FedEx: The world’s largest continuous flow process
From package pickup to final delivery, FedEx's air freight network is the world's largest continuous flow process, allowing it to deliver on its customer promise of fast, overnight, and reliable delivery.
FedEx Express is the world’s leading express delivery company. Founded in 1971 as Federal Express, the company has experienced outsized returns and growth since its inception, with a quarterly dividend and a 63% increase in share price in the last five years alone.(1) This success is directly attributable to the highly effective alignment between FedEx’s strategy and customer promise of rapid delivery and its highly automated and synchronized operating model, specifically within its major subsidiary, FedEx Express. FedEx serves as an excellent example of how executing a successful operating model is crucial to creating and capturing value.
Business Model
FedEx creates value by offering “high-value added” package delivery to over 220 countries. (2) The business model can best be summed-up in the company’s early slogan: When it absolutely, positively has to be there overnight. (3) With 652 aircraft (the world’s largest freight airline) moving over 4 million packages per day, FedEx guarantees speed with a reliability of greater than 99% (4). Very few companies can make such a claim, and FedEx is able to capture value by consistently delivering on this promise to its customers.
Operating Model
Any company could transport one package via aircraft from point A to point B quickly, but this is prohibitively costly without economies of scale. To deliver on its customer promise of rapid and reliable delivery while offering competitive pricing, FedEx Express relies on an extremely efficient operating model that is centered on its aircraft (Figure 1) (5). FedEx is colloquially known as an airline that owns trucks, unlike its nearest competitor UPS, a trucking company that owns airplanes.
While FedEx Express has the largest freight airline in the world, these aircraft do not fly direct. Instead, all aircraft pass through one of FedEx’s 14 major hubs placed strategically around the globe (Figure 2, illustrated in purple). (6)
Instead of aircraft taking off periodically during the day, all aircraft take off and land in waves (4 per day) within the same time windows (Figure 3). (7) This operational model reduces WIP time of delivery – packages are immediately placed on outbound aircraft instead of waiting around, yet this requires tremendous capacity to land, service, and launch aircraft as well as to sort, since all packages must be unloaded, sorted, and reloaded within tight time constraints. Therefore, hubs are located at passenger-light airports with large infrastructure to accommodate many aircraft.
Figure 3
Nowhere is this better exemplified than at FedEx’s “world superhub” in Memphis, Tennessee. Each night, 8,000 employees sort over 1.5 million packages. With a total of 3.3 million packages sorted per day, the Memphis hub is the largest mail and package sorting facility in the world. (8) Its efficiency relies on a continuous flow process (Figure 4 shows the superhub in action) (9). The Memphis airport is the world’s busiest airport after dark, with 140 aircraft arriving within a two and a half hour window between 10:30 pm and 1:00 am, a cycle time of one aircraft per 77 seconds.10 Aircraft take between 35 – 70 minutes to unload, equaling one container of ~245 packages entering the hub every 11 seconds. To assist in sorting, packages are placed onto one of three conveyor lines based on size and weight, then sent to the Matrix – where employees place packages face up for barcode scanning and an automated system of 42 miles of conveyor belts send the packages to the correct aircraft for outbound loading. The outbound launch of aircraft starts at 2:30 am; by 4:30 am the last of the 140 aircraft has departed. (10) This highly automated and efficient sorting and airline system is the critical competitive advantage of the company’s operating model. It’s also capital intensive, thus creating high barriers to entry and limiting competition. This unique operating capability allows FedEx to successfully deliver on its customer promise and business model of overnight delivery, thus creating and capturing value that is hard to reproduce.
Figure 4
Performance
In a fairly low margin industry, FedEx’s alignment of business and operating model has resulted in a healthy operating margin of between 5%-8% while generating revenues of $27.2 billion in fiscal year 2015 alone. (11) The company has also changed its pricing model recently – space is more valuable than weight and the new pricing model reflect this, resulting in increased yields (Figure 5). (5) As e-commerce increases worldwide, FedEx is well placed to leverage its highly efficient operating model to deliver on its business model in the years to come.
Sources:
[1] https://www.google.com/finance?q=fedex&ei=6MZgVpC2CI-oeb-BsSg
[2] http://investors.fedex.com/investor-home/default.aspx
[3] https://en.wikipedia.org/wiki/FedEx#Advertising
[4] http://about.van.fedex.com/our-story/company-structure/express-fact-sheet
[5] http://marketrealist.com/analysis/stock-analysis/industrials/courier-services/charts/ featured_post=492808&featured_chart=493056
[6] https://people.hofstra.edu/GEOTRANS/eng/gallery/Map_Air_Freight_Integrators.pdf
[7] https://www.youtube.com/watch?v=0xEczrGIy08
[8] http://www.ehow.com/info_8036798_fedex-hubs.html
[9] https://www.youtube.com/watch?v=SNFE_1Rnsu8
[10] http://www.cnet.com/news/at-fedex-sorting-packages-1-5-million-at-a-time/
[11] http://s1.q4cdn.com/714383399/files/doc_news/earnings/2015/FedEx-Q1-FY16-Earnings-Release.pdf
Excellent post – I particularly enjoyed the video depicting daily flights for FedEx. Quite impressive! I was struck by the fact that “FedEx is colloquially known as an airline that owns trucks, unlike its nearest competitor UPS, a trucking company that owns airplanes.” Does FedEx generate most of its revenue from overnight and second day delivery rather than from FedEx ground? How much of FedEx’s business is based on documents versus packages, and is this business at risk as legal documents can be more easily executed electronically?
Great question – Yes, over 60% of FedEx’s revenue comes from its Air segment (FedEx Express). See Figure 1 for the full breakdown. I agree with you that document delivery has the chance to be disrupted, however the company is well-placed to ride the rising wave of e-commerce. Even if a company like Amazon wanted to enter this space directly, it would be very capital intensive to do so.
Great post JP. As someone who grew up in a FedEx Family (Dad, Mom, and brother all worked for FedEx at one point) and grew up in Memphis, the scale is impressive. Watching the aircraft arrive at night is truly a sight to see. One point you alluded to WRT FedEx vs UPS owning trucks is actually quite interesting. FedEx is primarily an airline, meaning its employees are covered by the Railway Labor Act, and have little to no capability to unionize, whereas UPS is a trucking company whose employees are covered by the National Labor Relations Act, allowing them to unionize. This was because national coverage meant that union problems in one area could rob work from a different state. This has played out significantly in favor of FedEx, and is a huge reason they enjoy some advantages over competitors. UPS actually lobbied to change this and force FedEx to operate under the NLRA so that they become burdened with the same regulations. Obviously, this would have a HUGE impact on operations. Food for thought!
This is really impressive operating model for FedEx. Sorting packages from all 140 aircrafts and passing right packages to right destination aircraft needs highly efficient and more importantly effective operations setup. Thanks for sharing the video for US operations. On that, it raises two questions:
1) Does FedEx have same efficient operating model at international hubs?
2) Is FedEx planning to expand its network through more international hubs or the company does not feel the need for it at this stage?