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The Role of Logistics in an Age of Disruption
Kurt Kuehn, Chief Financial Officer

March 28, 2014 - University of Miami - Miami, FL: Kurt Kuehn, the chief financial officer of UPS, traces the history of logistics and the role of logistics in today's global economy.

It’s great to be back on campus to participate in the school's Executive in Residence program.

I’d like to use my time to talk about the history of logistics and I’m going to cover about 4,700 years in the next 20 minutes. So buckle up for a brief history lesson, it's going to be a quick journey.

Logistics is a broad term, but here's a simple definition: Modern logistics involves planning, creating and monitoring the flows of goods and information.

So by that definition, the art of logistics dates to around 2,700 B.C.

The Egyptians used logistics to build the pyramids. Think about what they had to do to build the Great Pyramid of Giza, which is nearly 500 tall and weighs 6 million tons.

The Egyptians had to create sophisticated equipment capable of moving these massive building blocks and dropping them into place. Even today, we’re not completely sure how they did it with such precision, given the hoisting technology and means of transport available at the time.

Sometime around 700 A.D., the Spaniards used sophisticated logistics to construct the Mezquita Mosque, which is still the largest mosque in Europe. This mosque is believed to be one of the first major construction projects that didn’t source the components locally but from across an entire continent. It required extraordinary logistics to transport the pillars of the mosque from all across the Islamic empire.

The earliest military leaders also appreciated the power of logistics.

Consider Alexander the Great, who used his superior knowledge of logistics to mount military invasions as far away as India.

Around 300 B.C., Alexander led a group of 40,000 soldiers and 6,000 horsemen to Asia Minor with a meager supply of food. He carefully timed the ocean voyage and his 30 days of rations to last 10 days beyond the harvest date in the country he was attacking.

On land, Alexander's army could only carry a 10-day supply of food, yet they covered 19 miles per day. This fast pace would lead him across Persia and India with a group of men that would eventually exceed 90,000.

He is famous for saying, "My logisticians are a humorless lot. They know they are the first ones I will slay if my campaign fails."

Sun Tzu was a military theorist who is known for penning the book "The Art of War" more than 2,500 years ago. In his book, Tzu notes that the three most important dynamics in military planning are calculations, quantities, and logistics.

Sun Tzu believed that logistical strategies were even more important than the balance of power and the possibility of victory because logistical success determines these points.

In more recent times, military historians believe that logistics played a role in the efforts of the U.S. and the Allied Forces to emerge victorious in both World Wars.

Before wrapping up my history lesson, I would be remiss if I didn’t recognize the two major developments that really catapulted logistics and global trade during the last century:

In 1956, the steel shipping container was invented, which made it so much more efficient to move goods by cargo ship halfway around the world. The shipping container probably did as much to promote capitalism as anything else.

And in the 1970s, Toyota Motors developed the Kanban and the just-in-time concept of manufacturing.

No longer did companies have to build massive warehouses to stockpile their inventories of goods. Instead, the trucks, planes, ships and railroads that delivered their parts became their “rolling warehouses.”

My company, UPS, has helped play a role in the logistics boom over the past century. But it required a lot of work and a lot of reinvention on our part.

Consider that UPS was founded in 1907 as a messenger service, started by two teenagers, a bicycle and $100 that they’d borrowed.

It wasn’t too long, though, before the popularity of the telephone disrupted our business model. So we needed to re-invent ourselves.

At the time, because most city dwellers did not own cars, retailers had private model-T truck fleets that delivered their purchases to their home after they purchased them at a department store.

We convinced major retail department stores like Lord and Taylor to sell us their fleets and allow us to be their delivery agents.

Over time, we added new cities, and then in the 1980s, we started our own airline. Today, if our airline was a stand-alone operation, it would rank as one of the 15 largest airlines in the world.

Over the past 30 years, we have expanded our mission with a vision of “synchronizing global commerce.”

To do that required a broad range of skills, so we took to the seas and today we’re one of the biggest buyers of cargo space each year.

And we’ve continued to expand internationally. Today, UPS does business in more than 220 countries and territories.

We’re capable of moving some pretty cool cargo, from pandas for zoos, to Humvees for the military.

And increasingly, companies are asking us to take over their entire supply chains. For some customers, we’re going further: Hopkins Golf makes custom wedges that have become popular with a number of Tour pros. UPS assembles the clubs, then ships and delivers them. That allows the executives at Hopkins Golf to focus on what they do best, designing the clubs and creating the marketing campaigns.

So it’s clear that logistics has played a big role in the course of history, a big role in the global economy and a big role at UPS.

You can think of logistics as the “plumbing” of the global trading system.

Thanks in part to logistics, we’ve seen an unprecedented boom in global trade over the last century. The ratio of trade to GDP for the world as a whole, a commonly-used measure of the openness of economies, has increased from 39% in 1990 to 59% in 2011. The total annual value of global trade today exceeds $20 trillion.

I also believe that trade, with big help from logistics, has played a big role in reducing poverty around the world in recent decades.  Between 1990 and 2010, the poverty rate in the developing world has declined by half, from 42% to 21% of the world’s population. This progress coincides with the fall of communism and spread of capitalism, which triggered one of the greatest trade booms in history.

But there’s so much more to do.

For one, there are still 1 billion people living in abject poverty in the world. The World Bank has set a commendable goal of bringing “the last billion” out of poverty by 2035, which we support. I believe that easing the remaining barriers to global trade could help eliminate global poverty in our lifetimes.

We also have a lot of work to do in feeding the hungry. Part of the challenge is logistical. We’ve all heard the stories of the rice and other staples that are donated but then sit rotting on the docks in the emerging market where it was bound. It also happens in the normal course of farming around the world.

Agriculture experts have a term for the percentage of crops that are harvested but spoil somewhere in the journey to the table. It’s called “post-harvest losses,” or “PHL” for short.

Some estimates for average losses in East and Southern Africa, for instance, put PHL for grains at 10% to 20% (in term of weight loss), with some regions reaching as high as 35%.

In South-East Asia, PHL for rice has been estimated at 37%. So there’s more we can do to reduce food spoilage, and logistics can help.

I’m actually optimistic that we, collectively, can solve this and many other challenges in the future. Because I believe we could be on the cusp of another boom in global trade.

According to a recent study by Oxford Economics, global trade in goods is expected to increase at an ore than 6 percent between now and 2030. If that prediction bears out, that means global trade flows could more than triple over the next generation.

The implications could be enormous: As a consumer, the world suddenly becomes your store. As a business person, the whole world becomes your customer. We just need global trade agreements to catch up to this surge in global demand. The proposed trade pacts between the U.S. and Europe, and the U.S. and Asia are a step in the right direction, and should be enacted.

But I believe that the dramatic changes we’ve seen over the past 100 years is nothing compared to the changes that we’ll see in coming decades.

We live at a fascinating time. We live in a world where many aspects of the human endeavor are being disrupted by new technologies and new ways of thinking.

Old business models are being challenged by a number of transformative forces in the global economy.

One transformative force is the shift in the economic balance of power. In coming decades, more of the world’s economic growth will from emerging economies such as Brazil, Mexico, Indonesia and Nigeria.

This shift is already underway. Roughly 1 billion people from developing countries are now entering the market for goods and services they see on display in the developed world.

For U.S. manufacturers, this shift creates the opportunity, if not the imperative to think globally. But too few companies are seizing the opportunity.

Today, less than 1 percent of the 30 million U.S. businesses export and of those, nearly 60 percent ship to just one country. There’s no reason why those numbers couldn’t be higher.

Old business models are being challenged by a number of new technologies. Technologies such as mobile and cloud computing, big data, crowdsourcing, fracking, and 3D printing.

Here are some examples of how these technologies are creating disruption and opportunity:

Mobile and cloud computing: Cloud computing spares companies from the cost of investing in IT hardware, which frees up money to invest in their core products. While this is a threat to IT hardware companies, it’s good for everyone else.

Big data: For better or worse, as a result of big data, 90% of world's data generated over last two years. Big data raises many privacy issues, of which I’m aware. But there will be unimaginable benefits, and opportunities, from big data.

For instance, Big data will enable health researchers to diagnose illnesses, and treatments, more quickly. With digital health monitoring, your annual check-up with your doctor could be a thing of the past. Because you’ll be receiving real-time checkups.

One day soon, you could get a knock on your day, and EMS workers tell you, ‘Sir, you’re about to have a stroke.” While this is a threat to traditional health providers, it’s good for consumers.

Crowdsourcing: New crowd-funding” sites like Kickstarter are enabling entrepreneurs to fund new innovations quickly and cheaply. By giving the public access to all of its data, outsiders can provide insights that help governments function better. While that’s a threat to banks and traditional lenders, it’s potentially good for everyone else.

Fracking: Wasn’t it just a few years ago that the experts were warning about “peak oil” that we had used up more than half of the world’s discoverable fossil fuels and the planet would be “out of gas” in mere decades?

Thanks to fracking, the U.S. enjoys lower energy costs and is quickly become one of the low-cost countries for heavy manufacturing that use a lot of energy but aren’t labor-intensive like petrochemicals, tires, steel, iron and cement. While that’s a threat to countries with higher energy costs, it’s good for the U.S.

3D printing: Not only enables entrepreneurs to build prototypes more quickly and easily, but could lead to more local and regional manufacturing.

So while these changes carry risks, they also create unimaginable opportunities for the companies that can capitalize on these trends. At UPS, we’re adapting to respond to these challenges and opportunities.

We making a renewed push into Emerging Markets.

We used “Big Data” analytics) to create ORION, (proprietary route-optimization software)

We used mobile computing to create UPS My Choice to re-invent the home delivery experience and move delivery from our schedule to the customer’s schedule.

Authorize release, leave with a neighbor, deliver to another address, and other options. All on your smartphone.

There was a time when business worked very hard to avoid disruption. Change was linear, and progress was incremental.

Today, disruption is driving progress and new technologies, new ways of thinking, new business models are taking the place of ones that disruption has weakened.

Rupert Murdoch, who founded the Fox media empire, once noted that in the new global economy, size doesn’t matter as much as before.

“The world is changing very fast,” he said. “Big will not beat small anymore. It will be the fast beating the slow.”

Bill Gates once said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.”

As I mentioned earlier, history has shown us again that times of great disruption are also times of great opportunity.

And just as logistics helped build the pyramids and launch a thousand ships, logistics can help make the world a more prosperous and interesting place to live.

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