Assessing The Federal Express Transportation Company Commerce Essay


The Federal Express Corporation (FedEx) Global Transportation and logistics corporation was the brain child of its founding CEO, Frederick Smith. FedEx, as it is more commonly referred to, was incorporated in April of 1971 and pioneered the overnight delivery business. FedEx is responsible for transporting over 3.4 million packages daily, circa 2009. This report will explore the vision and leadership behind the executive team at FedEx. It will look at the corporation's use of information technology networks and how this has helped build effective 'value add' customer synergies and also investigate its acquisition strategy which has helped effect the corporations growth of its global Transportation Infrastructure over the last quarter of a decade. FedEx's portfolio of services currently include worldwide express delivery, ground small-parcel delivery, less-than-truckload freight delivery, and global logistics, supply chain management, and electronic commerce solutions. FedEx's guaranteed on-time express delivery service and complete customer satisfaction is unconditional.

1a Strategic Vision and Leadership

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It could be said that Fred Smith, the founding President and CEO of Federal Express has always had transportation DNA in his blood. It was his father; James Fredrick Smith a former truck salesmen, set up Smith Motor Coach with a single converted truck in 1925 and went on to become a subsidiary of the Greyhound corporation in 1931. The idea for FedEx's overnight delivery service was borne from an economics term paper, Smith penned as an undergraduate at Yale in the sixties. The idea was to build a business that could deliver packages shipped from within the United States to any other location within the United States by the next day. By 1971, the entrepreneur Smith had raised millions in venture-capital funding alongside a substantial personal investment to launch Federal Express Corporation (FedEx), the overnight delivery service with 8 planes, initially covering 35-40 US cities (BusinessWeek 2004). Smiths' visionary leadership recognised that the United States economy was becoming service-orientated; needing an efficient, reliable overnight freight service to transport packages and documents for continued growth. It began by focussing on improving customer segmentation, quality and the reliability of its services surrounding the express overnight delivery market in the United States.

The leadership and vision of Fred Smith and his executive management team have effectively grown the company from its humble beginnings in Memphis to the billion dollar global transportation business as it stands today. Core to the success of FedEx is its People-First Philosophy. From the outset Smith wanted to make employees an integral part of the decision-making process, stating; "When people are placed first they will provide the highest possible service, and profits will follow" (FedEx 2010). These three tenets of the FedEx corporate philosophy: People, Service, Profit or P-S-P, form the basis for all business decisions made at FedEx. In an interview with Alan B Graf the current CFO, reinforced the idea that every customer interaction should be "outstanding" and that each of the 250,000 associates pledge to the "purple promise" - making customer service the cornerstone of its supply chain environment (Dalton 2005). The corporate culture promoted high standards or customer service from the top to the bottom.

During the seventies, Smith's vision of the overnight express delivery prospered due to government de-regulation of the airline industry in '77 '78 and then again in 1980, when interstate transportation was deregulated. As the business grew Smith had the vision that he could help his customers control their transportation and inventory costs through innovative use of information technology to track customer packages. At the time, FedEx started pioneering the use of crash-printed sequential bar code readable numbers (BusinessWeek 2004) and handheld bar code readers. The real-time tracking system was borne. This allowed customers to keep up with inventory items on the move and whilst sitting in a warehouse. FedEx now had the technical ability to add real value to the customers supply chain by synchronising the movement of customer's goods with information and the financial transactions that accompany them.

1b Transportation and logistics infrastructure

The supply chain facilitates the transportation of goods and services from suppliers to buyers to meet consumer demand. To this extent FedEx has built a global hub and spoke type transportation network utilising aviation, ground transportation, shipping and warehouses underpinned by interconnected computer systems which can pinpoint and track the life of a package across any part of the FedEx ecosystem. From the outset FedEx purchased its own aircraft and transportation fleet, unlike its competitors who purchased space on commercial airlines and used third parties for ground transportation. This approach allowed FedEx to control its operating costs and increase the speed and reliability of its services over that of its competitors. This is an example of FedEx showing visionary leadership to become a market leader (Kotelnikov 2010). Key to the success of FedEx in the early days was its parts bank. Customers had approached FedEx and asked them to help with their warehousing issues and storage of spare parts inventories. FedEx setup a warehouse next to their Memphis sorting facilities for multiple customers. This meant FedEx customers could have their parts shipped on the same day shortening the lead-time to the end consumer and reduced the cost of keeping inventories on-site. This value added logistics service became an important part of FedEx's portfolio of services, and demonstrates the strength of FedEx's ability to integrate its customers supply chain into its fast-cycle logistics model, raising the entry barriers for the competition.

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Over the coming years FedEx added more services to their portfolio and further refined and enhanced their supply chain and logistics solutions to meet growing customers' needs. To this extent FedEx has expanded with its five subsidiaries to include:

FedEx Express (formerly Federal Express);

FedEx Logistics (formerly Caliber Logistics);

FedEx Ground (formerly RPS);

FedEx Custom Critical (formerly Roberts Express);

Viking Freight;

This portfolio of businesses allowed FedEx to drive change in the industry by coordinating the movement of goods throughout the supply chain; giving FedEx the capability to combine express transportation with logistics. Businesses now had the ability to manage the flow of delivery of packages as well as their physical delivery across the global FedEx network. By combining the physical distribution of goods and management of materials combined with information systems, logistics started to take on a new meaning.

Competition in the transportation and logistics industry has seen FedEx's competitors catch up in recent years with the application of technology to streamline processes and add value to the customer. Third party logistics (3PL) companies such as UPS, TNT and DHL are now offering similar services, with the aim of catching up with FedEx as the market leader. The industry as a whole has raised its standards to keep up and this has had a positive effect on the customers' value chain by shortening payment times and improving the customers' cash flow and also by lowering the overall cost of transportation and logistics services in the industry. FedEx's continued success in the market will depend on its ability to integrate the services and shared capabilities of the five subsidiaries to operate as one seamless brand.

1c Virtual Information infrastructure

The advent of geopolitical events during the eighties and nineties saw a further three billion customers enter the international marketplace. Globalisation and the increasing use of technology by FedEx took advantage of these trends, exploring new opportunities in the new emerging economies. Federal Express Corporation had the visionary leadership to integrate technology into their processes and that of their customers. FedEx were pioneers in making use of innovative technologies to improve efficiency and customer service. At the backbone of this technology was a centralised computer system called COSMOS, which kept track of all the packages, vehicles, routes and weather patterns in real time and increased visibility of the process which enhanced levels of customer satisfaction. This enhanced the flow of information across the global networked infrastructure by integrating data on goods being shipped with information about their mode of transport, alongside financial and billing information.

New technology initiatives introduced by FedEx throughout the '80s and '90s saw tighter integration with the customer. During the PowerShip programme, FedEx integrated over 100,000 PC based systems into its customer sites which gave them the freedom to organise pickups, print labels and track their packages en route to the consumer. As a result of tighter integration with the customer using technology, FedEx was able to offer bespoke delivery services and the management of logistics services within the supply chain. Integrating PowerShip PC's onto customer sites in the early days increased levels of satisfaction as it introduced efficiencies into the customer's processes and increased visibility of their operations. This new found power gave them the opportunity to identify areas of the customers supply chain where process improvements could be achieved as FedEx could monitor customer trends using information technology. This helped reduce wastage by better managing the supply and demand of goods on the behalf of the customer. This was a key differentiator in the goods and services offered by FedEx over their competitors. As a first mover in integrating new technologies into the business, FedEx made it difficult for other companies to catch up without investing large sums of money, thus raising entry barriers for potential market entrants and the existing competition.

Further down the line, alongside the rise of the Internet; FedEx now had the perfect medium to manage one-to-one relationships with its customers. In 1994, FedEx launched its web site with an embedded package tracking application allowing customers to track packages from any Internet enabled PC. FedEx no longer had to ship hundreds of thousands of PC's equipped with its software to customer sites which they had to support and update when new software became available. The FedEx website today handles over a million package-tracking requests by customers every day and its electronic transactions account for approximately two thirds of all packages that FedEx delivers.

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FedEx also used its technology and its knowhow to assist companies like Dell, Cisco and National Semiconductors with their logistics supply chains. This use of technology was demonstrated by Dell, synonymous for their just-in-time manufacturing practices, where FedEx Express helped Dell speed up its customs clearance process and coordinated transport segments to allow door-to-door service in the United States from Dell's facility in Penang, Malaysia (Memphis Business Journal, 2002). National semiconductors outsourced its distribution and warehousing of its products to FedEx's facility in Singapore; with FedEx taking responsibility for warehousing and despatch of orders, and in effect becoming logistics department. National semiconductor's order processing application send orders directly to FedEx's inventory management system located in Memphis. These orders are then forwarded across FedEx's global area network to the warehouse and management application in Singapore and then the goods are shipped to customers around the world via FedEx Express (BusinessWeek, 2001). Cisco signed a deal with FedEx in 1999 to coordinate its shipping efforts and reduce their warehouse facilities. FedEx's technology was applied to streamline Cisco's supply chain so that orders could be merged in transit, and the real-time status of this logistics operation could be viewed from the Internet. The flexibility of this Information system also allowed Cisco to control and select the routes and different modes of transportation FedEx had at its disposal. These initiatives highlight FedEx's continued development of technology to drive business; raising the barriers to competition.

Technology has been a key driver to the continuing success of FedEx. Global interconnected Information systems ultimately control and drive all aspects of FedEx's business, and are thus responsible for continued revenue and profit growth. Businesses like FedEx, who harness the power of technology to enhance their processes and that of their customers, tend to have a higher market share and this can be seen as a competitive advantage. FedEx's commitment to the use of technology demonstrates a paradigm shift from the physical to information and value-add services in an e-commerce environment.

2 Branding and business structure

The most common motives for most mergers and acquisitions (M&A) are to increase or maintain market share and to increase shareholder value and initiating new, expanded services according to Nguyen (2003). The prospect of increasing a company's profitability and market share by acquisition has immediate appeal to shareholders. Mergers and acquisitions provide businesses with a means of achieving rapid growth though entry into new domestic and international markets, access to new product lines, processes and skills. The creation of value through partnerships and acquisition activities in the global transportation and logistics market, has seen logistics service providers (LSPs) acquire resources such as logistics hubs, aircraft and aviation landing rights, logistics track-and-trace software systems as well as skilled workforces in order to achieve competitive advantage (Yew Wong 2009). Joint ventures and the formation of strategic partnerships have also been used as growth strategies within this industry.

In the early days of the Internet and e-tailing within the global transportation and logistics market, UPS's use of technology lagged behind FedEx's who pioneered the use of Internet based systems in the marketplace. Rather than develop software in-house similar to FedEx, UPS formed a strategic alliance with an Internet software company, stating that it was not a 'software company' and had no desire to become one. Another LSP, DHL raised cash through sales twenty five percent of its stock to Deutsche Post and another twenty five percent to Lufthansa Airlines to help fund a $1.25 billion programme to fund improvements in handling systems, automation, facilities and computer technology. The partnership with Lufthansa and Deutsche Post (DP) also benefitted DHL as it now had access to destinations where Lufthansa possessed landing rights and DPs extensive facilities. DHL also entered into the APAC market offering express delivery to China in 1986 by way of a joint venture with the Peoples Republic of China (DHL 2010). FedEx's competitors were also pursuing similar strategies by using acquisition and strategic partnerships to increase their market share, driving revenue.

In 1984, FedEx acquired Gelco Express International, a courier service with offices in Asia and Europe. This opportunity allowed FedEx to setup its first Asia Pacific (APAC) regional hub in Hawaii giving it the ability to operate a scheduled cargo service to the Japanese market; introducing the FedEx brand into the region and increasing its strategic presence within the global economy. Seeking to capitalise on new growth opportunities in the Asia Pacific region, FedEx acquired the Flying Tiger line in 1989 which expanded its landing rights in 21 countries in the region, gave it facilities throughout the world and expertise of International airfreight. The landing rights and aviation routes in APAC were core to FedEx's growth strategy in the international market as these state allocated resources can be difficult to obtain by foreign entities wanting to expand services into the region over that of local carriers. This acquisition further bolstered its position in the APAC and helped expand trade between the US and Asian economies and facilitated business between Asian countries as FedEx introduced its 'knowhow' in the express delivery service into the region. According to an interview with the CFO, Alan B Graf in 2005, "...this was unmatched and unduplicated by any competitor at that time". With Flying Tiger Line, FedEx now had access to the emerging Asian High-Tech economies: Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan and Thailand. As part of integrating Flying Tiger Line into the business, FedEx moved its Pacific operating headquarters from Hawaii to Hong Kong in 1992. A subsequent restructuring and re-branding exercise of its APAC operations in 1995 saw the birth of FedEx AsiaOne strengthening the FedEx as a global carrier under a single common brand.

In 1998, FedEx acquired Caliber Systems Inc., which included Roadway Package Systems (RPS) Caliber logistics, Robert Express and Viking Freight. These acquisitions became subsidiaries alongside Federal Express under the newly branded FDX Corp in 1999. FedEx was using acquisition as a strategic tool to reposition itself within the industry as a total supply chains solutions company, rather than an express delivery business. The purchase of Caliber Systems brought with it new services, processes and knowhow into the FedEx portfolio which it needed to pursue its vision of becoming a complete end to end global supply chain solution provider. Each of the newly acquired subsidiaries continued to operated independently of each other, post merger, maintaining their own sales and customer service teams as well as having separate accounting and billing systems. This strategy didn't appear to move FedEx closer to its ultimate goal, as it was still promoting five separate brands which sent conflicting signals to the market and confused its customer base. FedEx had also failed to capitalise on its recent rebranding exercise of its parent company FDX Corp, by not appearing to have a visible marketing strategy. FedEx's main competitor UPS, had no such issues at that time and had the advantage of being able to market its services under a single brand.

The first quarter of the new financial year saw a slowdown of growth in the US economy and this coupled with rising fuel costs impacted negatively on FedEx's income statements. The company also issued a profits warning stating that it might not meet analyst's expectation over the coming fiscal year, which ended up being prophetic. Economic market forces were now starting to impede progress on the acquisition strategy FedEx had embarked on the previous year with Caliber Systems. The newly expanded FedEx had added over eight thousand vehicles to its fleet in the US market and wasn't prepared for the effect rising fuel prices would have on its operating costs and share value. This is an example macroeconomic activity in the economy affecting FedEx's post merger strategy, which may have delayed the integration process.

In the third quarter of 2000, FedEx announced three major new strategy initiatives to the market which it hoped would stimulate growth in its declining revenues. The first of these strategies was a rebranding of the parent company, with FDX Corp changing to its name to FedEx Corp. The FedEx name would also be extended to its new subsidiaries which were also re-branded, all except for Viking Freight. The second initiative was a rationalisation and reorganisation of its workforces in sales and marketing, customers services and within the IT and finance disciplines. After FedEx had acquired Caliber and its subsidiaries, they were all effectively running independently of each other. Each of the new companies had its own sales team and customer services operating separate finance and billing systems. Across the subsidiaries of FedEx Corp there was considerable duplication of resources. If FedEx was serious about repositioning itself as a total end-to-end supply chain solutions company, it would have to combine its sales, customer services and operate a single billing system across all service lines. Consolidating these functions would lessen the confusion amongst customers, making all service lines available under a single point of contact and allow FedEx to achieve greater efficiencies by controlling its staff costs. FedEx created a sixth corporate entity called FedEx Corporate Services Group to manage these functional teams.

The third initiative saw FedEx introduce a low-cost business-to-consumer delivery service in the US market. This was to exploit the rising popularity of the Internet economy being embraced by consumers. FedEx would apply its existing knowhow in the business-to-business overnight express delivery market and leverage RPS's knowledge in the one to three day delivery of small high value goods to form this new service. The desire to acquire RPS was to allow FedEx Express to compete more directly on price with UPS who had been relatively free to operate within the one to five day carrier service in the North American domestic market (Chatterjee 2008).

The acquisition strategy pursued in 1998 allowed FedEx acquire the skills and resources of Caliber systems brought them closer to achieving the vision of being able to offer a single point of access to a collective synergy of customer focused supply chain solutions. There were service integration issues duplication of resource in the back-office, this combined with fluctuations in the economy added complexity to the direction FedEx wanted to follow. Scenario planning exercises might have helped the management team mitigate some of the risks associated with mergers. Overall the purchase of Caliber was the right thing to do as it helped FedEx transform itself into a global customer orientated organisation able to market its business services under the trusted and familiar FedEx brand across the world.

3 Events leading up to the Jan 2000 reorganisation

The rise in popularity of the Internet in the '90s saw the incorporation of several iconic ecommerce companies like in 1994 and in 1995. In a '96 magazine article the value of global business-to-consumer ecommerce was predicted to rise from US$518 million to around US$7 billion in 2000 (Lappin, 1996). The potential opportunity in this new economy for express delivery companies like FedEx was enormous.

First quarter results in 1999 were below industry analyst's expectations, and FedEx attributed this effect on its net income to the rise in fuel prices and the slowdown in the US economy reducing demand for its express delivery services. The combined income from Federal Express and RPS accounted for eighty percent of the group's total revenue attributing US$10 billion directly from the US domestics market. A profits warning for the current financial year was issued to the market. FedEx's competitors had caught up in terms of utilising internet technology and web-based package tracking systems to service customer's needs. UPS was capitalising on its strategic partnership with software company Open Market Inc, who developed their Internet commerce proposition, combining logistics and customer fulfilment. Annual sales growth was 33.4% for UPS in 2000 and UPS was returning higher margins at 9.4% to FedEx's 3.4% (Appendix 1). FedEx had lost ground to its competitors and could no longer rely on the use of technology alone to achieve a competitive advantage. A new strategy was required for FedEx to continue to operate at the vanguard of the global logistics and transportation industry.

As a result of the Caliber acquisition in 1998, FedEx had four new subsidiaries which all had separate sales forces, marketing, finance and IT functions. Each of the subsidiaries also had their own finance and billing systems. By rationalising these systems and combining the skills and knowhow of the workforce, FedEx saw that it could achieve greater internal operating efficiencies. Under a single CIO the development of Information systems was standardised across the global FedEx network rather than being regional (Farhoomand, 2000). This gave FedEx the opportunity to develop systems with the ability to handle multi-currency transactions and be displayed in multiple languages. The engineering of new systems would also benefit customers who would now have a single FedEx account number from which they could be billed for all services across the FedEx portfolio.


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