1 Introduction

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1
Introduction
What is the first thing that comes to your mind when you think of sending an important
parcel or letter across to someone. Most likely it is FedEx. Once upon a time FedEx was
almost synonymous with express package shipping. Today Federal Express maintains a
big lead over competitors in express packages and letters sent within the US and from US
to overseas destinations. FedEx has a 43% share in the US market and UPS , its closest
competitor has a share of 27%. FedEx's initial delivery service began modestly with
small packages and documents, but today the world is addicted to shipping all manner of
goods around the globe swiftly and reliably. Even though Fedex’s services initially were
pretty much oriented towards shipping of important documents and parcels, these days
people send just about anything through these express delivery service.
The founder of FedEx, Fredrick Smith figured out two decades ago that this company
was in the information business, so he stressed that knowledge about cargo's origin,
present whereabouts, destination, estimated time of arrival, price and cost of shipment
was as important as its safe delivery. In other words, information about the packages, is
as important as the package itself. FedEx depends heavily on information technology to
conduct its day to day business. Technology is something that competitors too can use to
derive great benefits. But, Fedex, it is found is quite far ahead of its competitors in terms
of application of information technology. It is definitely going to take a lot of time, effort
and money for competitors to catch up with Fedex in this regard.
Recently, FedEx was ranked 18 by the Fortune Magazine in a survey conducted to
determine the top 100 companies to work for in the United States. The employee morale
seems to be pretty high. This is exemplified by the way FedEx employees rose to the
sudden increase in work pressure created by the recent UPS strike. Due to this strike by
the UPS employees, the other shipping companies bore the brunt of handling excess
shipments. Fedex was swamped with 800,000 extra packages a day and according to the
press releases, the employees of Fedex voluntarily worked extra hours to clear the
shipments. This kind of high enthusiasm among the employees is rarely seen in
companies today. The employees are well appreciated for their efforts. Fedex gives away
a lot of awards to the employees in recognition of their performance. This is probably
one of the reasons for the high employee retention at Fedex.
The growth in popularity of the Internet has introduced many new terms such as ecommerce and e-tailing. This has in turn created lots of opportunities for companies
involved in the package delivery business. FedEx and its competitors are vying to gain as
much advantage as possible out of these opportunities. Few of these companies, including
FedEx, are going beyond the package delivery business and getting involved in becoming
full service logistics providers that specialize in orchestrating the flow of goods and
information between customers, retailers, and suppliers. Fedex, which started off as a
simple package deliverer, is now getting itself involved in providing e-commerce
solutions. In fact Fedex’s presence is being felt throughout the supply chain. One of the
best examples in support of this is the case of National Semiconductors (Natsemi).
Natsemi has manufacturing facilities in Singapore, to take care of its product demand in
Asia. But, the company has essentially outsourced most of its warehousing and
distribution to Fedex. Orders coming into Natsemi are processed in the mainframes at the
company’s headquarters in Santa Clara, CA. Once the orders are processed, the
information is sent across to Fedex. From this point onwards, Fedex takes over and sees
to it that the orders are delivered to the customer.
FedEx is part of a bigger company called FDX, whose main objective is to provide the
most innovative transportation and logistics solutions for customers. FDX family
comprises of the following companies: FedEx, RPS Inc, Viking Freight Inc., Caliber
Logistics Inc., Roberts Express Inc., and Caliber Technology Inc. Fedex is the FDX’s
flagship company, providing express, reliable , time-definite delivery of shipments
throughout the world. It would be very interesting to analyze how FedEx goes about
conducting this business.
1.1
Brief History Of FedEx
FedEx was founded by Fredrick Smith in 1973. Smith was also the company’s first CEO,
and he remained in that position until March 1998. Smith got this idea about improving
the existing express delivery system while he was an undergraduate student at the Yale
University, way back in 1966. In those days, mainframes were very popular and many
mission critical applications resided in them. Whenever one of these huge mainframes
broke down, computer parts had to be physically transported from one place to another
and there was no reliable, fast and efficient express delivery system in place. There were
other time sensitive shipments such as medicines that badly required an efficient express
delivery system. Fred Smith recognized this and presented a paper describing the existing
system and recommended improvements to it. Smith received a ‘C’ grade for his efforts.
Obviously, Smith was not discouraged by the letter grade as is evident from the current
standing of Fedex.
In 1971, Smith bought a company called Arkansas Aviation Company in Little Rock,
Arkansas. While working in this company, Smith got a first hand experience in the
package delivery business and was able to analyze the problems involved much better.
This problem motivated him to do the necessary research for solving the inefficient
distribution system. In 1973, Smith bought an abandoned military hangar in a corner of
Memphis International Airport, and officially launched the operations of Federal Express
from there. During those days, couriers used to deliver packages in family cars and pilots
used to buy fuel for company jets with personal credit cards. In essence, the system was
very crude. The company could afford to do so back then because there were not many
customers and the business was small. As time passed, the business grew in size and the
infrastructure had to be strengthened accordingly. Smith recognized pretty early that
investment in information technology was essential.
Smith's heavy investment in information technology, coupled with a lavish marketing
effort quickly paid off. The company posted its first profit in 1975. In 1983, FedEx
became the first company in American history to earn a revenue exceeding $ 1 billion in
a financial year, without any mergers or acquisitions. In the financial year 1997, FedEx
had revenues of $11.5 billion, out of which more than a billion dollars were invested in
information technology. Federal Express became a publicly held company on April 12,
1978, and has been listed on the New York Stock Exchange since December 1978. The
stock price has had its ups and downs, but it has been steadily rising. The company has
now expanded in the international marketplace and now serves more than 200 countries
in Asia, Africa, Australia, Europe, North and South America.
Throughout its existence, Federal Express has been the industry leader in introducing
new services for customers. It was the first company dedicated to overnight package
delivery, the first express company to introduce the Overnight Letter, first to offer 10:30
AM next day delivery and the first express company to offer time-definite service for
freight. Federal Express was also the first in the industry to offer money back guarantee
and free proof of performance. In keeping with the tradition of “firsts”, FedEx received
the ISO9001 registration for all its worldwide operations in 1994, making it the first
global transportation company to receive simultaneous system-wide certification.
In 1994, Federal Express updated its corporate identity and formally adopted FedEx as its
primary brand name. One of the main reasons for the change in name was that there was
a general feeling that the word “Federal” indicated an association with the government.
Also, with the new name, less paint would be required to put its name on the aircrafts and
ground vehicles. The company’s legal name remains Federal Express Corporation.
1.2
FedEx Facts and Numbers
Began Operations
Headquarters
Worldwide
Asian
European
Latin American
Principal Officer
Revenues
Employees
Countries Served
Airports Served
Aircraft Fleet
Vehicle Fleet
World Service Centers
Drop Boxes
Authorized Shipcenters
Average Package Volume
Average Pounds per Package
Average Revenue per Pound
:
April 1973
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
Memphis, TN
Hong Kong
Brussels, Belgium
Miami, Florida
Theodore L. Weise
$11.5 billion (FY 1997)
More than 141,000 worldwide
211
325
610 Worldwide
More than 40,500 worldwide
Approximately 1,400 worldwide
Approximately 34,000
More than 6,500
2,715,894
7.2
2.11
1.3
The Federal Express System: How it Works
Millions of packages travel through FedEx’s integrated global network every day. Let us
take a look at the FedEx’s system from the moment a customer calls until the package
reaches its final destination.
COSMOS (Customer Operations Service Master Online System) is the nerve center of
FedEx’s operations. COSMOS is a sophisticated package tracking system that can follow
a shipment from pick-up through delivery. This big electronic brain monitors every phase
of the delivery cycle. The employees of FedEx constantly feed COSMOS information
through a number of other systems and devices. When a customer notifies a FedEx
service agent details of their pick up request, COSMOS automatically notifies a
dispatcher nearest the pickup location. The dispatcher then relays that pick up
information to a small on board computer called the DADS (Digitally Assisted Dispatch
System) in the courier’s van. At the point of pick up, FedEx’s courier uses a hand held
computer, called SuperTracker to scan the airbill on each package. This little computer
records information about the package, determines the best way to route the package
through the FedEx system and displays a specific routing code. When the courier returns
to the van, the SuperTracker is plugged into a shoe attached to the dispatch computer.
That shoe is SuperTracker’s link to COSMOS. The package now starts its journey
through the Federal Express system. Every time a package changes locations, the airbill
is scanned and the information transmitted to COSMOS.
Multi-Hub Sorting System: Until recently, FedEx used a hub and spokes system that
was designed long back to handle all packages through the FedEx system. As the daily
volume began increasing, FedEx discovered that it became even more efficient to sort
packages globally. FedEx finally worked out a new multi-hub system which was much
more efficient and flexible compared to the original single hub system. At the end of a
courier’s day, they return to the city station with a fully loaded van. The packages are
consolidated into containers at the stations, loaded on FedEx aircraft and flown into one
of five sorting facilities in the US system. FedEx has sorting facilities in Indianapolis,
Memphis, Newark, Oakland, and Anchorage. In the destination cities, the Federal
Express crews are waiting to sort packages again, this time from containers to courier
vans. When the vans are loaded , the couriers are ready to deliver the packages to the
customers.
1.4
The FedEx Technology at a Glance
Fueling the company’s growth and success has been the development of strategic
information systems that enable FedEx to provide superior service to its customers.
Those efforts have also earned FedEx a solid reputation as the industry’s technology
leader. Today customers are able to complete entire shipping transactions from their
desktop PCs, call for courier pick ups via modem, and track the status of their package
through the Internet. Nightly, FedEx moves over 2.7 million shipments through its
integrated global network. Over 60 percent of the total volume is processed using an
automated shipping system.
•
SuperTracker : In the simplest terms, the SuperTracker is a barcode scanner.
Barcodes are generated by customers using one of FedEx’s proprietary shipping
softwares. The barcodes identify the shipment destination, the type of service delivery
and the delivery commitment time. The information from each scan is transmitted to
the company’s mainframe system in Memphis. Real time information on the shipment
is immediately available for the service agents or customers through a number of
software applications such as PoweShip, FedexShip, Internet email or by accessing
FedEx’s web site.
•
ASTRA:
Automated Sorting Tracking Routing Aid (ASTRA) is a barcode
generator. The system uses specially designed bar code labels to provide accurate and
reliable package delivery information. Each ASTRA label contains all the necessary
information to precisely identify each package and its designated route from pick up
to final delivery.
•
DADS:
Digitally Assisted Dispatch System (DADS) is a nationwide
dispatch network that provides timely response to customers’ request for package
pick up and delivery. After a package is scanned with the SuperTracker, the scanner
is placed into a DADS transmitter, which uploads the necessary data into the
company’s centralized mainframe system in Memphis through an earth-orbiting
communications satellite.
•
COSMOS:
Customer Operations Service Master Online System, as described
earlier is a central component of FedEx’s strategic computer systems. It is a
sophisticated electronic network that contains critical information on the location of
each shipment in the FedEx system. COSMOS connects the physical handling of
packages and related information to the major data systems at FedEx, and in turn,
with customers and employees.
•
ExpressClear: ExpressClear Custom Clearance from FedEx streamlines
international shipping with an automated head start on regulatory clearance. Using
state of the art technology, ExpressClear initiates and expedites regulatory clearance
while cargo is enroute. This creates a competitive advantage for international shippers
by facilitating delivery and reducing the number of potential delays in the clearance
process. FedEx uses EDI (Electronic Data Interchange) to communicate with
governmental agencies and other brokers about the shipments. FedEx also uses
Imaging technology, which scans original documents into the FedEx computer
system for transmission when additional shipment documentation is needed.
•
Automated Shipping Systems:
These automated shipping systems generate more than 60% of FedEx’s daily
package volumes.
1. PowerShip was first introduced in 1984. It is a DOS based system. It
provided substantial efficiencies and benefits by enabling customers to reduce
shipping paperwork, streamline billing and track their shipments in realtime.
Typically, the PowerShip systems consists of a personal computer, software,
and printer. Free of charge, FedEx provides the use of a total shipping system
that includes PowerShip equipment, installation, training, and maintenance.
Each system is menu driven and easy to operate.
2. Tracking Software: This program lets customers track the status of their
shipments enroute and obtain a Proof of Delivery from their own personal
computers. The software and modem connection to FedEx computers are free.
The program is menu driven and compatible with IBM, Macintosh and
Windows applications.
3. FedEx Ship: This was first released in early 1995 and was a modified version
of the PowerShip. The system allows customers to quickly create entire
shipping transactions from their desktop PCs. FedexShip allows customers to
send shipping information to the recipient via an email template that indicates
shipment date, type of service, method of payment and tracking number. The
system is capable of tracking multiple packages simultaneously by tracking
number, date, reference number and city. The necessary equipment and
software to use FedExShip are provided free of cost by FedEx.
4. InterNet Ship: In 1996, FedEx announced InterNet Ship, the first automated
shipping transaction system available on the internet. By entering a valid
FedEx account number, customers complete entire shipping function directly
from the web page. That includes preparing all paperwork online, printing a
barcoded label for the package using any laser printer, scheduling a courier
pickup and automatically uploading the billing information to FedEx.
5. Virtual Order: This is a software that links Internet order with FedEx
delivery and online tracking. Specially designed for startups and small
business communities.
•
Technological Improvements: FedEx customer service operations have greatly
benefited from improvements in technology. A CTI “screen pop” was implemented
that provides customer service representatives with information that connects
incoming callers with customer account information. This now allows the service
representatives to answer the phone in a much friendlier and more informed manner.
FedEx also has a Proof Of Delivery imaging system. This system can now provide a
letter on company letterhead that states the proof of delivery information to a
customer. The system is probably one of the most complex and largest object
databases in the world. The signatures are captured and archived in optical storage
where they are instantly accessible. FedEx recently implemented another component
of their Enterprise Image System architecture – Domestic Customer Invoicing
System. The system is designed to scan, recognize, and store images of nearly one
million airbills each day. Imaged air bill invoices are then accessible and viewable on
client/server workstations. This new system improves the invoicing process by
reducing keystrokes, eliminating paper handling, and increasing worker productivity.
Fedex is also planning a major overhaul of its IT infrastructure under project GRID
(Global Resource for Information Distribution). The objective of this project includes
replacing 60,000 terminals and some PCs with 75,000 network computers. The NCs
will be connected to to Windows NT servers. Citrix Systems WinFrame software and
the Citrix ICA (Independent Computing Architecture protocol) will be used to present
the Windows desktop environment on the NCs, which will also run native-mode Java.
Fedex has traditionally used the two-tier client/server approach for a long time to
develop applications. The three-tier network computing architecture will allow Fedex
to build robust, scalable systems. The other obvious reasons for Fedex to move
towards NCs include low cost of maintenance and low cost of ownership. Another
objective is to retire Fedex’s three Hitachi Skyline mainframes and four IBM
mainframes by June, 2001, replacing them with Sun and HP Unix servers.
Developments such as these reinforce the company’s leadership position in
information technology and add value to Fedex’s transportation services.
2
Competitive Industry Analysis
Strategic importance of an information system has to be evaluated within the context of a
competitive environment an organization is operating in. In our analysis of express
package delivery industry, we will use Michael Porter’s industry an competitive analysis
framework (Figure 1).
Potential
new entrants
Bargaining power
of suppliers
Industry
competitors
Bargaining power
of buyers
Threat of substitute
services
Figure 1. Industry and Competitive Analysis Framework
We will first present our research on who we consider the primary competitors of Federal
Express to be. We will continue to analyze the service FedEx provides and its bargaining
power with customers (i.e.: price elasticity). Finally, we will outline technology vectors
that are present and are likely to drive the industry into the future.
2.1
Primary Competitors
The freight and air transportation industry can be segmented in a variety of ways. In
considering primary competitors to FedEx we have tried to select those companies the
have similar service offerings. The only exception to this rule is Ryder, that offers ground
transportation services. Since Ryder is trying to position itself as a provider of integrated
logistics solutions, we included the company in the primary competitors list. Figure 2
provides approximate market share for express package delivery.
DHL
Other
Airborne Express
UPS
Federal Express
0%
10%
20%
30%
40%
50%
Source: Fortune Magazine
Figure 2. Market share in express package and letter delivery in the U.S.
The charts depicts only those companies that offer time-definite service, that is, they
provide a guarantee that a delivery will be completed within a given number of days. US
Postal Service does not offer such guarantee and thus is not included on the chart.
2.1.1 DHL Worldwide Express
The company has been created in 1969 by Adrian Dalsey, Larry Hillblom and Robert
Lynn (hence the name) on the west coast. Initially, it delivered shipping manifests from
port to port by air to speed ocean cargo. In the next 10 years, it expanded into global
markets in Asia, Australia, Europe, Middle-East, Latin-America. Currently, it operates in
227 countries and territories and reaches 635,000 cities.
The company is privately held. Its major holders include Japan Airlines (25.001%) and
Lufthansa Cargo AG (25.001%). Recently, German postal service Deutsche Post AG
announced plans to acquire a 22.5% stake in the company. This gives DHL a solid
international backing from major industry players.
In 1997, DHL has spent $240 million in infrastructure and technology, and in Europe it
plans to open at least 30 new service centers and acquire nine A-300 aircraft. 40,000
people. As a result of continued 16% growth, DHL has doubled in size in five years.
From an Information Technology perspective, DHL faces major challenges in creating a
infrastructure that will support its global operations. In 1993, DHL has initiated a $1.25
billion worldwide capital spending program, emphasizing computer technology.
The company operates a private, high-availability TCP/IP based network to link their IT
centers as well as individual branches. The backbone system is a mainframe based
database, that is linked to a distributed relational DBMS (Informix 7) that provides
almost 100GB of real-time shipping data.
DHL expects to loose 18% of its documents-transport business because of electronic
communications, mostly over the Internet.
2.1.2 Airborne Express
Airborne Express was founded in 1968 with headquarters in Seattle, WA. It originally
offered freight services for the west coast region. In 1981, the company purchased
Clinton County Air Force Base in Wilmington, OH, and became the first and only carrier
to own and operate an airport. It also created the hub-and-spoke system for fast and
express package delivery in the US.
Airborne Express owns two other subsidiaries. ABX Air, Inc operates and maintains
company-owned chartered aircraft and Airborne’s package sorting facility in
Wilmington, and Sky Courier offers fast delivery services to both US and international
via next-flight-out air courier and expresss freight services.
Services offered by Airborne ranged from US domestic same-day/next-flight-out,
overngiht air express, next afternoon, and second day services, to international air
express, Global Post, air freight, and ocean service.
In FY1997, the company has a total revenue of $2.9 billion, and net earning of $120
million. It handled more than 302 million shipment, and enjoyed a yearly revenue
growth of 17%.
Airborne Express employed 21,970 workers, owns 14,140 delivery
vehicles, 12,140 drop boxes, 303 shipping facilities, and with a monthly active customer
base of 529,350. It operates out of 9 regional hubs in US, and owns 175 aircrafts, and
one airport.
2.1.3 United Parcel Service
United Parcel Service is a major competitor to Federal Express in the "delivery service"
marketplaces. For example, in 1995 UPS had revenues of $ 21.05 billion and a net
income of $ 1.04 billion. While their envelope market share was 12.8% compared to
Federal Express' 59%. In the overnight delivery market UPS has 42.5% compared to
Federal Express' 40%. As a trucking company, UPS ranks first in the US where Federal
Express doesn't even compete. Both Federal Express and UPS have massive service
areas, gross sales, employee base, delivery fleet, and aircraft fleet. In fact UPS's airlines
is the 10th largest airline!
UPS uses a similar technology base to accomplish their basic services much as Federal
Express does. They use technology to find efficiencies in the system and makes it more
profitable in a similar fashion. As with Federal Express, they employ a hub and spoke
system where packages are picked up locally, sorted at regional hubs, and then sent on
their way. Both Federal Express and UPS use the same competitive paradigm in
distribution systems they employ. UPS is also employing the technique of building
infrastructure costs with their customers. UPS, better know for its trucking side of its
business (where as FedEx is better know for its airplanes), has established bases of
operations with their business customers that ship at very high volumes, integrated IS
with high volume customers, and established IS links with other valued customers. This
is the same IS strategy that Federal Express in employing.
2.1.4 United States Postal Service
The USPS is an independent agency of the United States government, providing various
services to the public. The USPS recognized that the expedited and package market is a
very profitable one and that it continues to grow rapidly every year. In the express
delivery category, USPS has two main services to offer – Express Mail and Priority
Mail.
Express Mail is the faster of the two services. It is the only overnight service that
delivers 365 days a year, including weekends and holidays. Express Mail is very
convenient to use in that there are more than 40,000 post offices and 26,000 Express Mail
boxes in which you can deposit your shipments. On demand pick up service is also
available by calling a toll free 1-800 telephone number. When the speed of Express Mail
is not needed, but preferential handling is desired, Priority Mail is a better option. Priority
Mail offers fast delivery and is very economical.
The USPS is planning to simplify its product line and improve its parcel services to steal
market share from United Parcel Service and Federal Express. Under this plan, USPS is
considering merging its Express Mail service under the Priority Mail umbrella, calling it
something like Next Day Priority Mail Service. USPS would also offer a Two Day
Priority Mail and perhaps a Same Day Priority Mail service. USPS is not a player in the
Same Day Service market, but believes that its existing infrastructure can support it. Its
plan is to enter the Same Day market by initially offering service between major markets
and within some major markets, called intra-city delivery.
It is important to note that USPS faces some challenges that other express delivery
systems don’t face. Federal Regulations set forth in the Postal Reorganization Act of
1970 prevent the organization from offering products and services with prices and
characteristics that compare favorably with competitive offerings. These regulations
constrain the Postal Services ability to respond to rapidly changing market conditions
and to control costs. The USPS is not subsidized by the government, but the revenue
generated by the Postal Service goes into the US Treasury, that help reducing our taxes.
2.1.5 Ryder System
Ryder System is the world’s largest provider of logistics and transportation services.
Annual revenues of 5.5 billion. Part of Down Jones Transporation Average. Ryder’s tree
core competencies are: integrated logistics, truck leasing and rental, and public
transportation services. Integrated logistics services provide companies with inbound
transportation of raw materials to manufacturing facilities through the delivery of
finished goods. These services are also offered in Canada, the United Kingdom,
Germany, Poland, Mexico, Argentina, Brazil and The Netherlands.
Ryder rents and leases trucks to over 13,000 customers and has over a hundred thousand
vehicles on lease.
Recognizing the value to customers in integrated logistics, the company has recently
formed an alliance with IBM and Andersen Consulting to deliver integrated logistics
services to customers. IBM and Andersen will develop information services to support
these services.
2.1.6 Other Competitors
Almost any major airline has cargo operations. These services are targeted at companies
that need freight service for either large products or for products that need to be delivered
in a short time.
There is also a multitude of smaller shipping companies that typically are either regional
or have a specific industry focus. These companies may only play a role of shipment
coordinators, where they arrange shipment services with airlines or freight operators.
2.1.7 Potential for New Entrants
The potential for new entrants in the industry is small. To pose a significant competitive
threat to FedEx, requires an immense capital investment. On top of that, FedEx has a
substantial customer base and brand equity that is very difficult to duplicate.
Additionally, in order to provide efficient delivery service, sophisticated information
systems need to be developed. These are not off-the-shelf systems and can be considered
an advantage that FedEx has over any potential entrants.
2.2
Customers
Depending on the type of service, customers have different bargaining power. At the low
end, letter and small package delivery, the customers do not have any or have low
bargaining power. At higher volumes, and more specialized service (such as warehouse
management, catalog operations, etc) the customers are able to negotiate long term
contracts with the company and offer lower than retail rates. We view customer
bargaining power as low to moderate.
2.3
Threat of Substitute Services
Federal Express is clearly operating in a very competitive industry where customer does
have a lot of choice. Express mail package delivery has a lot attributes of a commodity
service:
• high volume;
• low differentiation;
• low margins (FedEx profit margins are about 3.2%).
The threat of substitute services is therefore very high. It may be diminished by the
temporary high market demand, but in the long run, the company should look for ways to
provide improve customer value through product differentiation.
2.4
Other Considerations
All delivery services are labor intensive. Packages have to be unloaded from aircraft and
sorted. Even if some of these operations are automated, human involvement is remains
high. Federal Express employs almost 110 thousand people. High portion of its cost of
operations (almost $11 billion) is therefore related to labor costs.
UPS strike brings to focus problems that companies face when it comes to negotiating
labor contracts. That also applies to pilots associations and unions. With FedEx pilots are
more of an issue than for UPS, because the company has a very large and expanding
aircraft fleet.
On the other hand, employee loyalty at FedEx is reported by be very high. According to a
recent Fortune Magazine article on FedEx some employees describe their blood as
purple. This is a result of an extensive performance evaluation system setup for
managers, who are not only evaluated by their superiors but also by workers they
supervise.
2.5
Technology Vectors and Market Trends
As indicated earlier, express package delivery is becoming a commodity. There are two
basic ways to grow revenues in this kind of business: improve efficiency (i.e.: reduce
cost) or diversify business into high growth, high profit areas. While efficiency
improvements are certainly a viable option, their potential for improving the bottom line
is limited. Diversification, while certainly riskier, offers a much higher potential for
growth.
According to industry analysts, the express delivery market will growth rapidly from $36
billion in 1996 to about $250 billion in 2016. During that period, express delivery
services will substantially increase their share in the freight and delivery market (see
Figure 3).
Less-ThanTruckload
Non-Express
Delivery
Express Delivery
0%
10%
20%
1996
30%
40%
50%
60%
70%
2016
Figure 3. U.S. Domestic Shipping Market, 1996. (Source: Federal
Express Corporation, 1997 Annual Report)
This trend can be explained by corporations’ struggle to reduce inventory and build justin-time inventory and delivery services, both for in-bound materials from suppliers and
outbound products for customers. Supply chain integration offers to deliver substantial
efficiency improvements but dramatically increases information requirements. Express
shipping companies, including FedEx, find themselves in the information business:
knowledge about cargo's origin, present whereabouts, destination, estimated time of
arrival, price, and cost of shipment is as important as its safe delivery.
FedEx is currently working on a project with KPMG and SAP as partners, to deliver a
module that will integrate FedEx shipping software and warehouse management services
with enterprise resource planning packages such as SAP R/3. The module will provide
logistics and shipment functions with SAP's R/3 software system.
Finally, electronic (not just Internet) commerce is gaining importance and acceptance.
This is closely related to just-in-time inventory services but goes beyond that.
Companies, such as National Semiconductor Corporations, are looking to outsource their
warehouse operations and shipping of product to customers. Electronic commerce should
enable linking of computer systems between a manufacturer and a shipper to provide
integrated delivery system.
3
The SWOT Analysis
We believe that doing a SWOT analysis will provide us with another view point on
Federal Express' competitive and strategic technologic positions in their current market.
And so below you shall find in each of the traditional four sections of a SWOT analysis,
and what we think are the major points for Federal Express with respect to technology
and information technology use in their business and industry.
3.1
Strengths
Having covered the story of Federal Express in previous sections, it should be apparent to
you at this point that Federal Express is a very large company. This is one of its biggest
strengths as it provides stability from local and regional market fluctuations, provides
deep pockets, and has been in business for a long period of time. This long period of
time has allowed Federal Express to establish a brand name, a complex and well
supported infrastructure in their home markets, and a basis for expansion into other
markets as well. If you look at UPS, they have developed similarly to Federal Express
since they too had a long time to build their infrastructure. And since there is no
switching cost to the typical individual user, Federal Express needs to protect itself from
market fluctuations.
Being one of the biggest players in the delivery marketplace means having a large service
vehicle fleet. Both Federal Express and UPS have armies of delivery trucks and planes,
and so they have made heavy investments in transportation technology. For example,
Federal Express kept on top of this as they introduced the Overnight Letter in '81, they
had already contracted 15 727s from Boeing. It is due to these necessary heavy
investments in transportation technology that has allowed Federal Express to expand as
quickly as it has. Fortunately for Federal Express, plane and vehicle technology has not
drastically changed over time, it has been more incremental change than discontinuous
change. This has played well for Federal Express as it means no need for replacement for
large amounts of new transportation technology. For example, a discontinuous
innovation would be the introduction of a supersonic transportation for the masses. This
would create more market opportunities father away that Federal Express would be
obligated to server. And so they would be forced to invest in the new technology as it is
an extension of their core competencies.
Another strength of Federal Express has been their continual investment in materials
handling technology. Within their hub and spoke system lay a sorting system, and that
relies on the effective combination of information systems and materials handling
technologies. In each of the regional hubs they have a conveyer belt system with
electronic eyes and diverting arms that steer the packages to the right destination vehicle.
This investment in technology has been the means for Federal Express to keep costs
down (instead of employing thousands of employees to sort) while increasing volume
dramatically. Again, the sorting technology for this system has not seen discontinuous
innovation, and so Federal Express has enjoyed the use of it without serious reinvestment.
Lastly, Federal Express has locked in the high volume customers with information
technology infrastructure. Federal Express realizes that it isn't going to be the single one
time user of their services that with profit them the most, it is the business segment of
their markets. Therefore, they have taken strategic steps to retain their business in the
long run. By far this is Federal Express' best strength, and most important one. If Federal
Express didn't do this, the business would have surely degenerated into a commodity
business, much like with residential customers today. With businesses, forming links and
ties to the business allows them to establish switching costs, which effectively locks that
customer in.
Allow me to further divert your attention to this point. Federal Express know that
creating switching costs are critical to keep their customers in the long run, so they have
developed a full array of tactics to do so. Concentrating on the business customer,
Federal Express has developed a suite of informational programs to use to interact with
Federal Express' computers and shipping software. For example, the more common
program is that which allows you to track packages at each stage of the delivery process.
The goal is to establish that initial link with that customer with respect to their
information technology infrastructure. This gets the customer more pliable for later
investment with Federal Express in their IT, and so creating the tangible switching costs.
If you go to Federal Express' homepage, and look at the levels of software integration,
you can see that each one is geared to a different level of commitment (or integration)
with Federal Express. If we look at Federal Express' operations in Hong Kong, they have
an operation where they have taken on the warehousing function of a prominent
semiconductor manufacturer. Federal Express has taken on the function of the
warehousing as well as delivery, and I believe this is an example of the extent to which
Federal Express is willing to take their integration. If you look around the market place,
their competitors are doing this as well to some degree (i.e. UPS in trucking
manufacturer's goods).
3.2
Weaknesses
We have touched on the idea that Federal Express in a poor position if the markets they
compete in degenerate into service commodities. Strong price competition would mean
little or no margin, and this would drive everyone out of the business. Federal Express is
required to generate that premium over base cost as it must make the aforesaid
investments in technology to keep up with demand, competition, and technological
discontinuities. Simply put, Federal Express is susceptible to price competition with
their strong competitors.
Another weakness with Federal Express is their high vulnerability to transportation cost
fluctuations. If you see gas prices go up by thirty cents, you'll grumble and complain,
and be able to afford it. If Federal Express sees this gas shortage, and must pay the price
difference, multiplied by thousands of vehicles, how fast will they go out of business?
3.3
Opportunities
Federal Express has the ability to extend this "locking in" procedure with IT to individual
customers (or what I called residential customers before). In a way they've already
begun. By providing a higher level of service by allowing the customer to know that they
know for no additional cost. This requires software for that individuals must install and
use to interact with Federal Express' information systems. That is where the level of
interaction is now, but if Federal Express wants to lock in these customers, and are half
way there, all they need to do now is create something like a reward system for continual
use. Since IS can easily keep track of this, it seems like such a little effort/cost for
potentially large returns.
More recently Federal Express has made bids and spent a lot of money to get into the
Chinese delivery marketplace. This is evidence that Federal Express is expanding the pie
as well as fighting for more of it. They are seeking other markets to expand into, and this
is what they need to keep doing as the world becomes more integrated. This pays off in
the end when they are more integrated around the globe than their competitors. It also
pays off in that when they expand the pie, they get more of the expanded part; or in other
words, they grow faster than their competitors.
Lastly Federal Express is one of the market leaders in the delivery markets, and in being
one, they can set standards for everyone. This would be applicable for the information
systems that they are distributing for interaction with theirs. Comparatively UPS's
information systems are unsophisticated, and so Federal Express has the opportunity to
'standardize' their IT processes to create switching costs for their competitors, and
asserting their leadership position.
3.4
Threats
By far the biggest threat to Federal Express' document business is electronic commerce
(the use of the Internet). Federal Express saw this years ago, and that is why they
attempted "Zapmail." It was too soon for such a product, and so it was divested in '86.
Today there is no way Federal Express can recover that market, the customers are talking
to each other via computer, bypassing Federal Express entirely. Since this is cheaper
than using Federal Express, the trend will continue as more companies get increasingly
computer savvy. Federal Express will have to create more business elsewhere (i.e.
foreign markets) to make up for lost revenue here.
Presently Federal Express employs a hub and spoke system that allows them to reap the
benefits of the cheapest way to distribute products. Currently this is the best practice, or
strategic paradigm. This is what Wal-Mart Figured out, and the airlines adopted. If
another competitor comes out with another strategic paradigm that is cheaper, then
Federal Express has really big problems since they've invested heavily in the one they're
using now. Whether or not they are able to change when that day comes will determine
whether or not they will remain in business (much like the other retailers when Wal-Mart
rolled in).
Strong competitors are likely to follow suit as Federal Express is one of the market
leaders. Already UPS has a similar tracking system, although lacking, they already
realize the utility of such a system, and are taking the cue from Federal Express.
Obviously Federal Express needs to keep innovating and keep on top. Already UPS is
employing swishing costs much like Federal Express has. With strong competitors in
Federal Express' back yard, it is not easy to make early mover's strategic moves to leave
the rest to follow.
Federal Express has a high dependency on IT in general, and they employ a wide variety
of system architectures. This means a lot of configuration and man hours involved with
such systems. And with any complex systems, there is a buildup time. We could not find
any evidence that Federal Express has addressed their year 2000 problem, and this could
be a crippling problem in the near future. Federal Express has a high dependency on IS
technology ('Strategic' on the IS Strategic Grid), and if the y2k problem kills their
information systems, then their business will die too.
References:
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
FedEx Information Packet
Information Week, Oct 27, 1997
Fortune Magazine, Oct 27, 1997
Fortune Magazine, Nov 10, 1997
Fortune Magazine, Jan 12, 1998
FedEx web site (www.fedex.com)
Airborne Express web site (www.airborne-express.com)
United Parcel Service web site (www.ups.com)
US Postal Service web site (www.usps.gov)
Sun-Sentinel , January 7, 1998
Business Mailers Review, March 9, 1998.
The USPS 5-Year Strategic Plan summary.
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