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VOL. 5 | NO. 50 | Saturday, December 8, 2012

Timely Delivery

As busiest day in history nears, FedEx changes course in hopes of saving money

By Bill Dries

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On Dec. 10 FedEx Corp. is expected to have its busiest day in the 40-year history of the global shipping company.

FedEx plans to add $1.7 billion a year in profitability, most of it through cuts in employees and other cost reductions. And most of the cuts and changes, $1.2 billion, will be in the company’s oldest and largest division, FedEx Express.

(Photo: Courtesy of FedEx)

Each year, the corporation plots out the day when shipments across its portfolio of services are expected to reach their peak for the year, which always occurs during the holiday shopping season.

This year is no exception in terms of the timing, but the volume is unprecedented.

On that Monday, FedEx estimates it will move 19 million shipments through its Ground, Express and Freight services, a 10 percent increase from the busiest day last year.

Beyond the holiday rush and statistical high point at FedEx hubs around the world including Memphis, there is a coming shift within FedEx that promises to be historic.

The transformation by the city’s best-known global business brand is a combination of proactive and reactive planning.

“I think maybe we arrived at a better strategy through the wrong process,” FedEx founder and CEO Fred Smith said at the end of 10 hours of presentations to investors and analysts in Memphis this past October.

What got the attention of those at the two-day investors event – an annual undertaking of major publicly traded corporations – was the dollar figure floating around.

FedEx plans to add $1.7 billion a year in profitability, most of it through cuts in employees and other cost reductions. And most of the cuts and changes, $1.2 billion, will be in the company’s oldest and largest division, FedEx Express.

“We have given you a lot of numbers, none larger than $1.7 billion,” said Alan Graf, FedEx’s chief financial officer. “A good decision is based on knowledge and not on numbers. I can’t believe I’m saying that,” he added as he attributed the axiom to Plato.

The FedEx changes also reflect a customer shift under way for years away from air to ground and ocean transport. Even high tech, high value low weight tech product launches that were once the exclusive domain of air services are part of the shift to ocean containers.

Some of the shift reflects customers moving elsewhere in the FedEx portfolio as a reaction to the recession. But the shift also reflects improved ocean container technology and shipping methods.

“Of course the business has deteriorated. That’s why we’ve done this,” Smith said, referring specifically to Express. “When we started going into fiscal year ’13, we were all thumping our chest thinking this is going to be a record year.”

But by October, Smith was unsure in his past belief that growth in international trade would do what it had done for decades – average twice the global gross domestic product. Still, Smith doesn’t see it as a shrinkage of Express business.

“It’s just not going to be a significant growth business,” he said.

Smith had already been thinking about the “portfolio” of services FedEx had already invented that revolutionized air cargo services by the mid-1970s.

FedEx and UPS are most certainly competitors, but Smith doesn’t regard them as being in the same business. At least he doesn’t define FedEx’s business the same as UPS’ business.

While other FedEx executives referred to UPS generally as a competitor, Smith didn’t hesitate to mention the UPS brand by name as he challenged analysts on their view of the competing business models.

“You think that it makes the most sense to put Express and Ground parcels together,” he told one during one of several question-and-answer sessions.

“We strongly disagree with that. UPS has looked at it as a package business. … We don’t think that putting the two networks together makes a lot of sense. We think our strategy is a better strategy assuming we get Express with its better strategy.”

This time the reinvention isn’t necessarily about expanding the methods. It’s more subtle.

“We just don’t need as many people shuffling paper to clear items when we have items on the line,” Smith said. “You don’t need as many couriers and handlers when you have a system that allows you to schedule your work before it ever comes into the station.”

Others in the management tier just beneath Smith on the organization chart said the reorganization is about eliminating redundant systems and processes in what began as a labor-intensive sorting process in the 1970s. Then workers planned to fill one module for a FedEx jet as quickly as possible and fill up as many more as it took to get packages on their way.

“This is a really big deal,” Smith said as he attempted to leaven the profitability goal with a healthy dose of tech talk pointed at cloud computing and items like wrist devices to show the shelf a package will fit on before the package arrives.

“It may be something that is adversely affecting the U.S. in total employment. This is going on everywhere,” he added. “It probably would have taken us longer. We probably wouldn’t have done it with the same degree of urgency. We may have decided to put more emphasis in one area or another. But I think it is fundamental to the enterprise.”

That made Rob Carter, FedEx’s chief information officer, a major player in an event that is normally dominated by bottom line questions and concerns, not to mention very cautious forward looking statements.

“You may be wondering why is the technology guy jumping up here on the first night?” Carter told the audience of several hundred as he boasted of his streak of not being asked any questions on quarterly corporate earnings calls by analysts.

Much of his talk that night was about a general theory of “dominant design” in technology that comes to be the standard used by its inventors, but more importantly by others, even competitors.

The next day, Carter was much more FedEx-centric pointing to targets like the 237 systems at FedEx that manage addresses and 302 separate databases that sort addresses.

“That’s not a particularly pretty picture,” he said as he talked of “enterprise foundational services” he and others are developing for FedEx that would have 80 percent less complexity and code and what he termed “sprawl of the history of our applications.”

“You don’t have to solve all of those problems,” Carter said. “You just stand up your new application and point at it.”

The first of three phases of buyouts begin in June 2013 across FedEx Corporate, Express, Services and Tech Connect U.S. divisions. Employees with five years of service get buyout packets in February with decisions by employees by April 1. There are specific places in Express the company wants to make the cuts that also go toward the longer-range goal – a change in FedEx’s culture of innovation and technology. (For more details on the buyout, see Page 13.)

“We can’t just cut off an arm,” Graf said. “We have to do this by design and make sure our service levels improve. … It depends on the ‘take’ rate and how long we may need for them to stay.”

The two purposes – a profitability goal and changes in the way FedEx operates that improve service levels – come with a $600 million program cost. Half of that cost is estimated to be in the current fiscal year. The other half of the cost would be in fiscal year 2014.

Smith said he believes most of the employees who leave or the “reduction in head count” will be through attrition based on a “significant” amount of attrition each year in some positions.

“I think the only significant effect on people and in most cases it won’t be significant, is … some folks will have to go to work at a different location to get the advantage of that,” he said.

Later, in a roundtable with reporters, Smith said the changes could mean more volume coming through the Memphis Super Hub, particularly with the rerouting of FedEx jets.

FedEx’s shift, meanwhile, is part of a larger fundamental change by both of the dominant names that have made Memphis International Airport.

Memphis-Shelby County Airport Authority leaders have long said no matter what happens with the passenger half of that equation – Delta Air Lines – FedEx is what keeps the continuing cuts in Delta passenger service at Memphis from taking a heavier toll on the airport.

Delta announced the terms of a “refleeting” that will mean fewer of the 50-seat regional jets used by Delta for connecting and regional service than originally anticipated a year ago.

The refleeting is the latest chapter in a passenger air service saga that has included two rounds of significant passenger service cuts by Delta at Memphis in a year.

Delta stopped the nonstop air service to Amsterdam for the fall and winter season and then as the service stopped for the fall, announced the Amsterdam flight was gone for good.

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