The Business and Operations of FedEx - Research Paper Example

?FedEx The following is a research paper about the business and operations of FedEx. FedEx, re d from Federal Express in 2000, is a logistics and courier service company that has operations in over 220 countries. Established in 1973 in Tennessee, FedEx has gained business and market penetration all across the world and is one of the main players in the logistics industry. The paper takes a look at the various business avenues of the company. Nature of Product & Service a. Products FedEx primarily offers shipping, logistics and freight services to customers across the globe. Product offerings include delivery, express, logistics support and freight forwarding under different brand extensions such as FedEx Freight, FedEx Express, FedEx Ground, FedEx Supply Chain, FedEx Corporate services and FedEx Trade networks. In addition to that, FedEx bought Kinko’s in 2004 and rebranded the offering into FedEx Office. With this brand, the company provides office supplies and printing services to consumers including computer use products, USBs, paper, business and greeting cards, stationery, mailing boxes and supplies, etc. b. Role of technology FedEx uses topnotch technology and MIS in everyday business that allows tracking of big and small packages across the globe. With the most advanced telecommunications and computer networks in place, a customer is able to log into the FedEx online website and track the exact location of the shipment and have an accurate understanding of when the product will reach destination. FedEx also offers FedEx Ship Manager at fedex.com, FedEx WorldTM Shipping Software and well staffed call centers (fedex.com) for the help of customers in tracking their shipments. In addition to that, FedEx utilizes advanced software and programs to assist employees in their everyday work and to be more efficient. For corporate clients, the company has innovative products such as Critical Inventory Logistics service through FedEx Supply Chain. c. Product life cycle FedEx is a mature company that has been in business since 1973. FedEx is in the maturity stage, as shown in the diagram1. However, the company has managed through innovation, new product development, increased customer outreach and efficient business practices to expand this cycle with higher sales volume. d. Price elasticities The logistics industry is highly competitive with not only international players such as DHL, FedEx and Maersk but also an abundance of local (domestic) players in various countries. This means high price elasticity for some of FedEx products. In the U.S. market alone, the two biggest players are UPS and FedEx and customers switch between the two based on the product and service prices. e. Substitute products and service The logistics industry is directly related to businesses and consumer demand for their products. A logistics company is run on a huge investment and requires use of infrastructure. The occurrence of FedEx substitutes is limited to competition such as UPS and DHL; there are no real substitute options for logistics companies that can service the customer need satisfactorily. Market trends Economic activity has a direct impact on the demand for logistics and transport. The logistics industry sees a boom when economies are robust and active: businesses have consumer demand for their products and the timely delivery of the products is based on the performance of the transport company. Conversely, a slow or bad economy shows a sluggish demand for logistics services. The economic downturn of 2007 impacted the logistics industry in a negative way. With a recessing global economy, trade slowdown and conservative consumer demand, logistics industry also faced scarce demand. a. Consumer behavior FedEx has individual customers as well as business or corporate customers. Both types of consumers have a few definite needs. They want specialized, customized products that target their specific needs. While creating a customized product for a corporate customer is more feasible and cost effective than creating one for the mass consumer, FedEx has addressed the needs of individual customers by studying cohorts and creating products for the specific groups of people that share interests. For example, one need identified is the buying and sending of gifts during Christmas season. FedEx offers special offers during this season so that consumers choose FedEx services and products over competition. Corporate customers have very specific needs as well. They have clients all over the world and the timely supply of raw material and finished goods is entirely dependent on the reliability and close cooperation of the logistics company. Consumers are also looking at options that are environmentally friendly and minimize the company’s carbon footprint. Consumers are hesitant to choose companies that are not socially responsible and sustainable; consumers boycott companies that harm, even inadvertently, the communities and environment around them. As reported on the company website, FedEx addresses these through responsible policies regarding the environment, communities, workplace safety, employee equity, global citizenship and philanthropy. Consumers are also more cost conscious; they compare between products, the features and offered prices. With the internet and social media, consumers also have a lot of information at their fingertips along with the need to know as much as possible, including the exact shipment location, the amount of time that delivery will take, swiftest options, environmentally friendly options, etc. b. Shifts in demand and supply curves The demand for logistics services provided by FedEx is directly affected by the economic prosperity and activity; higher economic activity would increase demand and shift the curve as it would increase the disposable income of consumers, urging them to buy more and businesses to produce more. The demand curve is also affected by the pricing strategy of FedEx in relation to competition, particularly UPS. On the other hand, the supply curve would shift when there are changes in technology, costs (e.g. fuel prices), demand and subsidies and taxes levied. c. Market forecasts for selected products/industries The logistics industry has changed dramatically in the past couple of years with increased accessibility of the internet to customers, globalization and sophisticated information technology. The next few years will see more focus of the big players in the industry on economies of scale in operations, network based management, increased use of technology (Lun, Lai & Cheng, 2010). In the face of higher costs, companies will become leaner and will cut down on jobs and capacity (“Transport and Logistics Industry,” n.d.). Furthermore, more mergers are expected for efficiency and economies of scale Supply Process & Costs FedEx uses 15 hub airports across the globe to manage over 11.5 million pounds of packages from different locations, further utilizing domestic airports (Smirti, Boubert, Calloud & Papson, 2007) to ensure timely delivery. The key things required in the supply chain management at this scope include effective use of technology, network management and managing volume and timeliness of goods to ensure cost efficiency. For FedEx, higher sales volume will result in higher volume of individual customers (mass) shipment delivery that has low margins or a handful of big corporate clients that offer higher margins with a lot of customization. The graph (McGee, 2012) shows that FedEx has had much lower margins as compared to its bigger competitor UPS since the economic recession in 2008. However, McGee points out, that there are other factors that must be considered with regards to the profitability of FedEx such as the company’s increased command over better cost management. Similarly, McGee reports that the revenue growth for FedEx in the same period is higher than UPS (2.58% for FedEx versus -0.72% for UPS). In these difficult times, a company like FedEx that is focused on managing its costs rather than hiking up prices is the best bet for customers and investors. Structure of Industry The industry is comprised of a few big players globally that includes FedEx, DHL and UPS. Many smaller local competitors are also present which have significant shares in the domestics markets. The nature of the industry is highly competitive and dynamic which requires the players to be constantly innovative in their service offerings. Products are normally highly price sensitive which makes them easily substitutable. Industry is dependent on the economy: as the economy booms, so does the logistics industry. Demand for logistics’ products and services is also often cyclical, experiencing peaks in certain seasons and months. The U.S. market is set such that there are two main players that dominate the logistics industry. Barriers to entry are high so new companies or competition is often not enticed to enter the market. The two firms, FedEx and UPS, are equally respected in the market and service differs only based on individual experiences. They offer substitutable products and compete mostly on price. Based on these factors, they fit the Bertrand model of oligopolistic competition. Government role a. Government Role & Regulations There are various sets of regulation that directly as well as indirectly affect the logistics industry: these include the regulations for manufacturing and transport of manufactured goods such as fuel economy, EPA, hazardous and inflammable material regulations, heavy road vehicles, transport safety, labor regulations, customs, export, etc. In addition to that, FedEx has to be aware of the trade zones and regulations of all the countries that it does business in. Logistics services are normally provided by the private sector but the public sector needs to provide the necessary support and backing to the industry. Infrastructure, roads, ports, freight centers and similar development needs must be met by the state. Furthermore, the state decides on subsides, taxes, tax returns, and incentives pertaining to all industries; based on the national objectives, the state sets the rates for various products and services, boosting certain groups over others. Farahani, Asgari & Davarzani (2009) quote Amos in determining the role of the public sector as follows: Setting policy on logistics that includes objectives, roles and responsibilities of private sector, public sector, industry, markets and governments Auditing logistical performance Establishing participation of private customers with suppliers Public infrastructure planning Reviewing industry objectives, timetables, milestones, etc. a. Economic and monetary policies Economic policies that support businesses are in the best interest of FedEx also as it has been determined that the two share a positively proportional relationship. Expansionary monetary policies that boost spending result in higher output, and greater business. Business environment The economic recession, which began with the collapse of the housing market in the U.S. in 2007 followed by banking and credit industry tightening, impacted the logistics industry ominously. With a slowing economy, business activity dropped pace as well. Consumer spending shrank. FedEx reported a drop in sales in 2008 and was unable to meet the targets set. a. Macro and Micro Economic Events The past couple of years have seen falling traffic in ports and airports around the world due to an impaired global economy (“Transport and Logistics Industry”). Changing fuel costs directly impact the logistics business. Furthermore, the local credit market in the U.S. is also very slow, which has encouraged people to tighten their spending. All of these has resulted in an overcapacity in the logistics industry, whereby fleet and infrastructure remains unutilized and depreciating. b. Globalization and Regionalization In this globalized world, industries are more dependent on each other than ever before. Raw material, labor and manpower, technology, support, finances, best practices and technologies are shared across regions and countries. Eventually, products that get made and reach customers are the result of many international joint efforts and inputs. In this capacity, transport industry plays a vital role. Regions and free trade blocs have been set up that have their own regulation and dynamics that FedEx must be aware of for effective operations. c. Forecasts As mentioned earlier, the shipping industry has taken a significant hit as a result of the economic downturn. The QFinance reports of the Baltic Dry Index, which “provides the daily average cost to ship bulk dry commodities (such as grain products or coal) around the world”. The Index is very representative of the overall global economy as “the freight costs it measures move in response to demand for shipping services. The greater the demand for raw materials around the globe, the higher the index moves.” (“Transport and Logistics Industry,” n.d.). Toughening up of environmental laws will affect the industry significantly. Transporting goods produced with lax environmental responsibility will be heavily fined so FedEx needs to ensure it is prepared beforehand on the production and operations management of business partners and clients. Industry location The logistics industry is very unique when it comes to location because to cater to a global audience, it has to be located everywhere. FedEx has operations in over 200 countries, with bulk of its revenue coming in from the United States market. FedEx uses aircraft, road vehicles and manpower all across the globe to serve customers; offices are located in all major cities in the countries that it operates in, with connectivity to the central domestic airport. This airport is then connected to the Hub airport, which routes packages through efficiently managed networks. The nature of the logistics industry is such that it requires presence all over the world. This is also one of the chief deterrents for new entrants as competing with the global giants that are already established is almost impossible without an investment of astronomical value. The mature markets of the world, such as the U.S. and Western Europe are saturated with the operations of the logistics bigwigs like DHL, UPS and FedEx. The true potential now lies in the emerging and developing economies. The chart below (Hess, 2011) chows in details the new and emerging blocs that should be the focus of FedEx in the coming years as that is where the business is going to grow and the revenues likely to be found. The cluster within Asia represents the highest growth potential based on trade, which covers China, India and Australia. Middle East and Africa also represents a high trade volume. Business and pricing strategies a. Business and Pricing strategies for different market structures FedEx offers different price offers at different product options. For example, the pricing for the same type of service will be different based on the time duration offered: e.g. overnight service by 8:30AM is offered at a different price compared to overnight by 10:30AM (Ferell & Hartline, 2010). Even when the service quality is same, the product pricing is differentiated based on the delivery time. This is aimed at targeting the relevant customer and availing a profit based on a simple point of differentiation. FedEx has used predatory pricing strategy in some locations, such as China, in order to gain market share and compete with local companies more effectively (“FedEx slashing prices for market ignites panic among domestic players”, 2009). The company modifies strategy based on the specific need of a market, the disposal income of the local clientele and competitive positioning. b. New Business Trends New trends in the industry are along the following themes: Relationships with clients/companies that require sharing of risk. Sustainable, green practices and efficiency. Restructured industry with mergers and acquisitions (“Logistics CEOs Identify Top Supply Chain Industry Trends,” 2010). More analyses and research in new client acquisition and conservative about expansionary practices with regards to older, risky customers that have cyclical businesses. Entrepreneurial Ability of Managers a. Importance of Innovation, Culture & Creativity FedEx has to rely on constant innovation and creativity to come up with unique ways to satisfy client needs before competition. This includes creating unique products that customers delight in, offering retail products like office supplies, which is a complementary business. The company was founded by a visionary entrepreneur who had the willpower and the charisma to create his vision of an overnight delivery service into a reality. Taking strength from Smith, the company values entrepreneurial spirit in the workplace and through other avenues and regularly rewards such behavior. FedEx encourages calculated risks as it believes that is the key to developing leaders for tomorrow. FedEx culture is very open and allows flow of communication through the flat structure. FedEx donates generously to the Junior Achievement program that identifies young people with entrepreneurial ideas and capabilities and provides them the resource to flourish and become successful. In addition to that, the company has a Ground Entrepreneur of the Year award that is given to an independent contractor based on his work, innovation, team management and safety adherence. b. Role of Sustainability FedEx recognizes the importance of sustainable practices and incorporates sustainability as a core part of strategy. In 2008, the company committed to reducing the carbon emissions of its aircraft and delivered; fuel efficiency in aircrafts and vehicles is another goal for the company (MARCACCI, 2012). Furthermore, the company is very focused on recycling waste and investment in alternative energy sources. Conclusion FedEx is positioned at a very lucrative position globally. The long term strategy of the company should focus on the growing economies especially in Asia and Africa to reap benefits in the coming years. Furthermore, the company needs to further streamline businesses to ensure better cost and operations management. Lastly, the company must stay focused on the sustainability of its businesses through proactive responsibility programs. References “FedEx slashing prices for market ignites panic among domestic players” (2009). People’s daily Online. Retrieved from http://english.peopledaily.com.cn/90001/90778/90857/90860/6598756.html Ferrell, O.C. & Hartline, M. (2010). Marketing Strategy, 5th ed. Ohio: Cengage Learning Hess, C. (2011). Logistics Trends. [PowerPoint Slides]. Retrieved from http://www.docstoc.com/docs/100971540/LOGISTICS-TRENDS “Logistics CEOs Identify Top Supply Chain Industry Trends” (2010). Market Wire. Retrieved from http://www.marketwire.com/press-release/logistics-ceos-identify-top-supply-chain-industry-trends-1325289.htm Lun, Y. Lai, K. H. & Cheng, T. C. (2010). Shipping and Logistics Management. Hong Kong: Springer Marcacci, S. (2012). “Is FedEx the World’s Most Sustainable Shipping Company?” Clean Technica. Retrieved from http://cleantechnica.com/2012/08/23/is-fedex-the-worlds-most-sustainable-shipping-company/ McGee, S. (2012). “UPS Vs. FedEx: Two Plays on (Eventual) Global Recovery – Only One That’s Low-Priced”. YCharts. Retrieved from http://ycharts.com/analysis/story/ups_vs_fedex_two_plays_on_eventual_global_recovery_only_one_thats_lowpriced. Smirti, M., Boubert, A., Calloud, V. & Papson, A. (2007). “Modeling the Logistics of FedEx International Express”. University of Califronia, Berkeley. Retrieved from http://www.academia.edu/157157/Modeling_the_Logistics_of_FedEx_International_Express “Technological Innovation at FedEx” (n.d.). FedEx.com. Retrieved from http://www.fedex.com/ma/about/overview/innovation.html “Transport and Logistics Industry - Major Industry Trends Slump in Global Trade Devastates Industry” (n.d.). QFinance - the Ultimate Financial Resource. Retrieved from http://www.qfinance.com/sector-profiles/transport-and-logistics Zanjirani, R., Asgari, N. & Davarzani, H. (2009). Supply Chain and Logistics in National, International and Governmental Environment: Concepts and Models - Contributions to Management Science. Singapore: Springer Read More