FedEx’s 3Q S&OP has Highs—and Lows
FedEx’s third quarter (December to February) marks a crucial time for the shipping company. The holiday season brings extreme surges in demand as consumer expenditure spikes due to holiday spending. Although this outsize demand brings the potential for outsized revenue, shipping companies like FedEx must have the operations planning and scheduling savvy to turn that extra revenue into operating profit. In regards to FedEx’s 3Q, their S&OP performance was a mixed bag.
FedEx’s ground business delivered a solid quarter. Revenues for this segmented surged over 20% to $634 million. A number of supply chain decisions likely contributed to the success of this first unit. First, FedEx’s recent capital investments in automation have sped up their ground service (WSJ Article 1). This increase in delivery speed was underlined by the 54 million packages that FedEx delivered at one day earlier than expected. Analysts noted that this demonstration of delivery speed and consistency are likely to increase customer trust in the shipping giant. In addition to customer service benefits, a recent NYT article highlighted a second advantage of FedEx’s investment automation: cost-savings (NYT Article 1). This combination of delivery speed, consistent customer service, and cost-savings likely drove top, and bottom, line growth for FedEx’s ground shipping business in the third quarter. That being said, perhaps the most pivotal reason for the ground business’ success had nothing to do with FedEx’s strategy. The WSJ noted that a shift in retail strategy could explain the huge demand for FedEx ground shipping services (WSJ Article 1). A broad shift in retail strategy this holiday season was to gamble on slower shipping methods. These slower options tend to be far less expensive than express methods such as aircraft. FedEx’s continuous improvement of their ground network and investment in automation helped them meet the greater-than-expected demand for their ground shipping services during the holiday season.
Despite the success of the ground network unit, the shift in retail strategy to slower, but more cost-effective, methods of transport materially impacted FedEx’s express shipping business unit. Anticipating a surge in demand for the firm’s express services, FedEx management bet on bigger aircraft spending and higher staffing needs. These extra costs totaled nearly $170 million during the third quarter (WSJ Article 1). However, demand for the express unit was significantly lower the anticipated and the unit experienced a sharp, 24% drop in operating income. The considerable drop in operating profit can be attributed to Sales and Operations Planning decisions. One of the strategic choices that FedEx made was to adjust the workforce of the express services business. It is unclear from the article is FedEx hired more full-time employees, shifted resources from another part of the business into express services, or hired temporary workers. Any of these options would have the effect of increasing FedEx’s capacity to meet the anticipated surge in demand for express shipping due to the holiday season.
Intuitively, FedEx’s bet on greater demand for their express business makes sense. Trends in retail from the growth of e-commerce to consumer desires to have products immediately would lend to the idea that management’s forecast of high demand for the express business was probably a good idea. However, as retailers struggle to stay afloat in an era dominated by the e-commerce, bottom line growth by betting on more cost-effective shipping methods may be a trend that continues. It will be interesting to see how FedEx navigates this dynamic.
WSJ 1: https://www.wsj.com/articles/fedex-pinched-by-retail-shift-during-holidays-1521639724).
NYT 1 https://www.nytimes.com/2018/03/18/technology/fedex-robots.html
Andy,
What I kept thinking about while reading your post is how many parts of this company must have come together to increase FedEx’s performance in so many areas. I know we discussed this idea of collaboration in class, but it really is amazing how well some companies are able to do this. With a company like FedEx, they have all your common business functions such as top management, finance, marketing, and distribution but they also have different segments of their business such as FedEx Ground, FedEx Freight, and FedEx Air. In such a large business, it is critical that all different groups are communicating well and attributing to these planning decisions.
You had outlined that FedEx puts a large emphasis on speed of delivery and consistency of delivery to their customer. I believe this is something that truly shines through with FedEx’s flexibility in their distribution team. I was reading FedEx’s 2018 Service Guide which outlines every possible way that FedEx can get you something, if need be. It was actually pretty eye-opening. One service is “FedEx International Next Flight” which means you can get a package internationally in just a couple hours. Basically, this package will get on the next international flight to where you are. Another service with the ‘wow’ factor is FedEx Charter. A customer can charter an entire aircraft for a special shipment. I believe that by expanding these possibilities for their customer, FedEx swallowed some upfront costs but in the end they will capture a larger market share for their loyalty and reliability to their customers. It is apparent just from this service guide that FedEx really does everything in their power to move inventory from Point A to Point B.
http://images.fedex.com/us/services/pdf/Service_Guide_2018.pdf
Andrew,
The use of larger scale aircraft was certainly a tough decision for FedEx to make. As we learned in our forecasting unit, the demand data from years past is used to predict demand in the future. It can be manipulated in many ways, depending on what the company wants to use. This is not a foolproof method, as we know, and cannot predict the future perfectly. Sales and Operations planning most likely does not have to be set in stone unless they are contractually obligated to some of their resource plans. I wonder if after the month of December FedEx decided to cut back on their express shipping capability that they increased for the holiday months.