What is ailing FedEx and can Digital transformation solve its woes ?

I said so…..

In July last year, I made a post on LinkedIn suggesting that eventually Amazon will go for both FedEx AND UPS. Looks like FedEx is the first Target (those that show first signs of weakness are the  ones that go first – Darwin’s Theory- kind of !). The $150 billion of market cap of DHL, FedEx, and UPS has begun  leaking to Amazon.

As I mentioned in that post, Amazon has successfuly built a brand of trust – as far as residential delivery goes. Rapid and reliable fulfillment has become associated with Prime – An Amazon product. A farsighted company like Amazon probably already had this end game in their sight years ago. Now it is playing the final chapters. The Mercedes Vans with large smile logos on them.

To add to the insult and play the Jedi mind game, Amazon embarrassed FedEx this past holiday season,  Amazon announced that sellers on its site will not be permitted to use FedEx for deliveries to Amazon Prime customers. The Wall Street Journal reported a “decline in performance” as the reason for the change.

What is ailing FedEx ?

In the recent earnings call, FedEx shared a multiverse of reasons for its challenges. But in my mind, at the core of FedEx’s problem is one aspect:

FedEx, once a company that pioneered operational excellence in freight and logistics, is still stuck in 1995, like some other legacy giant companies.

So, even if you see a long list of  reasons being cited in various articles behind FedEx’s struggle, like those listed below – the gist is – All those issues are coming to bite FedEx because FedEx did not feel the need to evolve and now it may be a bit too late.

  • Slowing global shipments
  • Increase in residential deliveries
  • Emergence of Micro warehouses

Loss of foresight ?

Even though no one could have thought about Amazon becoming a logistics service provider as well 15 years ago, the eCommerce explosion was a real indicator of significant increase of volume in residential deliveries. FedEx domestic infrastructure, particularly FedEx ground was not equipped to handle the increased volume with the same precision as its international and expedited freight. The operating model was just not built that way.

But FedEx never cared to invest in upgrading its systems and processes !

That too in a era where it was becoming evident that those with the power of technology and algorithms on their side will rule the world. One of the basic tenants on any business strategy in my mind is that you should not have all your eggs in the same basket- in this case, relying heavily on international freight/global shipments as a cash cow, ignoring what was going to become the new normal in the near future (residential deliveries)

And now it may be running out of time !

And likes of Amazon and UPS have smelled that weakness

As mentioned above, Amazon has sensed that the legacy giant is faltering. In my mind, the step of blocking its third-party sellers from using FedEx a few weeks before Christmas — ahead of the busy holiday season, was an on purpose move by Amazon.

The shipping business has changed, fundamentally and specifically in residential delivery segment. Amazon is creating the future and FedEx is struggling to catch up. 

United Parcel Service has also joined the party and is taking some of the business that FedEx is losing. UPS has recently invested significantly to ”expand and automate its network to handle more online orders,” according to a Journal, which reported that UPS has expanded its air shipment network to handle more packages from Amazon and others.

As a result, UPS’s financial results have been far better than FedEx’s. In October, UPS’s profit and revenue rose and it maintained its guidance for 2019. However UPS has to remember the fact that after Amazon is done with FedEx, they may be next.

Can Walmart acquire FedEx ?

A speculation is that FedEx might get acquired in next 24 months, and many are suggesting that Walmart should make the move.

A Walmart acquisition would mean the retail giant goes (more) vertical for an 11% dilution ($38 billion vs. $340 billion market caps). Walmart would recognize economies of scale, buttress their grocery offering (the gangster unlock of the last five years in business), burnish their data set, and go Yoda on Amazon’s a$$ — old, but not to be trifled with.

But with FedEx’s current legacy processes, will Walmart be able to harness the best out of it ?

So what does FedEx need if it wants to get out of this on its own ?

The very first thing that FedEx needs to understand is that:

If it wants to survive this decade, it MUST build residential delivery capability excellence and that can happen only through Digital Transformation

Keeping that as a pivot, the best strategy for FedEx is to collaborate with another big group of Amazon’s victims – retailers for example and create collaborated ecosystems. But this collaboration will not yield anything for FedEx if it decides to collaborate with its existing infrastructure and capabilities.

Blueprint a strategic partnership with Industry specific solutions

FedEx should not start investing in technology, mimicking likes of UPS. Since they will probably start, it is a good opportunity to build technology capabilities around tailored solutions- innovative solutions customized for industries (like retail).

And for that- the very first step is identifying what haunts retailers from a logistics and Supply Chain perspective and design customized solutions (blueprints first) around them. Good examples can be:

(1) Helping traditional apparel retailers leverage a “fast fashion” Supply Chain

(2) Reverse logistics process that minimizes waste and hence costs for the retailers

(3) Take over Supply Chain planning capabilities for some retailers

Such strategic solutions mean leveraging Digital Transformation

For building capabilities like the examples above, they need significant investment in Digital capabilities. The process of determining the investment required in this case needs to happen AFTER solutions are designed. A brute force method of investing in anything and everything that is shiny will not work. The high level steps that needs to be followed to leverage Digital transformation to build solution capabilities are:

  • First, you determine what capabilities and solutions you need to design. This comes in close, strategic, trustworthy partnerships with major players in the target industries- by understanding their pain points
  • Then you determine the following aspects that are required to build and support the solutions and capabilities:
      1.   System investments needed to support process changes
      2.   Analytical methods and processes required to support                                    the solution (leveraging Machine and Deep learning)
      3.   Talent needed to support the newly built                                                             solution/capability

There will obviously be change management issues and culture issues involved with such a massive Digital Transformation, specifically considering that the organization is still stuck in 1995 and Digital innovation mindset penetration may be extremely low.

If FedEx decides to take the route of Digital Transformation – it has a long road ahead of it !

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