Today's WSJ article:
Page One Feature
FedEx CEO Smith Bets His Deal
Will Recast the Future of Shipping
By DOUGLAS A. BLACKMON
Staff Reporter of THE WALL STREET JOURNAL
What does Federal Express do now, in a world that may not absolutely, positively need it overnight?
THIRD IN A SERIES
Frederick W. Smith foresaw today's fast-cycle economy a quarter-century ago when he created Federal Express, a company obsessed with speed and reliability. He leapfrogged the rest of the transportation industry, and FedEx's parent, FDX Corp., became a $17 billion-a-year landmark of the new economy.
Now, the need for a fast but pricey delivery service, something that was a brilliant bet not that long ago, isn't so clear. Indeed, the rate of growth in FedEx's delivery volume within the U.S., which accounts for about two-thirds of the company's revenue, has slowed significantly this year.
Some of the reasons are clear: e-mail delivers documents instantly. Low-cost truck lines, discount air carriers and even ocean vessels now provide tracking of shipments via the Internet. Big FDX rivals such as United Parcel Service of America Inc. and Airborne Freight Corp. offer reliable ground and air services, along with versions of the elaborate information systems that once distinguished FDX from the pack.
But something bigger is also threatening FedEx: Companies are a lot smarter than they used to be.
A big part of FedEx's business has traditionally come from firms that would suddenly realize they were short of key parts needed for their production, or that they were low on goods demanded by their customers. Because those companies couldn't plan their needs particularly well, they relied on FedEx to make up in speed what they lacked in precision.
Now, many businesses are deploying complex new "supply chain management" systems. Those systems are designed to eliminate much of the unpredictability in their operations -- and also much of the need for the kind of expensive, rapid-fire delivery FedEx excels at providing.
So Mr. Smith, the 55-year-old chairman and CEO of FDX, is making two more big bets. First, he is gambling that his company can remake itself by slowing some things down. The company is improving its delivery services that compete more directly with UPS and the U.S. Postal Service. It has invested $500 million in the past two years to double capacity at its RPS unit, a business-to-business delivery network acquired in 1997. RPS transports packages more slowly, more cheaply and with much higher profit margins. FDX is also planning to build at RPS a residential ground-delivery network, though it won't be available nationwide for several years.
Second, and more ambitiously, FDX is trying to recast itself as a major provider of the very management systems that threaten the company. Mr. Smith wants to design a network that can supplant a company's inefficient stream of faxes and phone calls with digital exchanges of information about demand, factory schedules and the availability of materials.
Working at their best, such systems would select the most logical, most economical type of transport -- air, land or sea -- for delivering packages on time. They would also coordinate customs clearances around the world and minimize the amount of time any item sits in a warehouse along the way. If this idea pans out, assembly lines won't need to be shuttered unexpectedly due to a sudden drop in consumer demand, and factories won't have to pay huge premiums in overtime to handle busy times.
"That is absolutely the way the world is going to work," says Mr. Smith. "If we aren't successful in this area, we aren't going to be successful at all."
And indeed, if this strategy really jells, it could enable some companies to dispense with warehouses altogether. That is exactly what FDX is hoping to do, and it isn't starting small: Its first client is Internet hardware behemoth Cisco Systems Inc.
That said, Mr. Smith's bets are loaded with risk. For starters, the company says it has spent "tens of millions of dollars" and devoted hundreds of employees to devising the new software and systems. Also, such programs have been notoriously difficult to implement at many companies.
And the business is swarming with rivals. Andersen Consulting, at times teaming up with truck and leasing company Ryder System Inc., supplies supply-chain systems to dozens of companies. International Business Machines Corp. and i2 Technologies Inc. are big software players too --minus the trucks and planes. The reason for the competition is simple: These systems are at the heart of business-to-business electronic commerce, a category expected to hit $1.3 trillion of transactions by 2003. That would dwarf expectations of consumer spending on the Web by 10 to 1, according to Forrester Research.
Deep in the fray, of course, is UPS, the giant nemesis of FDX. The company's chairman, James P. Kelly, describes UPS as "a global conveyor belt" arranging just-in-time delivery of materials and data from anywhere in the world.
UPS has already had powerful success in e-commerce by leveraging its ground delivery system, which reaches nearly all addresses in the U.S. Because of its massive volume, UPS's costs per package on residential deliveries are tiny. So UPS can charge rates much lower than air freight and still make money. That, coupled with electronic tracking and guaranteed delivery dates, has made UPS the preferred method of delivering consumer goods purchased over the Internet. A survey found that 55% of all online purchases last Christmas were shipped via UPS. FDX carried only about 10%.
Mr. Smith dismisses UPS's lead in residential e-commerce and its inroads on overnight packages. He says e-commerce transactions between businesses will be vastly more profitable, and adds that FDX is heavily focused on leveraging the international delivery network it has spent billions to build, particularly in Asia. Still, in shipping goods between businesses, FDX concedes that it rarely wins more than about 25% of the packages shipped by its 300 biggest and best customers.
And with expected 1999 revenue of $26 billion, UPS has far greater financial resources than FDX. It is expected to become an even more potent player this month, when the company plans to hold a $4.1 billion initial public offering, the largest American IPO ever.
UPS scoffs at Mr. Smith's new vision as overkill at best, recycled software at worst. "We don't believe we are software developers," says its e-commerce chief, Mark Rhoney. Companies making that gamble "are trying to go a bridge too far."
UPS says it can achieve the same efficiencies by using existing, less expensive software and its own highly advanced warehousing and logistics unit. "Maybe you don't need an inventory completely in motion at all times," says UPS spokesman Steve Holmes. "There's debate over that theory."
High-Tech History
But working to FedEx's advantage is this fact: The company has an impressive history of technology breakthroughs.
In the 1980s, Mr. Smith began to give away more than 100,000 desktop computers packed with FedEx software, designed to link and lock in thousands of customers to its ordering and tracking systems. FedEx was the first to equip its drivers with hand-held scanners capable of alerting customers when packages had been picked up or delivered.
And, in 1994, FedEx was the first big transport firm to launch a Web site with tracking and tracing capabilities. "It was very clear to me that this was going to change the whole way that people interacted with each other," Mr. Smith says. "What I didn't understand was how rapidly it would be adopted."
Other companies did figure that out, though, and began pushing software programs to wit. "Maybe you don't need an inventory completely in motion at all times," says UPS spokesman Steve Holmes. "There's debate over that theory."
High-Tech History
But working to FedEx's advantage is this fact: The company has an impressive history of technology breakthroughs.
In the 1980s, Mr. Smith began to give away more than 100,000 desktop computers packed with FedEx software, designed to link and lock in thousands of customers to its ordering and tracking systems. FedEx was the first to equip its drivers with hand-held scanners capable of alerting customers when packages had been picked up or delivered.
And, in 1994, FedEx was the first big transport firm to launch a Web site with tracking and tracing capabilities. "It was very clear to me that this was going to change the whole way that people interacted with each other," Mr. Smith says. "What I didn't understand was how rapidly it would be adopted."
Other companies did figure that out, though, and began pushing software programs to wring efficiencies out of transport and delivery services. Mr. Smith urged his executives to come up with a smart response, but he had a hard time persuading them to invest in technology that didn't have a clear payoff for the transportation side of the business. "It was enormously frustrating," he says. "It took a long time for me to get across to people ... how profound I thought this was going to be and what a different set of disciplines it was going to require to be successful. We couldn't continue to conduct business as usual.
"The benefits were not necessarily predictable, but the risks were potentially just so injurious that we just had to go out and do them," Mr. Smith says. "It became obvious that it wasn't a big deal, but tat transacts 80% of its sales over the Web. FDX is scheduled to begin coordinating all of Cisco's shipping over the next two years -- and in the following three years, gradually eliminate virtually all of the company's warehousing.
Here is how that ambitious plan would work: The company relies on factories in the U.S., Mexico, Scotland, Taiwan and Malaysia to make the dozens of finished parts its customers want. Now, Cisco often holds on to each part at a warehouse near the factory so the whole order can be shipped to the customer at once.
But Cisco's business is booming -- its revenue has grown 40% annually over the past three years -- and the company doesn't want to continue building warehouses, paying for reshipping, and owning tens of millions of dollars of inventory while it awaits transit. Beyond that, the company needs more flexibility to be able to drop or add manufacturers at a moment's notice. So Cisco wants a far more advanced system for moving products.
The idea: Merge the orders in transit. As many as a hundred different boxes destined for a single customer would be shipped independently as soon as they are manufactured -- and they would all arrive at a customer's door within hours of each other. The parts could be assembled right there, never spending a moment in a central warehouse.
FDX and Cisco began talking about this idea back in the spring of 1997. The following January, Mr. Smith met with Cisco's senior officers at their San Jose, Calif., headquarters and then spoke privately with the CEO, John Chambers. The two executives struck a chord about how manufacturing and transportation companies should evolve in a networked economy.
Meanwhile, Cisco discussed the plans with its other transportation suppliers. Several, including UPS, said they could handle the job using their current logistics programs.
But in the end, Cisco picked FDX because the company said it was willing to overhaul its entire operation. FDX is creating a unique system that will automatically select routes for an endless number of Cisco shipments: routers made in Mexico, hubs from Scotland, switches from the U.S. Breaking with a past practice that often rankled customers -- pushing customers exclusively into FedEx services -- the new software is supposed to pick whatever type of transportation is most effective and economical. So, it's quite possible that FDX's system will route deliveries on ships, airplanes or trucks owned by other companies, even UPS.
In addition to planning every shipment, FDX must coordinate customs controls as a package moves from country to country. As the system is fully phased in, management of all shipping shifts to an FDX "command and control center." Gradually, Cisco's need for warehouses is supposed to disappear as more orders are merged in transit. Just as critical, the real-time status of this massive synchronization is to be constantly available on the Internet.
"FedEx said, 'We will change our networks, our capabilities, our structures to allow you to do that,' " said Lincoln Holland, the Cisco vice president for logistics overseeing the project. "They said that's our vision of the world... Now we are just hoping they can create a product that will work for us."
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