The model created by FedEx Corp. in the early 1970s has served the company and its customers extraordinarily well for more than four decades. It also transformed how people and companies across the globe interacted with one another, and in so doing, helped FedEx achieve cultural-icon status that transcended everyday business.
As of mid-October, the model ceased to exist.
In its place will emerge a very different FedEx—one that will expand into new markets and services, serve a certain type of customer, and manage its networks in ways that its founder couldn't have imagined 20 years ago.
At a long-awaited meeting of analysts and investors Oct. 9 and 10 in Memphis, Tenn., Chairman and CEO Frederick W. Smith and his top lieutenants outlined a plan codifying what the world, and the company, already knew: that the shipping environment which FedEx rode to glory—and to $43 billion in annual revenue—has irrevocably changed. In the process, certain precepts FedEx has held dear since its founding in 1971 will change as well.
FedEx's "profit improvement plan," which has been under way for nearly a year but never made public until now, is expected to add $1.7 billion annually to its bottom line by 2016. The gains will come through a mix of cost cuts, efficiency enhancements, and yield-boosting measures, virtually all targeted at FedEx Express, the company's traditional core air and international business, and still its largest revenue-producer.
The effects of the revamp will carry the company well into the next generation of leadership. The FedEx of the future will be an active player in such segments as freight forwarding, rail intermodal, ocean freight, supply chain management, customs brokerage, and postal services. It will aggressively court so-called vertical industries like health care, though in that arena it has a long way to go to catch rival UPS Inc., which has played on the verticals field for some time and recently opened its 36th facility worldwide dedicated to health care logistics.
Most importantly, FedEx will play a larger role in the ground parcel segment, a business it entered in 1998 when it bought Caliber Systems, the then-parent of Roadway Package System. At the same time, FedEx's air express operation, particularly the U.S. segment, will no longer drive the company's fortunes as it has since its inception.
A CHANGED MODEL
It's a drastic change for a business whose culture has been built around the idea that "fast-cycle" distribution is best accomplished with the fastest means of transportation available. But the reality is the domestic air market has stagnated for more than a decade as cost-conscious shippers burned by two recessions abandoned premium-priced airfreight service in favor of lower-cost surface transportation. As part of their strategy to trade down in transit times, they created regional distribution networks to allow them to still meet their delivery commitments without an overreliance on buffer inventory, or on air service.
From 2001 to 2011, the domestic air market shrunk by two percentage points a year, according to The Colography Group Inc., an Atlanta-based research and consulting firm. During that time, FedEx and its chief rival, UPS Inc., gained share of the overall market, though UPS grew its cut of the market at a faster clip, the consultancy said.
By contrast, the ground parcel market grew annually by the equivalent of half of one percentage point in that same 10-year span, according to Colography Group data. FedEx Ground, the company's ground parcel unit, gained one percentage point of share annually, while UPS lost one percentage point of share, according to the data. Most of FedEx's share expansion came at the expense of UPS, the consultancy says.
In 2011, 60 percent of FedEx's domestic volumes, on a point-of-sale basis, moved on the ground, according to The Colography Group. In 2001, it was about 40 percent.
In response to the secular change in shipping patterns, FedEx Ground will expand its capacity so as to be able to handle 45 percent more shipments by its 2018 fiscal year. In addition, FedEx's SmartPost operation, through which it funnels mostly e-commerce shipments to the U.S. Postal Service for "last-mile" delivery, is primed for an 85-percent capacity increase over that period, reflecting what is projected to be explosive growth in the volume of merchandise ordered online.
Its once-struggling less-than-truckload (LTL) division, FedEx Freight, has turned the corner following a reorganization in 2011 that established two separate products with different delivery standards and price points. Today, FedEx Freight moves 14 percent of its total vehicle miles via rail intermodal service, a telling commentary about the change in FedEx's mindset toward other transport modes. Until recently, the company had virtually ignored intermodal.
SHAKEUP FOR THE EXPRESS UNIT
Not surprisingly, the impact of the corporate realignment will be felt most deeply at FedEx Express. Of the $1.7 billion in projected annual savings, $1.65 billion will come from the unit. It will consist of staff reductions through voluntary buyouts; a migration to newer, more fuel-efficient equipment such as Boeing 757 and 767 freighter aircraft and the replacement of thousands of older trucks with more modern vehicles; growth in its international business; and targeted expansion into industry verticals.
Perhaps most important will be a realignment of the FedEx Express network to better match package volume with flows. According to consultancy TranzAct Technologies Inc., two examples cited by FedEx management at the October meeting were the Houston area, where five stations were closed and replaced by two facilities, and the Atlanta area, where 2 million miles of driving were eliminated by consolidating more than 100 surface routes.
In an Oct. 30 report, TranzAct said the overarching themes of the streamlining are "The Right Solution to the Right Customer at the Right Price," and "Getting the Right Packages Into the Right Network." TranzAct said shippers should not see any decline in delivery standards given FedEx's longstanding commitment to service quality. It advised them to work with FedEx to understand how they are perceived in the company's eyes, what are the strong and weak operating characteristics of their traffic mix, and if they rank high in a "targeted" vertical in which FedEx is anxious to do business.
For FedEx, the profit payoff could be enormous. Though the air unit's package growth is essentially flat—and barring a drastic improvement in U.S. and world economies, is likely to stay that way—the revenue per package, or "yield," has still grown in the past two years by 11 percent to $15.46 per package, not including the company's fuel surcharge. If FedEx hits its financial targets through the revamp, the resulting savings and efficiencies will take yields on its express product "through the roof," said an industry official who asked for anonymity.
Some of the yield gains are the result of a controversial move in late 2010 by FedEx and UPS to adopt a dimensional-weight pricing scheme for shipments based on package density. Shippers whose packages fell outside the new dimensional parameters and who couldn't reduce their shipments' cubic dimensions to fit the revised guidelines were hit with rate increases that often ran into the double-digits.
In the Oct. 10 presentation, FedEx said the revenue from the dimensional pricing changes "substantially exceeded our expectations" during the 2011 calendar year. It is believed that FedEx has generated at least $100 million in additional revenue from those changes alone.
In an environment where express package volume isn't growing but the value of each package is, air express shippers will become coveted prospects, said TranzAct. "Whatever the reason for [FedEx] Express's decline—conversion to electronic transmission [for documents], cyclical service downgrades to save money in difficult economic times, a marketplace that is reaching maturity—today's premium air-express shipper is going to be a strongly desired client by any carrier," the firm's analysts wrote.
The industry official went one step further, saying air shippers tendering shipments traveling less than 300 miles will be like liquid gold for parcel carriers. That's because those shipments could easily be diverted to truck and still be delivered the next day to meet the air service delivery commitments. FedEx—or UPS, for that matter—can charge higher air rates and capture the huge differential between the cost and price of the service, the official said.
FedEx has boasted that its ground deliveries are faster than UPS's over about one-fourth of U.S. lanes served by both companies. The official said that claim understates FedEx Ground's speed advantage. "I've been in this business a long time, and I've never seen anything like it," the official said, referring to FedEx Ground's time to market.
As an example, the official cited the unit's ability to deliver ground packages from Dallas to virtually the entire United States within three days, and to some closer-in markets within one or two. "This type of transit time improvement—through probably not of the same degree—is also true from other U.S. origins," the official said.
SOMETHING OLD ...
All of this is a far cry from the mid-1990s, when FedEx hitched its wagon almost exclusively to the airplane. Around that time, Smith told an industry conference that, "To us, **ital{truck} is a four-letter word." A company spokesman, asked years before FedEx expanded into the ground parcel business if that scenario was feasible, replied, "We see no need for a slower service."
A move into supply chain management services also seemed anathema to FedEx, even as UPS was growing its presence in the segment. As FedEx saw it, transportation—particularly air transportation—was where the profits were. Supply chain management services generated decent revenue but had relatively thin margins, it reasoned.
By the late 1990s, however, actions began speaking louder than words. With the Caliber acquisition came Roberts Express, which gave FedEx an entry into the time-critical delivery market, and Viking Freight, a regional LTL carrier serving the Western United States. Three years later, FedEx bought LTL carrier Arkansas Freightways, whose Eastern U.S. operations were then combined with Viking's to create a national system.
FedEx even rebranded itself and took a new corporate name, changing from "Federal Express Corp." to "FedEx Corp." to position itself as more than just an express provider.
Now, as the company enters its next 40 years and Smith begins to think about his legacy, the focus will be on profitable growth, and a changed business model. "It's not about just taking share anymore," the official said.
Updated on November 26.
