OPERATIONS AND SUPPLY CHAIN MANAGEMENT
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NAME COLLEGE ID CONT
SUNIL KUMAR KODURU 190375
CHAKRADHAR NALLAPANENI 060884CS 07733745678 nallapaneni7@yahoo.com
HAMID SHAFIQ 310577HS 07863599990
MUHAMMAD SAIFUDDIN 041271MS 07956672818
Maq26@hotmail.com
FedEx Operational Strategies
Executive Summary
FedEx has been successful over the years in achieving growth in both the domestic and international markets. This success, however, has not been achieved without challenges. The company needs to address the issues of positioning its brand to ensure that it does not become synonymous with its competitors and reduce costs in an effort to increase profit margins. These issues can be rectified through comprehensive employee training on workplace practices, promotional efforts, and cost reduction initiatives. The employee training should focus on the company’s ethics, harassment, and discrimination policies. The company should also educate customers on the services it can offer and focus advertising campaigns toward businesses seeking these services. Current expenditures should be reviewed to ensure spending is monitored and adds value to the overall business. Cost reductions can be made through shared resources and planning of routes. Implementation of the recommended strategies will result in an increase in the number of customers served aiding in the growth of market share. These strategies will also offer the company additional opportunities to strengthen its position in these markets.
Overview:
FedEx is an express and ground delivery company that houses its headquarters in Memphis, Tennessee. The company operates using eight business divisions that include FedEx Ground, FedEx Freight, and FedEx Supply Chain. The company’s primary objective is to increase revenue through expanding market share and reducing costs through various initiatives. The company was founded in 1973 by Fredrick W. Smith who recognized the need for an express delivery market. The company has been able to expand its operations through its series of acquisitions, which has provided valuable resources and avenues into international markets.
Performance:
Companies of FedEx Corporation are committed to providing the best portfolio of reliable, time-sensitive services while remaining innovative and efficient in its practices. FedEx processes an average of six million shipments per day worldwide. Approximately 99% of all deliveries are made punctually. FedEx represents more than 50% of the express delivery market and about 16% of the ground delivery market. FedEx registered over $3 billion in operating income and a remarkable $32.3 billion in total revenue in 2009. The following chart displays FedEx’s revenue over the past five years, which has steadily increased from $20.6 billion in 2002 (FedEx.com).
Past and Current Strategies:
Past and current strategies include the growth in the international market and expansion of products and services through a series of acquisitions. Since 1975, the company had been shipping packages between the United States and Canada, but did not move global until 1984 when the company expanded its operations to Europe and the Far East. In 1988, with the acquisition of Tiger International, the company expanded the number of locations served, especially in the European and Asian markets. By 1992, the company was able to offer next-morning service from major markets including Paris, London, Brussels, Amsterdam, Hong Kong, and Tokyo. In 1997, the company became the only cargo carrier permitted to fly its own aircraft and use its own warehousing facilities in Moscow. This provided the company exclusive rights to serve the growing customer base by providing next business day delivery service from Moscow to North America and Western Europe. In addition, the company was the first to offer express services in India as well as the first overnight express flight from India to China. The company also established similar services from the United States to Argentina and other South American countries.
Throughout the life of the company, FedEx has been able to acquire a variety of companies, both domestic and international, to achieve growth and expansion. These acquisitions include Gelco International, Flying Tiger Line, Kinko’s, and Caliber Systems. With each of these acquisitions, the company was able to obtain invaluable resources that would have taken years to otherwise attain.
In 1984, the company’s acquisition of Gelco International provided the avenue needed for expansion into the European and eastern markets. The recently established European Union and dismantling of the closed Eastern European markets allowed for the company’s entry. These markets were largely untapped markets where there is vast potential.
In 1988, FedEx acquired Tiger International Inc., the owner of the Flying Tiger Line airfreight service. This acquisition provided FedEx with crucial routes and airport facilities as well as valuable expertise in the European and Asian markets, which FedEx was struggling to enter. The merger also provided the company with landing slots needed to continue its global expansion in a variety of cities, including Sydney, Singapore, Bangkok, Hong Kong, Paris, Brussels, and Tokyo. The acquisition forced FedEx into the freight distribution market which was more capital intensive than its other markets. The acquisition also brought with it difficulties in integrating the work force, which was primarily union. Regardless, the acquisition was instrumental to the company’s global expansion strategy.
In 1998, Federal Express acquired Caliber System and its subsidiaries. This acquisition provided the company with a complete transportation delivery network. The subsidiaries acquired consisted of several companies, each with their specialty in the delivery market. Between 1998 and 2001, FedEx renamed the corporation and its companies to better leverage the FedEx brand. Also during this time, the company acquired other companies to enhance the services provided. These acquisitions included Tower Group International which specialized in international logistics, trade information and World Tariff, a customs duty and tax information form. These firms were combined with Caribbean Transportation Services and FedEx Global Logistics to create FedEx Trade Networks. The chart below shows how the acquired companies played a valuable role in the expansion of the FedEx brand.
| FedEx Company Name | Acquired companies |
| FedEx Ground | RPS |
| FedEx Freight | Viking Freight American Freightways |
| FedEx Custom Critical | Roberts Express |
| FedEx Trade Networks | FedEx Global Logistics - Tower Group International - World Tariff - Caribbean Transportation Services |
FedEx Corporation acquired privately held Kinko's Inc. in February 2004 and later re-branded it FedEx Kinko's. The acquisition provided the company an avenue to expand into the retail market which provided document management services. These FedEx Kinko’s locations also offered shipping options for greater customer convenience.
In 2006, the company gained complete control of its Chinese partner Datian Group, giving them complete control over Datian’s fleet and hubs. The company plans to close its Asian hub located in the Philippines in 2008. They plan to replace it with a $150 million super hub in Guangzhou, China.
Current and Potential Customers:
FedEx’s customers are not described by a specific age, race, or gender nor are they from a certain demographic area. They consist of any consumer or business who wants or needs to ship a package, document or letter through a wide variety of shipment methods. Customers can be classified as business to business, business to consumer, or consumer to consumer. When a consumer is purchasing from a business, whether it is via on-line, by phone, or in a store, the business decides what shipping company they will be using to ship the purchase to the consumer.
Competitor Analysis:
DHL dominates the international market in all countries except the United States. This could be a potential threat to the global expansion of FedEx.
Environmental Analysis:
Political changes in foreign markets like the founding of the European Union and opening of the Eastern European markets provided FedEx with the opportunity to gain access to these markets. Other external issues include dealing with foreign customs, landing rights and establishing information networks all of which can be costly.
United States law forbids foreign ownership of domestic airlines. When DHL acquired Airborne Express, the acquisition was challenged by both UPS and FedEx. Their complaint stated that the acquisition was in violation with this regulation. Unfortunately for UPS and FedEx, DHL won in 2004.
SWOT Analysis:
| Strengths | Weaknesses |
| · Logistics · Brand · Innovations/Communications · Fleet Sized · Diversity · Economies of Scale · High Customer Satisfaction · On-Time Delivery · Distribution | · Labor Problems · Lack of Ground Transportation · Increased Debt · Negotiation Policies |
| Opportunities | Threats |
| · Global Business Growth · Online Consumer Services · Alliance with USPS · Increased Demand in Logistics · Consumer to Consumer Market · Expansion into India · Ebay (E-Commerce) · Technology | · Economy · Increased Foreign Competition · Online Competitive Advantages · Gain in Competition Service Costs · No exclusive rights for drop boxes = potentials for USPS to negotiate with Competitors |
Overview of Strategic Issues:
The previous analysis of the internal and external environments has established the issues that FedEx Corporation must rectify in order to achieve continued success in their industry. There are several issues that the FedEx Corporation needs to address in order to achieve its mission and further their performance in the future. The issues the company faces are:
· Labor problems
· Need for reduced costs
· Increased competition in foreign markets
· Increased use of E-commerce
FedEx has faced drawn-out litigation due to labor problems that include racial harassment, union negotiations, and allegations of misclassification of employees. The company paid $61 million to two Lebanese drivers who made allegations of racial harassment that was ignored by management during a period of two years. FedEx intends to appeal this settlement. The company has also faced an increasing number of lawsuits filed by their drivers who are classified as independent contractors. The drivers believe that they should be classified as employees due to the demands the company has set forth for them and that they should be entitled to receive employee benefits. Though the company believes that the potential earnings are $80,000 to $120,000 annually, the drivers claim that they have received low wages. In addition, the company has encountered problems in prior years during negotiations with their FedEx Express pilots. These challenges continue to exist between FedEx and the Airline Pilots Association. The company must find a way to increase general employee satisfaction and morale.
The company needs to find a way to improve productivity and reduce costs in an effort to maximize profit. Past mergers have resulted in debt and negative earnings per share. The purchase of Flying Tiger resulted in a debt of $2.1 billion. This purchase also resulted in an increase of fixed costs. Secondly, expansion strategies have resulted in costs from negotiating land rights, dealing with foreign customs regulations, and establishing information networks. There were also exit costs associated with leaving the European market. The company has to find a way to pay off their debt and increase shareholder profits.
Balancing eight operating divisions could pose a threat to FedEx. Having eight operating divisions is not cost efficient for the corporation since resources have to be contributed into each of the divisions. Also, having so many operating divisions could potentially confuse current and potential consumers.
FedEx also has an opportunity to increase competition in the foreign market. There are many untapped markets within the global market. However, DHL has been in the foreign market longer than FedEx and the company could face retaliation if they were to enter into that market. Also, they face branding issues within these markets. The FedEx brand is not strong in foreign countries, which has resulted in poor gain of market share.
Potential Strategies to Address Issues:
Strategy 1:
To address the issues above, the company could initiate a promotional campaign in which it raises awareness of the company’s services and advocates a positive brand image in the minds of their customers and potential customers. This campaign would be both domestic and international and targeted to business owners as the one-stop shop for their delivery needs. Business owners are seeking to outsource those functions of their value chain that do not add value to the overall business. These customers should be educated about the services that FedEx can offer to add back value to their businesses. These services include FedEx Freight, FedEx Trade Networks, and FedEx Supply Chain. In a time where the outsourcing of logistic operations is at its peak, the company needs to take advantage of the current opportunities and grab market share while it is available. By doing so, the company can increase its customer base and achieve larger economies of scale, thereby increasing revenues.
Strategy #2:
To increase market share in the international market, the company should establish relationships with its clients and their communities in key global markets. Many foreign cultures value their business relationships and have more respect for companies who values their relationships too. The company should establish a sale force whose mission would be to build new relationships and develop all relationships further. These relationships will prevent miscommunication within the business transactions and break down language barriers. The relationships could also assist with training to other employees regarding the cultures surrounding their market.
To further assist the sales team with the promotion of the company, FedEx should sponsor community activities and allow its employees to participate. These efforts would promote stewardship and give employees a sense of pride. The opportunity to help the community is a strong message of company culture to the employees. It is also free publicity in a positive way for the company.
Strategy #3:
The company needs to reduce costs and increase profits. While increasing price is another way to increase profits, changing the pricing strategy is not recommended due to the price sensitivities of our current customer and the number of competitors striving for the company’s share of the market. Several ways to achieve lower costs is to achieve high levels of employee satisfaction, integrate existing business divisions, and utilize technology to obtain greater efficiencies.
By attaining high levels of employee satisfaction, the company can reduce its turnover rate and those costs associated with hiring and training new employees. In addition, through the monitoring of employee concerns, the company could be able to reduce or eliminate lawsuits surrounding their labor practices, thus reducing costs.
Whenever possible, technology should be used to ensure that all routes are planned as efficiently as possible to ensure that duplication of resources and effort does not occur. Both aircraft and trucks used to transport deliveries between FedEx locations should be as full as possible prior to leaving for their destination. In addition, the fleet of ground vehicles should be interchangeable, thereby creating a reduction in maintenance expenses.
Strategy #4:
Another strategy is for the company to do nothing and let the current strategies work for them. The company has been able to grow over the last five years. It was even able to increase its revenue in the current environment. This strategy is not recommended because of the changing environment and increased competition in the market. The issues previously discussed will not be addressed by staying on the current course and not making adjustments.
Justification of Strategy:
The company should move forward with the promotional strategy which will encompass the implementation of an international sales force, promotion of services offered, and press releases to reemphasize the company’s commitment to social responsibility and ethical practices. This strategy will grow the customer base, both domestic and international, thereby increasing revenues. The strategy will also assist the company in repelling negative press for current litigation surrounding labor issues as well as reinforce the company’s ethical standing within the minds of its customers. It is important for the company to ensure that the public is aware of its continued commitment to its social responsibilities relating to activities not only within the company but also external to the company.
In addition to the promotional strategy, the company should implement measures to reduce costs. The ability to increase revenues without increasing prices is crucial to the success of any company, especially when customers are price sensitive. Instrumental to achieving this goal is an effective set of cost reduction initiatives. This is especially true for FedEx, which operates with high fixed costs. A decline in the company’s profitability could hinder its overall performance. Through this process, the company will be able to increase its profit margins and improve its overall financial performance. Prior to implementing these cost reducing measures, the company needs to ensure that measures taken remain in line with the company’s overall strategy and do not have a negative impact on operations and corporate goals such as customer satisfaction and timely delivery. Three initiatives that are recommended include employee retention, improving efficiencies within the business, and partnerships with office supply stores.
Implementation:
Promotional strategy:
Rather than waiting for customers to come to them, the company should take a proactive approach and bring their services to the customer. The company should conduct hiring fairs in the international market to attract qualified people to represent the company. The sales force will be instrumental to enhancing the company’s current presence within foreign markets. The sales force will be responsible for positioning the brand within these markets through contacting current customers to establish communications to cultivate a personal relationship with them. In addition, the sales force will also be responsible for reaching out to potential customers and establishing relationships. They will target businesses that require timely deliveries, logistics, and supply chain services. The sales force will also be responsible for educating the customer on the services that are offered and how the services can benefit the customer’s business. Because of the need for continued employee training, the company should retain some control of the sales force. Therefore a combination pay structure that includes both a salary and commission based pay scale should be established for these employees. The benefit of adding the sales force will far outweigh the costs associated with its implementation.
All of the above actions relating to employees and contractors will promote positivity within the organization. It will also ensure that the company remains socially responsible in an increasingly negative environment. Employees will be brought together through these practices to share in their commitment to the company and their communities. Through these methods, the company can achieve its corporate goal and maintain its corporate values which states:
- People: We value our people and promote diversity in our workplace and in our thinking.
- Service: Our absolutely, positively spirit puts our customers at the heart of everything we do.
- Innovation: We invent and inspire the services and technologies that improve the way we work and live.
- Integrity: We manage our operations, finances and services with honesty, efficiency and reliability.
- Responsibility: We champion safe and healthy environments for the communities in which we live and work.
- Loyalty: We earn the respect and confidence of our FedEx people, customers and investors every day, in everything we do.
Cost Reduction Efforts
Through the focus on corporate culture, the company will reduce costs through decreasing the employee turnover rate. By having satisfied employees, the company will retain more of its employees and require less hiring. This in turn will aid in cost reduction efforts by eliminating costs associated with hiring employees such as drug tests, background checks, and initial training. An added benefit to retaining employees is the knowledge and relationships they have built within the industry and surrounding communities throughout their service with the company. They can perform their responsibilities more efficiently than a new employee would as they are aware of corporate practices and policies.
Another way to obtain higher levels of efficiency is to reduce costs through the company’s delivery mechanisms. Where possible, the transportation resources should be shared to ensure the greatest level of cost containment without interrupting the distribution network. Trucks used to transport packages and freight from one FedEx center to another should be loaded to its full capacity to ensure the company does not duplicate its efforts by sending two trucks along the same route when one truck was sufficient. The fleet of ground vehicles should be interchangeable, thereby creating a reduction in maintenance expenses. This will prove true when a vehicle is inoperable and requires servicing. In addition, drivers should plan to ensure the most direct path has been chosen to make efficient use of their time and the vehicle. This planning should occur prior to leaving the distribution center. While delivering packages, the trucks should not be allowed to sit idle as it is an inefficient use of fuel. A similar strategy should be used to increase the efficiency attained for all flights. Planes should be loaded to their fullest capacity to ensure efficient use of resources.
Another cost reduction plan involves the FedEx Kinko’s stores. Rather than building brick and mortar retail locations, the company can negotiate partnerships with office supply retail chains to provide document management services and, of course, FedEx delivery services. By establishing partnerships, the retailer will benefit from increased customer traffic of customers who use the Kinko’s services. FedEx will benefit by not having the overhead costs associated with maintaining a separate store. The partnership will create a broader level of awareness of the FedEx brand and its services through an increased number of locations and greater customer reach. The company must evaluate their existing stores for profitability. Partnerships should be established in the general area of those locations that are not performing to expectations. Those FedEx Kinko’s stores should be closed, which will eliminate unnecessary overhead costs.
References:
§ Foust, Dean, Fredrick Smith: No Overnight Success, retrieved 2007-10-30
§ Bartiromo, Maria, The Inspiration Behind Federal Express: A Central Hub, retrieved 2007-10-30
§ Cato Institute, Does Fred Smith and FedEx Have Ed Crane and The Cato Institute In Their Back Pockets?, retrieved 2007-10-30
§ Financing the inauguration". USA Today. Retrieved 2008-05-25.
§ "FedEx to maintain standby operations in Subic until April". GMA Network. 2009-02-06. Retrieved 2009-02-09.
§ "FedEx Acquires UK Express Company ANC". FedEx. 2006-12-18. Retrieved 2007-02-17.
§ FedEx Reports Strong Revenue and Earnings Growth in Third Quarter
http://insight.fedex.com/us/investorrelations/downloads/earningsreleases/Q3FY05.pdf
http://www.hoovers.com/fedex/--ID__10552--/freeuk-co-factsheet.xhtml
