FedExs Strategy for Success in the Marketplace - Assignment Example

Providing customers with purchasing convenience and seamless access to the company’s portfolio is the main evidence of customer intimacy and support that FedEx offers to its customers. In addition, each of the FedEx\u2019s business segments has independent operations and strategies that enhance anticipation and customer support. In addition, FedEx has a supportive website (fedex.com) that demonstrates its product leadership.  

What are FedEx’s four main business segments? Provide two examples of traceable fixed costs for each of FedEx’s four business segments. Provide two examples of common costs that are not traceable to the four business segments.

FedEx Express, FedEx Ground, FedEx Freight, and FedEx Kinko\u2019s are the main business segments of the company (FedEx Form 10-K 2005, p. 3). On the other hand, the cost of maintaining the Memphis international airport facility and the purchase of 557 airliners are examples of traceable costs for FedEx Express. Traceable costs for FedEx Ground include the cost of maintaining information and data centers located in Pittsburgh (FedEx Form 10-K 2005, p. 25) in addition the business segment caters to Daniel Sullivan’s (CEO) salary. Finally, traceable costs for FedEx Freight include the cost of owning and maintaining 39,500 vehicles and trailers and their customs-critical headquarters in Ohio. A common example of not traceable to the four business segments would be PGA golf tournaments sponsored by the company.

Identify one example of a cost center, a profit center, and an investment center for FedEx.
- Cost center -Memphis based FedEx Express’s primary sorting facility
- Profit centers-Kinko’s Office and Print Centers
- Investments center- FedEx Ground

Compute the margin, turnover, and return on investment (ROI) in 2005 for each of FedEx’s four business segments (Hint: page 99 reports total segment assets for each business segment.)

(Dollar values in millions)   FedEx Express    FedEx Ground     FedEx Freight    FedEx Kinko's

Sales                                        $19,485            $4,680                   $3,217                      $2,066

Operating income                    $1,414               $604                     $354                          $100

Segment assets (2005)             $13,130             $2,776                  $2,047                        $2,987

Segment assets (2004)             $12,443              $2,248                  $1,924                       $2,903

Avg operating assets

(2004+2005)/2                         $12,787             $2,512                 $1,986                         $2,945

Margin (operating income / sales) 7.3%             12.9%                11.0%                              4.8%

Turnover (Sales / Avg operating

assets)                                          1.52                  1.86                     1.62                              0.70

ROI (margin * turnover)            11.1%                 24.0%                   17.8%                           3.4%

ROI (net op income/ Avg op

assets)                                        11.1%                 24.0%                  17.8%                           3.4%

Assume that FedEx established a minimum required rate of return of 15% for each of its business segments. Compute the residual income earned in 2005 in each of FedEx’s four segments.

Residual income = net operating income of an investment

(Dollar values in millions)           FedEx Express              FedEx Ground              FedEx Freight              FedEx Kinko's

Average operating assets (a)              $12,787                      $2,512                          $1,986                           $2,945

Net operating income                          $1,414                   $604                              $354                              $100

Min return 15% * (a)                          $1,918                        $377                              $298                              $442

Residual Income (loss)                       $504                            $227                              $56                              $342

Assume that the senior managers of FedEx Express and FedEx Ground each have an investment opportunity that would require $20 million of additional operating assets and that would increase operating income by $4 million. If FedEx evaluates all of its senior managers using ROI, would the managers of both segments pursue the investment opportunity? If FedEx evaluates all of its senior managers using residual income, would the managers of both segments pursue the investment opportunity?

The return on investment for $20 million investment is 20%* (20,000,000 /
4,000,000) = 1. From the previous trading period, FedEx Ground had a 24%; therefore, it would be sensible for FedEx ground to pursue the investment since their ROI is less than 4%. On the other hand, FedEx Express should pursue the 20 million-investment opportunity since the expected ROI is greater than their 11% calculated ROI. Capitalizing on the investment indicates that FedEx express would increase their overall value of ROI.

When using residual incomes, FedEx ground and FedEx express business managers should pursue the investment as indicated in the table below. It is evident that the investment opportunity would increase the holdings of each individual business segment by $1 million.

(Dollar values in millions)                                                                      FedEx Express                           FedEx Ground

Residual Income previously calculated (loss)                                            $227                                                    ($504)                                                 

Additional operating income (investment)                                                  $4                                                        $4

Required ROI new investment (15*20)                                                        $3                                                        $3

Residual Income (loss) from investment                                                      $1                                                        $1

Residual Income (loss) after investment                                                      ($503)                                                  $228

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