newsworthy
UPS INC. HAS LONG FACED CHALLENGes to optimize its vast U.S. surface transportation network. On one hand, it deals
with traffic surges that put its infrastructure
under stress and force it to pay exorbitant
rates to have others move its shipments. On
the other, it struggles with empty miles and
missed backhaul opportunities.
That could explain why the Atlanta-based giant paid $1.8
billion in cash and debt to acquire Chicago-based truckload
and less-than-truckload (LTL) broker Coyote Logistics
LLC. The deal, which closed in mid-August, is the largest in
UPS’s 108-year history and the biggest pure brokerage deal
ever. Beyond the headlines is the profound change the deal
may bring to UPS’s system by finally reducing the network
variability that has plagued the company for decades.
For UPS, the deal has two parts: First, it adds an important arrow to its product quiver. UPS plans to stand back
and let Coyote do its thing, which is to arrange transportation of more than 6,000 daily loads for shipper customers.
UPS can now come to market with a portfolio that includes
truckload brokerage and can position itself as more of a
lead logistics provider than it has in the past. Sources close
to the deal said UPS’s desire to boost its competitive position at the bidding table or to compete with a company like
C.H. Robinson Worldwide Inc., the nation’s leading broker
and a big third-party logistics service provider, were not the
primary drivers behind its purchase.
Others find that rationale hard to swallow. “Robinson
needs to pay attention. (It is) no longer swinging the
biggest bat,” said Michael P. Regan, founder of TranzAct
Technologies Inc., a consultancy and audit firm based
in Elmhurst, Ill. Robinson was unavailable to comment.
Regan said other freight brokers also should be concerned
because Coyote now has the deepest pockets in U.S. transportation behind it. UPS generated $3.3 billion in free cash
flow in the first half of 2015 and is on track this year to
break the $60 billion annual-revenue barrier.
The challenge of maintaining Coyote’s freewheeling
culture and keeping an organizational firewall between
the two companies was not lost on UPS. In announcing
the deal, UPS said: “Coyote possesses significant industry
knowledge, intellectual property, (and) employee talent,
and has a strong company culture.” Coyote will operate as
a UPS subsidiary and stay in its Chicago home base, and
husband-and-wife cofounders Jeff and Marianne Silver will
remain in charge for what appears to be an open-ended
period, though there remains some question as to how long
an entrepreneurial couple like the Silvers can comfortably
coexist with UPS’s bureaucracy.
FILLING THE GAPS
The second, and perhaps most relevant, part of the deal is
the role Coyote will play to help fill the gaps in UPS’s road
system. Each day, UPS moves tens of millions of parcels
and freight across its ground infrastructure. In addition,
shipments booked to move via “air freight” often move
on the ground, depending on the distance and the delivery windows. A network so large and complex inevitably
suffers from the plague of “variability,” where supply and
demand are not always in proper alignment. The result can
be less-than-optimal utilization of the company’s fleet, at
least by UPS’s standards.
UPS has longstanding relationships with many truckload
carriers to move shipments that, for whatever reason, can’t
go on its equipment. Those relationships will remain in
place, and UPS will continue to be responsible for purchasing space. It also uses Coyote to broker shipments.
The plan is for Coyote to serve as an adviser of sorts,
leveraging its expertise and technology to enhance truck-load-shipment visibility for UPS, thus identifying new
opportunities and reducing UPS’s network variability. In
effect, Coyote’s goal is not to do UPS’s job but to help
UPS do a better job. UPS CEO David Abney said in the
statement that UPS expects to realize as much as $150
million a year of “annual operating synergies,” ranging
from better backhaul utilization to increased cross-selling
opportunities. p. 16
For UPS, Coyote purchase is all about
smoothing out the network wrinkles
