United States

UPS is a company that all of us know. Certainly they've delivered to all of our houses, all of our businesses. They operate in virtually every country in the world that's not embargoed in some way. Yet it's also a company we don't know as well as we think we do. When I did research for this interview I found some great tidbits. I'm going to save Bob the trouble of bragging about UPS and do a bit as a form of introduction.

They have the largest alterative fuel vehicle fleet on the planet. They have the 9th largest airline in the world and it's the most fuel efficient. They were the first in their industry to publish a corporate responsibility report. This is its 7th edition. They're the only company in their industry that belongs to EPA Climate Leaders and they're on the Carbon Disclosure Project Leadership Index. They are a leader in running supply chains and delivering packages. They are also a leader in sustainable business practices.

We are, as the earlier speakers have done, going to delve into not just the what, but the hows and the whys. And I'm happy to have Bob here and I have to read this because Bob also has the longest title on the planet. He is the Senior Vice President of Engineering, Strategy, Supply Chain and Sustainability for UPS. I want to know how you get that all on one business card.

As we heard from Rich's presentation a few moments ago as well as from all of you in the room today it is readily apparent that the conversations around sustainability are becoming more intense. They're becoming more complex. I'd like you to tell us how the conversations are changing at UPS. How are they evolving? How are they are different than they were a year or two ago?

Well first, thanks for taking my commercial messages. I might have to repeat them to make sure everybody heard them.

Rich hit on a lot of them and I'll talk first about the economic realities. It's estimated that in 2008 the global output of carbon dioxide emissions was 32 billion metric tons. If you look at it from 1950 to 1996 it grew anywhere from five to six percent. So it's big and it's an issue. It's a concern. It's not going to go away even if you stopped it today. Even with Kyoto and everybody's best efforts, and with Copenhagen coming up, it's still anticipated that it's going to grow somewhere between two to three percent annually. Starting from just a pure health of the world scenario, it's big. And we have to get involved in it.

From an economic perspective -when you look at the 59 pieces of legislation that look like they're going to go through - A.T. Kearney and the World Resources Institute estimate that the average manufacturer or the average consumer goods company is going to have their EBITDA impacted anywhere from 20 to 47 percent by the year 2018. So you either care about it from an earth perspective or a business perspective and they're coming together. I guess that's good news.

I attended the World Economic Forum and you would think it would be all about trade discussions. There's a lot of concern about nationalization given the current economy and people hunkering down and closing their borders. But the environment was one of the big conversations -and it was in every conversation. I was there with my peers and we were in a discussion about what can we do collaboratively in the environmental area. I met Boris Johnson, the Mayor of London -whose city was just awarded the Olympics for 2012 -and all we talked about was the use of electric vehicles. We purchase those for London. They have a carbon tax or congestion tax in London. So it's gaining momentum. The IKEAs and Wal-Marts of the world are insisting that who they partner with upstream and downstream must have a record of environmental policy and responsibility.

And we're starting to see companies come up with more goals. Rich talked about an IBM goal. When you start looking at the goals and you hear "by 2030 or 2050," you say oh well, big deal. You won't be around then. But we're starting to hear companies move up those goals. L'Oreal has a goal in 2015 of 50% carbon reduction and water waste reduction. So it's real. It's happening quickly.

Tell us a bit more about the customer aspect of this because you just mentioned a couple. And you touched on many businesses. Are you pushing customers or are they pushing you? Where's the balance there? Who's leading whom?

The answer is it's both. We're seeing it from our customers in multiple areas. We're seeing it in requests for carbon foot printing. We're the transportation provider of our customers -we certainly have emissions. Our customers are interested in their supply chain carbon footprint. There are policies that I mentioned -"if you're going to do business with us, you have to show us your sustainable practices." You've seen Andy on the UPS white board commercials. We actually do those white board sessions with our customers to benchmark their supply chain and talk about their footprint and what opportunities there are to reduce it.

Global trade had the unintended consequence of elongating supply chains. So cheap labor means goods travel longer distances, which means more carbon and more emissions. And so our customers are asking us for help because it's complex. Here are a couple of facts. You have air. You have ocean. You have rail and you've got trucks. Trucking is eight times more efficient than air. Rail is four times more efficient than trucking. And ocean, even though the fuel is bunker fuel, it's 60 times more efficient than air. So we're working with customers to help them trade modes and balance speed with being green. So yes, it's intensifying from customers and it's going both ways.

That's great. UPS is obviously going to continue down the path of sustainability. We've heard from Rich that IBM will as well. But you also hear about companies who are having a hard time getting started, having a hard time getting traction and building momentum around sustainability. What lessons learned can you share about getting started down that path and making sure that you do it in a way that will gain momentum over time?

If you remember the quality movement of the ‘90s, everybody knew enough to be dangerous. We had people running around quoting Deming and "the system produces what the system produces." We all memorized that. I draw the analogy to that because sustainability is in that stage of infancy where people are all trying to get going, trying to learn, trying to figure out where to get started. The first thing we found is that in your organization everybody's going to claim a piece of it. You have PR. You have public affairs. You have marketing and business development. You have engineering. And they all claim a piece of the environmental bandwagon. But it's not integrated. No one's going to pull it together.

So we had to pull them together. We had to make it strategic and take it to the executive level. We took those same parties and created a working committee. We called them the "Smart People" because they all knew a little bit of their piece of sustainability. I hate to advocate committees because sometimes I think we have too many. But we had to do this cross-functional committee. We created a governance committee -an Executive Committee -and I just happen to be the tie-breaker because it's a passion with people. Some want to talk about alternate fuel vehicles. Others want to talk about solar panels. And they'll all stick to their guns. So we gave governance to the Executive Committee to make holistic decisions, versus having anyone specifically pushing an agenda.

So you prioritize what comes first and what's going to roll out?

Exactly. So for the next step we took an inventory of what we were doing -an inventory of our greenness, if you will. What are all the green activities? Then we took a look to see what benefit was there -- in direct ROI or image or reputation or just doing the right thing. And we started comparing notes.

The next thing we did was calculate our own carbon footprint. That took about a year and included Scope One, Two, and Three -not only our direct emissions but what our suppliers generated on behalf for us. We measured the impact and we started switching priorities based on the impact. We're going to release our global footprint in a few weeks. So now we're in a position to start making reduction goals. People are talking of making reduction goals, but first you've got to find out where you stand. We'll be coming out with some carbon reduction goals in the very near future.

Rich talked about this. This is an area where you can't go it alone and you're crazy to try. It's not only our suppliers and our customers that we collaborate with. It's government agencies. You mentioned the EPA. We have several activities going on with them. It's NGOs. You have the 3rd parties that are talking about you and writing about you; that take what you publish and compare you to your peers and make an assessment on you. You can run and hide from them but we chose to embrace them. Maybe that's too strong of a word but we're actively working with third parties because we want to be involved in decision-making, in policy-making. And we want to get our message out there. So in terms of partnerships, we certainly have them with our customers, our vendors, our NGOs and the EPA. We've got a great relationship with the EPA, Navistar and Eaton. We're collectively developing a hybrid hydraulic vehicle. We couldn't do it by ourselves. We realized that you can't go it alone and so that's why we value partnerships that why we've got them going all across the board.

You have engineering in your title. One of the things I've learned about UPS over the years is there's nobody better at measuring things and then looking at processes and taking friction out of the processes. That's part of your legacy. Tell us a bit about how you've done that. How have you gone about identifying the areas and then measuring the results?

From our perspective and just to put it in terms; we deliver two percent of the world's GDP every day. To do that takes about 100,000 trucks and about 550 aircraft. So we certainly have a large global carbon footprint and we're very aware of that. And we've got to reduce that footprint. We travel about three billion miles on the road a year so a one percent reduction is huge from a cost perspective and from an environmental perspective.

We have literally dozens of projects. I'll bucket them and start with alternate fuel vehicles. Everyone gets excited about alternate fuel vehicles. And they are exciting. We have 2,200. It's the largest fleet in the industry. But we call it a rolling lab because we have every type of alternate fuel vehicle. We're not sure where it's going so we have electric, hybrid hydraulic, hybrid electric. We tested hydrogen vehicles, compressed natural gas, liquid natural gas. For those of you who heard Robert F. Kennedy, Jr. speak last night, he said it's going electric. Our engineers don't know for sure so we're hedging our bets and testing all technologies for alternate fuel vehicles.

From a facilities perspective, it doesn't get a lot of notoriety but we changed our lighting fixtures in 200 buildings. That's a huge reduction in carbon footprint.

Our airline is 53 percent of our carbon output so we've done things with air. It's the most fuel efficient airline in our industry. Fifteen years ago we got rid of 727s. We got rid of the three-engine aircraft. They had a poor payload and were noisy. So we have the quietest fleet too. And that's paid dividends, saving us 1.5 billion gallons of fuel over time. And those little winglets you see on airplanes? Those save us about 5 percent.

We also found we can slow down some routes. We always wanted to get in as quick as we can. We figured we could slow down some routes and there are huge savings associated with that approach. We're leveraging GPS instead of radar to land and takeoff our aircraft. We can put them tighter together. The list goes on and on.

The thing I get most excited about is what we're doing with our package car technology. We're implementing telematics. We've got it in about a fourth of our vehicles. We've got a GPS in our drivers' handheld computers. We've got a GPS in the vehicle, and we've got seven sensors attached to different places in the vehicle. We know when the driver's backing. We know when they're going forward. We know when they're separated from the car and we know when they go have lunch somewhere. And it's huge. We're able to reduce idle time by 25 minutes with telematics. Technology in our cars is saving us about 20 million miles per year and that translates into about 2,200 metric tons.

You talked earlier about supply chains. You do a lot of managing customers' supply chains. Tell us what you're doing there. What are the big opportunities and challenges to overcome in supply chain?

We've been in business 102 years. And we have about 2,500 industrial engineers. They make us more efficient. We move over 15 million packages a day across the globe, so if I save one second, that's $35 million. Ten years ago we pointed them outward. They became supply chain engineers. I mentioned those white board sessions. These engineers work with our customers to map their supply chains and talk about different alternatives. But we'll look at it not from how much it takes me to get from point A to point B but rather where you start, where you get your raw materials, who your contract manufacturers are, where your alternate manufacturing is, where your customers are, and just as important, how you get your products back. That's the cycle we're talking about, so we've elevated the discussion.

We'll switch modes. We'll switch processes. We'll put visibility on it so we can trade modes. We'll even cannibalize ourselves. We'd like revenue-wise for everything to fly individually on a brown airplane. But we're not married to a UPS solution. What we found with our customers is that sometimes it's better to use trains, or other people's planes or ships. We'll do that. We're looking for the best alternative, balancing cost with the greenness of the supply chain. And these engineers, you've got to love them. They just love to solve problems and that's how we work through it.

We're not a non-profit so it's important to us that everything we do has some return. One of the things Rich was saying is that there are obviously returns that are more intangible -your reputation, your image, and being an employer of choice. We're very concerned about our reputational image.

So you have three buckets. I'll call it NPV positive, NPV neutral and NPV negative. I'll give you an example of NPV positive. The lighting upgrades we put in pay for themselves within three years. We spent $13 million and we're saving almost $5 million a year just because of our lighting upgrade. It's a no-brainer. We talked about water. We installed flushless urinals. It's a one- to two-year payback and we're saving 40,000 gallons of water per urinal. Those are what we call no-brainers.

Our alternative fuel vehicles are more R&D. They're NPV neutral-to-negative depending on the vehicle. A typical diesel truck costs about $50,000 and alternate fuel vehicles will range from $70,000 to $120,000 for all electric. There are incentives that will help with that. But at $50 a barrel, they're not NPV positive. At $150 a barrel they are NPV positive. So I consider that more R&D. We're going to do it because we need to evaluate the technology.

An area that we're struggling with, which is NPV negative, is solar. We've got three solar projects and a fuel cell project. Fuel cells are in our Anchorage facility. There is a negative return on investment there but we have to understand those technologies. We can't try to put solar in and find out the roofs won't support it. We have parking lots for cars but we don't have enough room to put solar panels out there too. That's an example of NPV negative, but we need to understand the technology.

Another example of NPV negative is reporting. It costs us over a million dollars a year to support our sustainability efforts and to track it and to buy software. So you walk into the CFO's office or the CEO's office and say, "this is what we've got to do to do it." There's no question about it. So you balance out the image with the return on invested capital.

Tell us a bit more about the employees. I think it's interesting that you measure so much of what the package car drivers are doing out there. Has the enthusiasm for these efforts leveled up naturally within your workforce or how have you encouraged people to embrace it?

It's a great point. We have 425,000 employees. Think about all the negative things employees are hearing nowadays. They're hearing about cutbacks, layoffs, wage freezes. This is a positive communication and it's something they embrace. It's not something you have to sell or tell. They just automatically do it. We're seeing it in our employee surveys. We've got websites where we recognize employees and where we talk about what we're doing. We've got employees competing for how green they can be both at work and at home. So it's really being embraced by our employees. And you really can't ignore it because that's a strong constituency.

Do we have time for questions on the floor? Bob has been doing a lot of talking up here. We'd love to hear from you. Right up front here please. The question is, can there be an ROC, a return on carbon where you can calculate your return with your carbon output and saving in addition to an ROI?

That's a good question. I wish I had a good answer for you now. It's something we're evaluating. We're certainly trying to understand where the cost of carbon is going. We think it's going to cost about $11 per metric ton. We have financial models that talk about this, that talk about the cap and trade system. We're in the learning phases right now. I wish I could give you a better answer but we have to understand it and I don't know at this point. We're evaluating it.

Great -we have time for one more. Yes, again right up front.

The question was innovation runs, implementation crawls. When am I going to get some of these great, exciting pilot projects into full scale implementation and roll them out where they can have their largest impact?

It's an evolution and I think in most organizations this whole track we're on is evolutionary. I think you're going to see a serious groundswell. You're going to see it in the economic recovery plan from the Obama administration. There's about $700 million available for diesel fuel elimination. So there are more incentives out there. We've applied for these incentives so we can purchase more alternative fuel vehicles. We would have purchased them anyway, but now we'll double, triple or quadruple the amount of vehicles we purchase because the administration is adding to the incentive to do so. And I think the adaptation is going to be catching. People are going to see it and they're going to jump on the bandwagon. You're going to have to remain economically viable. But I think all these things will come together. In terms of the technology, the help we need, it's where are you going to bet the bank? Where are you going to bet that the technology is going to be there? If I knew that all electric was going to be the answer -and it isn't, it can't sustain a full-day charge for us -I would go there. My engineers think hydrogen fuel cells are the answer. But that's 10 years away. I think a lot of it has to do with technology and government incentives to help us get going. And I think you're going to see all that happen. It's going to get some momentum.