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Special Delivery
Think FedEx is only about delivering packages? Think again. The company's presence is being felt all over the supply chain.
Information Week
October 27, 1997
Federal Express Corp. is all about networking. Its fleet of 40,000 ground vehicles and 590 planes forms the visible backbone of the company's $11+ billion business. But behind the scenes-and increasingly center stage-is an equally impressive infrastructure of IT systems and electronic connections that underpins FedEx's transformation from package deliverer to strategic provider of E-commerce, logistics, and other supply-chain services.
FedEx is unabashed in its assertion that building and leveraging these networks will be key to its success into the next millennium. The Memphis, Tenn., company is not only reorganizing its internal IT operations around a more flexible network computing architecture, but it's also pulling in-and in many cases locking in-customers with an unprecedented level of technology integration.
All major transportation and delivery companies, from United Parcel Service to Ryder System, are betting big on technology. The Web package- tracking information capabilities pioneered by FedEx have become industry norms rather than a competitive advantage. It's now a given throughout the industry that information about a package is as important as the package itself.
But FedEx is using IT to remake itself into something different to serve today's networked and increasingly electronic economy. Moving well beyond delivery services, FedEx seeks to be a fully integrated corporate partner that picks up, transports, warehouses, and delivers all of a company's finished goods from the factory to the customer's receiving dock-with status data available every step of the way.
"We believe that information can replace inventory," says Laurie Tucker, senior VP of logistics, electronic commerce, and catalog, a $500 million FedEx unit. "We could just sit back and be the beneficiary of electronic commerce, but instead we want to be the catalyst for the customer to reduce costs."
In many ways, Tucker's division is a prime example of the new breed of IT-driven business units sprouting at companies across the country. Fundamental to the E-commerce and logistics business is forging technology links with customers. That means FedEx's internal IT must be virtually inseparable from the business unit. In fact, says FedEx CIO Dennis Jones, "all our employees do IT to one extent or the other."
Jones, a senior VP on par with Tucker, meets often with business executives as well as CIOs of FedEx's logistics customers. FedEx is developing and training a technical sales force for logistics. And when logistics customers asked for a FedEx shipping module within SAP's R/3 application, FedEx's internal IT helped develop it with SAP (the software is currently in beta). "It's all about integration," says Tucker, "whether it's inside FedEx, with our technology partners, or with our customers."
Integrating Customers
Customers say FedEx's commitment to technology-it spends about $1 billion a year on IT, close to one-tenth of total revenue-helps drive their own businesses. More important to FedEx, that commitment keeps customers from switching to other providers.
Omaha Steaks chose FedEx four years ago as its exclusive delivery service for mail-order steaks and other foods because UPS didn't offer two-day air delivery service. While UPS has since started such a service, Omaha Steaks has stayed with FedEx exclusively because of intimate IT links with FedEx that let Omaha Steaks' customer-service employees easily track delivery status.
When orders-whether from phone, mail, fax, the Web, or America Online-are sent from Omaha Steaks' IBM AS/400 to its warehouses, they're also sent on a dedicated line into FedEx. "We generate a FedEx tracking label at the same time as our own shipping label," says Ron Eike, director of operations for the Omaha, Neb., company.
Omaha Steaks delivers the warehouse-fulfilled orders by truck to FedEx in Memphis or to FedEx regional hubs in Indianapolis and Columbus, Ohio. Once FedEx takes over, Omaha Steaks has full access to FedEx data on delivery status, planned routing, and planned delivery day. Using a peer-to-peer connection over a FedEx value-added network, Omaha Steaks' AS/400 communicates directly with FedEx's Hewlett-Packard and Sun Microsystems servers.
Omaha Steaks, like many FedEx customers, also lets customers track their orders on its Web site with a link to the FedEx Web-based tracking service. "It's delivering information to our customers, and that's what they want," says Eike, who adds of FedEx: "They're very strong in the use of technology and give us very specific information that we can deliver to our customers. For us, that's a very valuable tool in the marketplace."
Some large companies are handing over their entire logistics management to FedEx. National Semiconductor Corp. decided five years ago to outsource to FedEx most of its warehousing and distribution. Today, virtually all of NatSemi's products, manufactured in Asia by three NatSemi factories and three subcontractors, are shipped directly to a FedEx distribution warehouse in Singapore.
The tight IT links between that warehouse and NatSemi exemplify FedEx's strategy of technology integration with its corporate customers. NatSemi's homegrown order-processing application, running on an IBM mainframe in Santa Clara, Calif., sends a daily batch of orders over a dedicated line directly to FedEx's inventory-management application running on a Tandem Computers machine in Memphis. At that point, FedEx essentially takes over, sending the orders to its warehouse-management application in Singapore, where they're fulfilled in the warehouse and shipped. Except for receiving an execution record back from FedEx, NatSemi is done with the order transaction.
"They have the goods, they operate the warehouse, and they create everything necessary to process the order and then hand it off to the carrier-which of course is FedEx," says Larry Stroud, NatSemi's manager of logistics analysis.
For NatSemi, the bottom-line results are impressive: a reduction of the average customer delivery cycle from four weeks to seven days, and a reduction of distribution costs from 2.9% of sales to 1.2%.
"FedEx has helped us prove that quicker cycle times and reduced costs are not mutually exclusive," says Dennis Samaritoni, VP of corporate services at NatSemi. "It's been five years of hard work and a painful change process, but we've succeeded. We used to have to deal with so many different nodes in the process-freight forwarders, customs agents, handling companies, delivery companies, airlines. Now FedEx is our one-stop shop."
In the process, NatSemi also eliminated seven regional warehouses in the United States, Asia, and Europe. "We believe we can shrink customers' costs by helping them remove mass from the enterprise," says FedEx's Tucker. Among FedEx's other high-tech customers for distribution from offshore factories are HP, Bay Networks, Cisco Systems, Compaq Computer, Dell Computer, and IBM.
More Than FedEx
FedEx certainly isn't alone in leveraging technology to move beyond package delivery. UPS, which has spent $9 billion on IT since 1986, has already formed five alliances this year to help disseminate its logistics software among E-commerce users. In each case, the UPS tracking software is integrated into an E-commerce server, which provides order-entry, catalog, and inventory management.
Another transport company that has diversified into logistics is Ryder System. Ryder earlier this year inked an alliance with IBM and Andersen Consulting to deliver logistics services to customers. IBM will lend technology expertise and Andersen its consulting personnel to Ryder projects worldwide. "The key today is to take a systemwide view across the supply chain, as opposed to a functional view, and to pursue systemwide excellence," says Kevin Hagerty, director of marketing for Ryder Integrated Logistics, the company's fastest-growing unit, up 27% last year to $1.1 billion in revenue. "We help companies develop a more coordinated logistics approach."
FedEx, meanwhile, is making several enhancements to its shipping software and E-commerce technologies. The company is rolling out a service, called Virtual Order, that puts customers' catalogs on their Web sites for them. FedEx Ship for Workgroups, a version of FedEx's Windows-based shipping and tracking software housed on a server, is being tested and is slated for release in early 1998. It lets users share address-book information, access to shipping logs, and a tracking database. The server can be connected to FedEx either via modem or the Internet.
Like its competitors, FedEx hopes that partnerships and third-party developers will help disseminate its software and add value for customers. For example, FedEx is working with several push-technology vendors to develop products that push order-fulfillment data to customers. Among the products it's testing internally and with beta customers is Netscape Communications' Netcaster.
FedEx will publish Web APIs in early next year that will permit third parties and customers to write software that makes FedEx tracking and shipping functions seamlessly available, over their intranets or the Internet, from Web browsers. Some FedEx customers, such as Cisco, are already a step ahead. Cisco, for example, lets customers order FedEx services without leaving the Cisco Web site.
FedEx is also testing software written with KPMG Peat Marwick that integrates shipping functions directly into SAP's R/3 enterprise applications suite. The goal: to make R/3 work like a standard business process and automatically trigger other processes, such as proof of delivery and payment. "Most of our customers are in the process of integrating an enterprise system," says senior VP Tucker. "They are looking for ways to improve return on investment and are interested in any business process that can be integrated, as opposed to being separately invoked. Our most innovative customers are pushing us and their other suppliers for that integration."
Underpinning much of what FedEx hopes to accomplish with its customers is the company's own internal IT infrastructure. FedEx is now overhauling that infrastructure under Project GRID (Global Resource for Information Distribution), a program FedEx executives say has been defined in part by customer requests and requirements.
From Terminals To NCs
The objectives for Project GRID include replacing 60,000 terminals and some PCs with up to 75,000 network computers. FedEx is expected to pick a supplier from a short list of five companies later this year. The NCs will be connected 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 decided to go with NCs rather than PCs partly to reduce what Robert Carter, VP of corporate systems development, calls "desktop churn"-the rapid obsolescence of PCs as new applications eat up processing power. With the NCs using WinFrame, "we still have a rich Windows computing environment, but without the churn, and without the high cost of ownership," Carter says.
The NCs, linked over a global Internet Protocol network, will support collaborative applications that FedEx believes will enhance the quality and quantity of services it can deliver to customers. Some of these will track packages through the various steps in the FedEx chain, so that their whereabouts are fully visible to all FedEx employees at all times. One, called the Route Planner System, is dynamically updated software that FedEx station managers can access on the NCs and use to map the most efficient delivery routes.
Another project will enhance Cosmos (Customer Operations Service Master Online System), a system that runs the company's dispatching and tracking system. Cosmos Squared is a next-generation, massively parallel system due to go into production early next year. It will allow enhancements like Non-Event Tracking, a feature that triggers alerts when scheduled events, such as the arrival of a package, do not occur.
Another advantage FedEx hopes to leverage from its thin-client architecture is more efficient gathering and dissemination of real-time data. FedEx runs a 24-hour, seven-day operation called the Global Operations Command Center, the nervous system of its vast worldwide network. Housed in an underground bunker in Memphis, it's staffed by 80 people on rotating shifts. The lighting is low, and the walls are covered with huge screens that track world events, weather patterns, and the real-time movement of FedEx aircraft and trucks.
Over the past year, FedEx has developed software for the center's Sun Ultra workstations that helps specialists predict inbound traffic with greater accuracy, says Kevin Humphries, VP of line haul systems development. Broadly, the software integrates a vast amount of real-time data into a rules-based architecture, which in turn helps FedEx prioritize the hundreds of variables involved in the successful pickup, processing, and delivery of packages. This model is used in many different applications, all geared to faster delivery.
FedEx's aim, Humphries says, is to use as much real-time data as possible to reduce the company's dependence on averages. FedEx wants to extend these applications beyond the center to be available on servers and accessible by the NC clients companywide. Eventually, customers will be able to access some of this information as well, or it could even be pushed out to them.
"We're in the express transportation business, but we've discovered how to lock up a lot of value in the information that we have," says Mark Dickens, VP of integrated technology for FedEx's logistics, E-commerce, and catalog division.
The thin-client architecture helps to ensure platform independence. "When we've designed traditional client-server systems, we've had to make sure we had the proper configuration on the desktop," Humphries says. "What we're talking about now is universal access, without any knowledge on the developer's part where it's going."
In fact, he says, one of Project GRID's main objectives is to provide standards so that real-time information can flow more readily across the network. "How much more powerful we could be if we could make that information [on the Sun workstations] available to our management team," Humphries says. "The things that help us reduce failure is everybody having current and accurate information. Having a common platform, and unifying standards like IP, helps to resolve the frustrating problem of delivery."
Mainframe Retirement
Another objective is to retire FedEx's three Hitachi Skyline mainframes and four IBM mainframes by June 1, 2001, replacing them with Sun and HP Unix servers. Besides its main data center in Memphis, FedEx operates centers in Colorado Springs, Colo.; Orlando, Fla.; Dallas-Fort Worth; Singapore; and Brussels. Another center will be added in Miami next year. All the data centers will run Sun and HP servers.
To support the thin-client architecture and expected new applications, FedEx is upgrading its wide area network. While the NCs have performed satisfactorily in tests, says Winn Stephenson, VP of network computing, they are "bandwidth-hungry devices. And the ICA protocol sucks up a lot more bandwidth as well."
By year's end, FedEx will have rolled out 1,000 T1 lines, running frame relay. FedEx also operates a 155-Mbps ATM link between Memphis and Brussels, using switches from Northern Telecom. Cisco routers are used for the rest of the network. Stephenson says FedEx is experimenting with tiered bandwidth-so-called "class of service" capabilities-to enable multimedia applications such as streaming video.
FedEx's business-perhaps more than most-is a moving target, and the company's senior officers meet every Friday to review the previous week's operations in excruciating detail. "Every time we fail to deliver a package on time, that's where we start," Humphries says. "We begin to ask questions and continue to peel back the onion. We may get down to totally unrelated events."
In addition, the Friday meetings are a forum where FedEx executives take a hard look at their prime asset: information. "Equal to our passion for accountability is our passion for information" says Humphries. "In the meetings, we ask if we have detailed information about the root causes of failure. Unless you have metrics that are real time, you have a hard time with accountability."
Also, because detailed data is analyzed every week, trends become apparent over time, such as systemic aircraft problems, consistent underestimations of the amount of packages moving between two cities, and truck failures. Apparently unrelated events turn out to be related, says Humphries.
But in the long run, says CIO Jones, what FedEx's IT staff of 5,000 people aims to do is build an infrastructure that can support the company's rapid growth, particularly following its planned $2.4 billion acquisition of ground-transport company Caliber System Inc., announced last month. Another goal is to keep FedEx's profits in high gear.
"We are in a growth business, and growth is not a marginal problem given the IT intensity of our business," Jones says. Conversely, without its intensive use of IT, FedEx would have a much less compelling growth story to tell. |
