FedEx at Forty: At FedEx, Say Hello to the Next 40 Years

A major revamp reshapes the company, lays the foundation for how it does business in the twenty-first century, and bows to present and future realities.



An early Federal Express print advertisement.

photograph courtesy FedEx

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Editor’s note: This detailed overview of FedEx’s current business strategies first appeared in the December 2012 issue of DC Velocity, a monthly business magazine designed to provide for the informational needs of logistics and distribution-chain professionals. Mark B. Solomon is Senior Editor of DC Velocity and is based in Atlanta.

 

The model created by the Federal Express Corporation 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.

But the traditional company model is now in a state of transition.

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 held in October 9-10, 2012, in Memphis, 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 over a year but never made public until recently, 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 healthcare, 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 healthcare 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 ‚Ä®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 air freight 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 over-reliance 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.

 

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