Bob Stoffel's UPS green dream

FORTUNE -- Can a company with 100,000 trucks and 550 planes be environmentally friendly? Bob Stoffel's job is -- among other things -- to help make UPS greener and more efficient. His title is the longest at the company: senior vice president, supply chain, strategy, engineering, and sustainability. The logic is that those functions fit together in a global economy where supply chains may be changing radically and UPS's customers must increasingly demonstrate sustainability to their own customers and investors.

Like virtually all top UPS (UPS, Fortune 500) executives, Stoffel has spent his whole career at the company, in his case starting as a part-time loader while attending the University of Illinois at Chicago. And, yes, he also did a stint wearing the famous brown uniform while driving what UPS calls a "package car" and everyone else calls a van. Today he's experimenting with virtually every green technology and reducing the company's carbon emissions by millions of tons annually. He talked recently with Fortune's Geoff Colvin about the intercepted package bombs from Yemen, a vehicle-power technology that most people have never heard of, why he won't make left turns, and much else. Edited excerpts:

Q: Terrorists recently used UPS and FedEx to ship bombs addressed to the U.S. from Yemen, and they were detected only after a tip from Saudi intelligence. What is the company doing in response, and how safe can the recipient of a UPS package reasonably feel today?

A: In the immediate aftermath of the Yemen shipments, UPS reviewed its procedures and took steps to secure its network. We immediately embargoed all packages out of Yemen. We also met or consulted with officials of industry, trade associations, law enforcement agencies, the Department of Homeland Security and its international counterparts, congressional staff, and airport officials. We take a multilayered approach to security. We have processes, systems, and procedures designed to protect our people, aircraft, and customers' shipments, and they meet or exceed regulatory requirements globally. We also view the security of our network as a shared responsibility, requiring a partnership between industry and government around the world. That's particularly true since the extent to which any country performs or regulates security activities varies greatly.

Every night you get a pretty good reading on the state of our economic recovery. What are you seeing?

We're a current indicator, with just-in-time transportation and inventory levels being kept tight. The third quarter was great for us. We had over 13% growth in our international operations, 3½% growth in U.S. domestic. We see less vigorous growth in the fourth quarter and next year -- about 2½% at the end of the year, and going into 2011, industrial production at maybe 4%.

You're echoing what I'm hearing from a lot of executives -- probably no double dip, but slow growth.

Right, we don't see a double dip. Inventory-to-sales ratios are at historic lows, which could help. A few factors would support restocking of inventories sooner rather than later. One, commodity prices might be going up. Two, money's cheap. Three is strong buying signals for the Christmas season. We're hoping for that, obviously.

You mentioned the impressive growth you're seeing internationally. Is that China-focused, or is it broader?

It is broad-based. China exports grew 50% for us. Intra-Asia was at 30% growth for us. U.S. exports were up 10% -- not as strong. Imports were up 20%. China's a big story, but intra-Asia is growing at 9% or 10% compounded. In 2000 there were three free-trade agreements between Asian countries. Now there are 53, and more are being signed every month, particularly with China. So the opportunity for growth in Asia is very strong, and in Latin America is good growth also.

You've got strategy in your title. What is UPS's strategy?

No. 1, no one has the global supply chain logistics capabilities that we do. We bought transportation companies, warehouse companies, bulkage companies, we bought UPS Store, the retail company. We bought forwarding companies to give us a global presence. Our No. 1 strategy now is to put all these together. We're bringing them to our customers to strengthen their business processes. No. 2, it's all about solutions. We talk with customers about how to run better, stronger, faster, cheaper, how you get to market, get to new places. We have 1,000 engineers who work with customers on their supply chains. International growth would be another large piece of it. It all revolves around the capabilities that we put together over the past 12 years.

UPS sees shift in global trade

A really big strategic question for UPS is the future of physical stuff. Alan Greenspan said that in the last half of the 20th century, the value of America's GDP increased by a factor of five, but the physical weight of the GDP didn't increase at all. Is the dematerialization of economic growth a potential threat to UPS?

I would say that was more of a U.S. phenomenon, because the U.S. became more of a service economy, a technology economy. I think we can compete in specialized products. A lot of U.S. products are demanded in China -- it could be high-end fashion, high-end fragrances, or the Procter & Gamble-type products. You're seeing shifts in global trade. China became the factory for the world. We're now seeing that move, though. As wages in China go up, Vietnam is coming pretty strong. You're always seeing this rebalancing of trade, and it's not a threat because of our global footprint and our capabilities in over 200 countries.

So if there is any dematerialization of growth, it's more than made up for by this opening of commerce around the world. Is that right?

Yes. For example, there are 600 million or so Chinese teenagers who are going to become consumers very soon. There will be 350 million more people living in urban areas by 2025. China will become a consuming economy. So there will be shifts in global trade. It'll follow cheap labor, yes, but more and more we're talking strategically about sourcing of raw materials and where your end consumer is. We're talking a lot with customers about risk mitigation, manufacturing in each of the major geographies -- America, Europe, Asia. The price of oil is a wildcard.

UPS has a big interest in the price of oil. It affects the company's own profits and also affects how customers configure their supply chains. So where do you see it going?

For the near term we're forecasting it will be around $78 a barrel, right about where it is now. We think it will be pretty stable next year. But as part of our strategy, we do scenario planning, and we did a plan called Oil 200. It played out exactly like the recession. The same things we expected to see in the Oil 200 world, we saw with the global recession.

Supply chains have already become tremendously more efficient in the past decade. Where's the opportunity to create more value now?

Zappos is a good example. They built their whole logistics strategy around our capabilities. They're located 10 minutes outside our Worldport in Louisville. This is e-tailing -- when you have the buyer's remorse factor, how quick can you get the product in the hands of the consumer? They'll ship as late as 10 o'clock. True story: My daughter ordered her wedding shoes from Zappos, and it was 10:45 at night. She had them the next day by 10 o'clock in the morning, and we enabled that. Another thing about Zappos is that they make it easy to shop. They want you to try four pairs of shoes, four different colors, and they make it easy for you to return them. No questions -- return them. Go on the UPS website and print return labels, and just hand them to a driver. Or return them at any contact point we have. So it's really about how fast you can get in new markets and differentiate yourself, and our tools help customers do that.

You're doing things that go far beyond what most people would consider UPS's competencies. For example, when somebody sends in his Toshiba laptop for repair, it's UPS that actually repairs it. How far down that road can you go?

We can keep going down that road. Toshiba's a good example. It was a modeling exercise. They had repair locations all across the U.S. We warehouse their parts. It was a logical transition to say, "Bring your repair technicians into our facility, we'll run the repair technicians, and we can cut that back to a 24-hour return." You can literally get that laptop in that day and back the next morning. You've saved transportation links, you've reduced inventory because you don't have inventories spread out, and you've reduced your carbon footprint. It's a triple win. So we can keep going down that path. It's not about how to get a 10-pound package across the country. It's finding a better way. Why does it have to move across the country, for instance?

You've improved the fuel efficiency of your domestic delivery fleet 10% in the past 10 years, and you want another 10% in the next 10 years. How will you do that?

We'll be adding more alternative-fuel vehicles, and the higher-efficiency diesel engines that we're introducing now are going to be a substantial improvement for us. We call the vehicle fleet our rolling laboratory. We have all-electric vehicles, hybrid-electric, compressed natural gas, and liquid natural gas. They all have merits in different situations.

You also have hybrid hydraulic vehicles. Most people have never heard of them. How are they working out?

We're partnering with Parker Hannifin and Freightliner to develop this. It works great. It has a four-cylinder engine, and when you take your foot off the gas, the slowing down of the vehicle compresses the hydraulic fluids, and then it releases the hydraulic pressure to power the vehicle. There's no transmission. It basically powers an axle. There are no batteries. Batteries are not sustainable, if we're talking about electric vehicles. We're pretty high on this technology.

What are you learning about vehicle power technology that might apply to general consumer vehicles?

Hybrid electric will certainly be a factor. All-electric vehicles will certainly be a factor, depending on driving habits. If you're going to drive 50 miles a day and not carry a lot of weight, electric works. But if you're going to go more than that, it doesn't work. Even though the alternative-fuel vehicles get a lot of excitement, we're really working on not driving the miles in the first place. In August we delivered 350,000 more packages a day than last year, but we drove 53,000 fewer miles a day. That's leveraging the technology you can put on vehicles, the telematics, and GPS.

Why UPS trucks never turn left

Everyone knows what GPS is, but what are telematics?

The vehicles have sensors monitoring 200 different vehicle activities -- braking, speeds, idling, seatbelts, doors open, things like that. A lot of them are engine components. So, for example, we're not changing the oil as much as we used to. We'll change it based on the sensors, vs. changing it every 6,000 miles. We can also monitor when the GPS coordinates onboard and the address on the package don't match. So if you're at the wrong address, it'll beep the driver and say, This package doesn't belong here. That technology enables us to plan our routes. The famous example is that we don't allow drivers to make left turns.

It's famous, but not everybody knows it.

When you make a left turn, you've got to cross traffic. So it's a safety issue. You also have the delay factor, particularly on busy roads -- commercial, not residential roads. So we'll never have a person turn left to deliver on that side. We'll have someone going down the right-hand side do it. That and the other uses of the technology save us about 20 million miles a year. It drives my wife nuts. She says, "There's a gas station right there." I won't turn left: I say, "We've got to find one on the right."

You've started offering an Eco Responsible Packaging program, where you certify the sustainability of a customer's shipment packaging, with third-party verification. What have you learned from it?

Maybe you've received one little item in a real big box, and you've got all the nonsustainable corn chips in there. Multiply that over hundreds of shipments every day. Our vehicles run out of space before they run out of weight capacity. So we work with customers on shrinking product-to-package ratios. We'll go in and recommend specific packaging, because the other nonsustainable activity is broken and damaged goods.

Have you looked at reused packaging as part of that?

Yes. We test packaging on simulators. We test reused packaging and new packaging to see how it holds up on a 1,000-mile trip, whether it's on a train or on a truck. About 15% of our packages go on the train.

But you don't have any trains.

It's about 40% better from an emissions perspective than putting it on a truck. So when we can, we'll leverage rail.

For that matter, ocean transport is even more efficient, so I gather you put stuff on ships as well.

We do. We'll work with customers constantly on that balance. For example, from Asia to Europe the options always used to be three days by plane or 40 days by boat. But we might suggest shipping by boat from Asia to Saudi Arabia, then fly from Saudi Arabia to Europe, and that's 10 days. So here's a 10-day option that's more sustainable than the three-day option. That's what we use the engineers for. We ship 15 million packages a day. If I can figure out a way to get one second out of there, that's about $30 million in annual savings for us.