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UPS, FedEx Growing by Tapping 'Adjacent Business'

Monday, 23 Jan 2012 | 2:51 PM ET

The shipping business is huge, but the sector isn't necessarily experiencing huge growth. UPS and FedEx combine for about $90 billion in revenue, but to get that number above $100 billion, the two companies need to look beyond just shipping.

In this era of efficiency and globalization, a viable growth engine has emerged: Adjacent Business.

It sounds like an MBA glossary term, but in practice it makes perfect sense to anyone, even those who did not take the GMAT.

Oliver Quillia for CNBC.com

Instead of just shipping products for companies, UPS and FedEx are also storing, maintaining and even customizing products — all with their own employees.

They are revenue generators that are "adjacent" to the shipping business — both physically and philosophically.

Sprint phones are a perfect example.

Did you know that when you get your new phone from Sprint, it was probably configured and shipped by a UPS worker at a UPS facility in Louisville, Ky.?

Phones from manufacturers like Motorola and Kyocera arrive in Louisville from Asia. At UPS' Worldport hub, the phones are received, customized, packaged, and shipped straight to stores and individual customers.

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At peak times, UPS can process 5,000-6,000 items per hour.

"In our long-time partnership with Sprint, we've had a proven track record of great quality," said Tim Boyd, the 23-year UPS veteran who runs the Sprint-UPS operation. "We are constantly showing ways to improve their supply chain over the years."

But the prove is in the numbers. According to Boyd, it cuts Sprint's warehouse costs by 30-percent, and Boyd says this kind of relationship is a window into the future. "From a contacts, logistics standpoint, yes, absolutely."

Within the same UPS building in Lousiville, an even bigger adjacent business is booming: Healthcare.

In one corner of the building is a freezer that stays at minus-103 degrees farenheit. Inside, there is a product from Advanced Biohealing, which is based in La Jolla, Calif.

It's a skin-replacement therapy, and UPS cares for it AND ships it.

A hydraulic hybrid UPS delivery truck is seen with the Philadelphia skyline in the background during a demonstration in Philadelphia, on Friday, June 23, 2006. The UPS truck uses an Environmental Protection Agency patented hydraulic hybrid technology that the EPA claims will increase fuel efficiency by 60 to 70 percent. Full hydraulic hybrid technology means that the conventional transmission and transfer case have been removed and replaced with a hydraulic drivetrain. (AP Photo/Matt Rourke)
Matt Rourke
A hydraulic hybrid UPS delivery truck is seen with the Philadelphia skyline in the background during a demonstration in Philadelphia, on Friday, June 23, 2006. The UPS truck uses an Environmental Protection Agency patented hydraulic hybrid technology that the EPA claims will increase fuel efficiency by 60 to 70 percent. Full hydraulic hybrid technology means that the conventional transmission and transfer case have been removed and replaced with a hydraulic drivetrain. (AP Photo/Matt Rourke)

"It's a very time-sensitive product," says Mark Via, who manages supply chain solutions for UPS. "We have minutes to remove it from our freezer and seconds to place it in the shipper."

It's shipped in a container UPS designed and sent next-day to operating rooms across the country.

"If we do not maintain the integrity of the product from the freezer to the shipper, we're compromising that patient's outcome," Via said.

"I don't want that to happen, ever."

In Louisville alone, healthcare-related businesses have a million square feet of FDA certified warehouse space.

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From X-ray machine parts to drugs, they are just minutes away from planes that can ship just about anywhere in the world.

"It's a business in its youth globally," said Urs Dur, who covers both UPS and FedEx for Lazard Capital Markets. "But UPS does seem to have a bit of a lead there (right now)."

According to UPS, it has logistics agreements with over 500 companies. In 2010, revenue was about $6 billion and is expected to continue growing.

FedEx, however, is feverishly closing the gap.

Dr. Lisa Jennings is the CEO of Cirquest Labs, which is based in Memphis, right near FedEx's 800-plus acre Superhub.

Cirquest's proximity to the hub helped close a key deal with the American Heart Association.

"They (American heart Association) kind of relaxed a little bit about, 'Well, gee, you know, Memphis may really be the spot that we want to place this trial because of FedEx headquarters here,'" Dr. Jennings said.

FedEx has a facility dedicated to maintaining and fixing its own electronic equipment. Now, it's opening it up to fix machines from outside companies.

“If you were a manufacturer of PCs or hand-held devices, servers — those kind of things — those would be definitely in our target audience for what we'd be looking for,” said Cary Pappas, President of what FedEx calls TechConnect.

“We have a handful of customers that we've just signed,” jhe said. “We are probably four or five months in, so we're in our infancy at this point.”

But if this “baby” grows up as expected, it’s going to be one large and growing kid.

Follow Brian Shactman on Twitter: @bshactman

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  • Shactman joined CNBC in 2007 as a general assignment reporter and fill-in anchor for CNBC's business day programming.