                                    and better educated
               150,000 access points bet UPS and
               customers

               Product development
               Provide a complete logistics          Highly integrated operations support High sense of culture and esprit            Highly liquid company has been
               infrastructure to a businesses of any product offerings to offer low cost  contributed by low turnover rate,           investing at a faster rate than
   OBJECTIVE   size                                  delivery operations                  stock participation plan, promotion         returning cash to investors, which
                                                                                          opps                                        are for most employees.




Figure 15 -Functional Analysis of UPS
                          MARKETING                 OPERATIONS / TECHNOLOGY                           HR                           FINANCE

                 Market                             Scope of Opers                     Structure                        Source of funds
                                                                                       The management of this           FDX has increased its debt in
                 World                                                                 company                          the past year by 66%
                 air freight consolidator                                              is siloed to its business unit
                 supply chain / internet retailer   Functions                          A portfolio mgmt approach        Deployment of funds
                                                                                                                     hgh dividend growth 75 % over 4
                                                    645 aircraft                       where FedEx provide oversight years
                                                                                                                        Little to zero growth on treasury
                 Product                            1450 retail outlets                and technology expertise to      buybacks
                 Express / Ground                   928 stations                       the main operating divisions     including the last year of $0
                 Freight / Supply Chain             10 express hubs
                 Suppl: Kinko Bus Svc               321 freight service centers
                 service/benefits                   500 pickup terminal                                                 FDX's program of expansion
                 Innovative leader in logistics     70,000 trucks                      Systems                          is increasing FA and putting a
                 broad range of logistics svcs                                         Performance is measured          strain on WC
                                                                                       at the business unit level       Over the past five years, FDX's
                                                                                                                        worsening Quick Ratio is
                                                    Capital/labor intensity                                             pointing to trouble ahead
                 Price                              Extremely capital and labor
                 Price leader, always willing to    intensive operations
                 raise prices first.                                                   Human Resources
                 Uses fuel surcharges               Development                        195,838 employees                Capital Structure
                                                                                       Ground drivers are not
                                                    IT major transformation project    employees                        47% Eq, 23% CL, 12% LTD
                                                    Beginning to increase
                 Promotion                          integration                        Express drivers are employees
                 Heavy advertisement to keep        Ground Contractor Model            causing labor strife.
                 customer share of mind
                 Seeks smaller customers in                                                                             Growth
                 retail outlets/USPS office       Operations Contrl                                                     FDX is growing cash faster
                 Branding important to collective
                 strategy                         Business units are managed                                            it is growing its RE and SE
                                                  as separate units under one
                                                  brand
                                                  Expanding capacity to meet
                                                  increased needs
                 Placement
                 Retail for Air and Ground
                 Direct Sales for Freight


                 Product development
                 File, Print, FedEx Kinko's

                 Heavy promotion to attract the     Independent business units operate Employees are rewarded and       FDX is reinvesting cash to
                 small business customer that has   under one brand.                   organized along business unit    integrate their collectively
    OBJECTIVE operations and/or customers far                                          performance - "Collective        independent businesses into one
                 away.                                                                 independence"                    unit.



Figure 16 - Functional Analysis of FedEx

				
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