{"id":2996,"date":"2015-12-08T15:11:23","date_gmt":"2015-12-08T20:11:23","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/fedex-grounds-remarkable-ride-to-the-top\/"},"modified":"2015-12-08T15:11:23","modified_gmt":"2015-12-08T20:11:23","slug":"fedex-grounds-remarkable-ride-to-the-top","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/fedex-grounds-remarkable-ride-to-the-top\/","title":{"rendered":"FedEx Ground\u2019s Remarkable Ride to the Top"},"content":{"rendered":"

Introduction <\/strong><\/p>\n

When Federal Express Corporation (let “FedEx\u201d represent the corporation) merged with Roadway Package System in 2000, the FedEx Ground business unit (let \u201cFedExG\u201d represent the Ground business unit) was created. Prior to this, FedEx was known for premium overnight air courier services (Express), but recognized an opportunity to compete at the bottom of the market with ground services (Ground) as well.<\/p>\n

By 2002, FedExG had captured 14%[i]<\/a> market share in the USA and by 2015, FedExG had reached 32.5%[ii]<\/a> market share. Nearly all of this growth came directly from taking share from the industry incumbent United Parcel Service (UPS). FedEx was able to do this by segregating its Express and Ground businesses and then closely aligning each business\u2019 value proposition to its own unique operating model. UPS on the other hand, has continued to run Express and Ground through the same operation.<\/p>\n

Value Proposition<\/strong><\/p>\n

FedExG has a simple value proposition; they will move a package from one point to another for a better price than anyone else. They will also move it more quickly than anyone else can on the ground. FedExG fulfills this value by making business decisions that are specific to the Ground business unit, and by optimizing a flexible operating model.<\/p>\n

Operating Model <\/strong><\/p>\n

FedEx\u2019s approach is interesting because it is opposite to what every other transportation provider has done. FedEx already had a network of infrastructure that covered the entire USA, yet as they built out the Ground business, they did it with a whole new labor force and physical network. If a customer ships one package with FedEx Express and one with FedExG, FedEx will go so far as to send two separate trucks to the \"fed3\"<\/a>customer for pick-up. FedEx allows each business unit to manage its operating network in a way that best meets customer needs \u2013 facilities are rarely combined. The result is that FedEx may have an Express facility in an expensive downtown location, and a Ground terminal in a cheaper industrial setting. UPS combines facilities into one location that tries to meet the needs of two very different sets of customers (premium service versus value).<\/p>\n

The courier business is correlated with GDP growth and trade flows, but also has large seasonal fluctuations, especially over the holidays. FedExG deals with this variability by outsourcing line-haul trucking, pick-up, and delivery to independent contractors. These contractors own a specific group of postal codes and are paid per piece handled<\/u>. UPS on the other hand, has a unionized workforce of employees who are paid by the hour<\/u>. This allows FedExG to keep costs variable on a daily basis, whereas costs end up semi-fixed in the UPS environment. FedExG\u2019s contractors also buy their own trucks, pay maintenance, fuel, and insurance. FedExG\u2019s contractors are thus incentivized to take better care of their trucks and are more conscientious in regards to fuel consumption. In addition, FedExG avoids paying these drivers benefits or vacation pay.<\/p>\n

Contrary to what may be thought, FedExG drivers are not being taken advantage of in this model. When they are not working for FedExG they can leverage their assets to transport goods on behalf of other carriers. If they work efficiently, they may earn great sums of money (many earn over $1M\/year[iii]<\/a>). Not every driver is successful though, and this has led to some disgruntled drivers and court claims.[iv]<\/a><\/p>\n

An additional benefit of drivers owning their own routes and getting paid per piece is that they are incentivized to provide better service. If a UPS driver loses business on her route, she will just be provided with a larger route. A FedExG driver will fight to maintain business and even refer new customers to the sales team in order to increase the revenue on his fixed route.<\/p>\n

Results<\/strong><\/p>\n

Consequently, this model results in FedExG paying drivers a mere $1.88 for a single-piece delivery and $2.48 for a single-piece pick-up. This is more than 40% lower than UPS Ground\u2019s cost.[v]<\/a> The cost savings on labor propagates additional benefits for FedExG. FedExG can price lower than UPS, allowing them to increase volume in a business that benefits from economies of scale. FedExG has used proceeds from this success to invest in automated sorting facilities, which further lowers cost. FedExG has also steered profits into investments to improve transit times. The cheapest Ground carrier is now also the carrier with the fastest service.<\/p>\n

Figure 1 \u2013 FedExG vs UPS Ground Transit Times[vi]<\/a><\/p>\n

\"fed4\"<\/a><\/p>\n

Since FedExG was created in 2000, FedEx has significantly outperformed UPS. A large part of this success is due to the Ground business’s consistent growth and profitability as\u00a0cost conscious businesses\u00a0continue to switch away from Express services.<\/p>\n

Figure 2 \u2013\u00a0FedEx vs UPS Share Price since 2000<\/p>\n

\"UPSvsFED\"<\/a><\/p>\n

The Path Forward<\/strong><\/p>\n

When building volume in new markets, FedExG is highly selective in choosing the lanes[vii]<\/a> it wishes to serve. FedExG will drive density in certain profitable lanes to drive costs down and then expand on a strong base. For example, the price that a customer will be charged to ship a 16 lb piece from Toronto to Montreal is $13.91, compared to $39.50 for Purolator, the Canadian market leader[viii]<\/a>.<\/p>\n

In conclusion, FedEx has successfully split Ground operations from Express and pursued an operating model focused on matching the Ground business\u2019 low-cost value proposition. The result of these unique and strategic decisions is that FedExG has positioned itself to completely dominate the Ground courier market.<\/p>\n

 <\/p>\n

[i]<\/a> http:\/\/money.cnn.com\/magazines\/business2\/business2_archive\/2003\/10\/01\/349456\/<\/p>\n

[ii]<\/a> http:\/\/marketrealist.com\/2015\/06\/fedex-ground-segment\/<\/p>\n

[iii]<\/a> http:\/\/triblive.com\/business\/2223183-74\/fedex-ground-contractors-company-delivery-business-employees-contractor-drivers-deliveries#ixzz3tUwKe7J3<\/p>\n

[iv]<\/a> http:\/\/www.bizjournals.com\/sanfrancisco\/morning_call\/2015\/06\/fedex-settlement-drivers-independent-contractors.html<\/p>\n

[v]<\/a> Based on interviews with former UPS and FedEx employees combined with Financial Statement analysis<\/p>\n

[vi]<\/a> http:\/\/investors.fedex.com\/company-overview\/fedex-ground\/competitive-position\/<\/p>\n

[vii]<\/a> Lane: A specific point to point route (e.g. Toronto to Montreal is a lane).<\/p>\n

[viii]<\/a> Quotes from Purolator.com and FedEx.com<\/p>\n","protected":false},"excerpt":{"rendered":"

Over the last 15 years, FedEx Ground has grown from nothing, into being widely viewed as the preeminent ground courier transportation provider. 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