In 1998, the company started UPS Capital, a financial-services firm. “All transactions involve the movement of goods, information, and funds,” says Mounts. “We were already doing the first two very well.” By adding the third capability, the company could complete the circle of transaction settlement. With all three, says Mounts, “a company can outsource its whole supply chain to us, and focus on what it does best.” The bottom line for customers, he says, includes better inventory management, accelerated cash flow, and lower working capital. “We help them run their businesses better.”
And the bottom line for UPS? The new business units, with $2.9 billion in 2003 revenue, accounted for more than half of the company’s new growth from 1998 to 2003, says Mounts, who adds that the supply chain outsourcing market is growing in the double digits. In the last quarter of 2003, operating profit for the nonpackage-delivery segment of UPS rose 27 percent, to $121 million. “Our fourth-quarter performance underscores how effectively our strategies are working,” noted UPS CFO Scott Davis at the company’s quarterly earnings call in late January. “All three of our business segments are showing expanded margins.”
Rx for Growth
Key to UPS’s growth is the way the company came to see opportunities: not just in terms of what new products and services it can sell, but also in terms of how it can help customers improve their businesses. The same shift in perception helped Cardinal Health, a Dublin, Ohio-based provider of health-care products and services, embark on a sensational growth spurt over the past decade.
Before 1995, Cardinal was primarily a pharmaceutical- distribution company. In the mid-1990s, while the health-care sector enjoyed robust growth, distributors like Cardinal were increasingly squeezed; average net margins plummeted to around 1 percent. Like other companies in the industry, Cardinal had grown mostly through acquisitions, but with just three major players left, it faced pricing pressure and slowing growth.
The company decided to look elsewhere for new opportunities. But being a middleman, it looked not only to its customers, but also to its suppliers. “They ran the play both ways,” says Mercer’s Wise. “By looking at suppliers as a potential customer, they hit on a whole new business model”"—one that enabled Cardinal to take a wider view of its business without losing focus on what it does best.
Thus, in 1998, Cardinal leveraged its relationship with pharmaceutical companies to move into contract manufacturing. It acquired RP Scherer, a drug manufacturer that held a patent for making gel-cap pills. Now, a pharmaceutical maker can provide Cardinal with the raw active ingredients for a drug, and Cardinal will manufacture it in gel caps, package it, and distribute it to pharmacies and hospitals. By expanding these capabilities, the company now manufactures, packages, and distributes all major over-the-counter and prescription dosage forms for its pharmaceutical and biotech customers. The business segment now represents more than $2 billion in annual revenue. What’s more, the segment grew a whopping 44 percent last year and contributed 15 percent of the company’s operating earnings.