Changing How the World Does Business: Fedex's Incredible Journey to Success - The Inside Story

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From one of the founding executives of FedEx comes the first full inside story of how Fed Ex came to be one of the world's most successful, innovative, and admired companies. Frock reveals the details of how the company was conceived, launched, and kept afloat despite incredible obstacles.

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1. The Trail of Inspiration

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FedEx originated the modern integrated priority package express industry, the first small-package airline to maintain direct control of shipments with a self-contained transportation system from pickup to delivery. Millions of people rely on FedEx every day for their most important business and personal deliveries whenever and wherever they must have overnight and time-definite service. The delivery service is so much a part of our lives that we can barely recall living without it.

It seems that FedEx has always been there, ready to respond to our most urgent needs, yet few people know how it was first conceived. When its efficient hub-and-spokes network was originally proposed, the concept was ridiculed as impractical. Existing regulations prohibited this form of nationwide delivery service, experts considered it a financial impossibility, and airline executives forecast its demise.

To understand the mountainous road to success, we must look back more than 40 years to glimpse the early dreams that inspired and motivated Frederick Wallace Smith, the Mississippi-born founder of the company.

 

2. Checking with the Experts

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I first met Fred Smith in December 1971. My twelve-yearlong business career up to that time had been spent entirely with the consulting firm of A. T. Kearney and Company, first in Chicago and then in New York City. I worked primarily in the fields of transportation and physical distribution and, at the time, was the principal responsible for that part of the firm’s practice on the East Coast.

Kearney was a very professional organization and a great place to work. Its clients included most of the major airlines, railroads, and trucking companies in America. The Kearney approach involved conducting a thorough analysis of the client’s needs, development of programs specifically tailored to the client’s situation, and in later years, assisting the client to implement the recommended changes. This approach demanded the maximum level of creativity from those of us working day to day, with the client’s senior management. It was a challenging environment, one that guaranteed the rapid development of a consultant’s management and communication skills.

 

3. Feeling More Comfortable

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The priority airfreight market in the early 1970s was dominated by REA-Air Express (the Railway Express Agency), a company already on the decline, and Emery Airfreight, the first certified airfreight forwarder in the United States. Emery and some eight hundred other airfreight forwarders performed the ground service and consolidated shipments for transport by the certificated airlines. The airlines themselves also offered air cargo services, using for the ground portion of the movement Air Cargo, Inc., a company owned by twenty-six airlines. UPS (United Parcel Service), through its Blue Label Service, consolidated small packages for transport by the airlines, but did not provide a true priority service. The Post Office offered a “Priority” mail service that amounted to only a small fraction of the total airfreight market.

We structured our market research to include more than one hundred personal interviews backed up with a mail questionnaire to over four thousand commercial and industrial organizations selected from industries known to be users of airfreight. Data compiled by the Civil Aeronautics Board, the Air Freight Forwarders Association, the U.S. Department of Commerce, and Dun & Bradstreet were also included in the research effort.

 

4. This Dog Might Hunt!

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In mid-April 1972 I arrived at the offices of Arkansas Aviation Sales to present our last progress report prior to preparing a final report. We started with a tour of the facilities and met some of the employees, most of whom were involved with sales operations and care of the corporate jets. While the offices at Arkansas Aviation were at best Spartan, the hangar area was quite a different story. Crammed into every possible parking space were beautiful, shining, expensive corporate jets of various configurations and with a variety of company logos and color schemes designed by their previous owners, which Arkansas Aviation had purchased for resale.

There was even an Aston Martin sports car parked in the corner of the hangar similar to the James Bond model. Curiosity got the better of me and I just had to ask what that beautiful car was doing parked in an airplane hangar. Fred had taken the car as a down payment in trade for one of his smaller propeller planes, as he turned his attention to the more rewarding corporate jet market. As he explained, “It takes up a lot less space than the plane.”

 

5. An Irrational Decision

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The following week Fred was in New York and had some people he wanted me to meet after work. Later that day at a Midtown Manhattan hotel, I was introduced to Art Bass and Vince Fagan. Fred then proceeded to explain that Art and Vince were consultants from the Aerospace Advanced Planning Group. They had just completed a study to evaluate the potential market for the proposed Federal Express service!

I had no clue that another team had been working on a study, duplicating at least a part of the research we had been doing. Trying to conceal my astonishment, I calmly probed to find out more. Fred had first become acquainted with AAPG when Art was making a sales presentation to Little Rock Airmotive, the neighboring airplane modification center on Adams Field. The month before Fred first contacted Kearney, he authorized AAPG to determine the size and nature of the market for priority small packages and to recommend the most effective way to structure a marketing program for the service.

Art and Vince were confident in their assessment of the market but practical in their appraisal of the proposed venture. It seemed odd to me to have two independent groups developing information on the size and nature of the market; however, as I was later to learn repeatedly, Fred was anything but a conventional businessman.

 

6. Kick the Tires, Light the Fires

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Fred was never one to wait around for things to happen. Near the end of the consulting study, Fred began searching for an agency to develop a professional corporate image and logo. At his request, I made several calls to New York firms, but the best price I could get was over $100,000, and that was just too expensive. The company was still months away from startup, and Fred decided to defer development of the corporate image while he attended to other more pressing matters.

Then fate stepped in. Rick Runyon, a young designer from Los Angeles, flew his own airplane, a Cessna 310 to Little Rock on a mission to convince Fred that he was the one to create our corporate image. Rick had his own West Coast graphics company and was responsible for the branding for Getty Oil. He now wanted to do the same for a new airline in need of a dramatic, eye-catching image. Fred was somewhat skeptical, but Rick offered to do the whole thing at his own risk and charge a fee of $25,000 only if Federal Express used his design. It was a generous offer, and one that Fred was pleased to accept.

 

7. A Climate of Chaos

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In my 12 years at A. T. Kearney, I had adjusted to the realization that corporations rarely conducted their operations in the crisp, professional manner we had presumed in the business school classroom, but even the more disappointing consulting experiences had not prepared me for the chaos I encountered at the Arkansas Aviation Sales facility.

Irby Tedder, a retired air force colonel, was the executive vice president, controller, and “mother hen” of the group. He was well qualified for his role at Arkansas Aviation. Irby had served as inspector general of the Continental Air Command and as commander of two large air bases. The “Colonel,” as he was frequently addressed, had amassed over 8,000 hours of command pilot experience and served as deputy wing commander in the Strategic Air Command, which operated B-47 jet aircraft.

Irby was a calming and mature influence on the group, but in some respects, the staff was almost unmanageable. He described Fred as “a nitpicker who had his hand in everything. He worried about seemingly insignificant problems that other people could easily have handled.” However, after my first few days of “managing by walking around” and just observing the confusion, I concluded that Fred had a right to be concerned about the trivial problems. People were doing a lot of talking but had no idea of the enormous tasks required in the next 10 months to launch our small-package service.

 

8. Looking for a Few Good People

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The development support staff needed to be experienced, creative, flexible, and capable of moving quickly in order to have the system ready in less than 12 months. Most of all, the staff would have to be compatible and work in harmony. This was to be no place for egos to disrupt the flow of accomplishment. Only a group of dedicated individuals could pull off this Herculean task. It was going to take a significantly larger and more sophisticated staff than the one we had at Little Rock in the spring of 1972.

Irby continued to be a valuable source of information, providing knowledgeable insights into the personalities and capabilities of the small staff from Arkansas Aviation Sales while serving as a stable bridge between the corporate jet activities and the hectic pace of the Federal Express startup. It sometimes seemed as if everything needed for the small-package operation required a unique approach; we were not merely reinventing the wheel, but creating an entirely new type of service that had no direct precedent.

 

9. Mr. Smith Goes to Washington

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Our air taxi exemption for planeload charters did not license us to operate the small-package service. Regulations then required any airline operating aircraft with a maximum takeoff weight in excess of 12,500 pounds to obtain a certificate of public convenience and necessity (CPCN) from the CAB—our Falcons had a maximum takeoff weight of 28,660 pounds.

Application for a CPCN typically required three or four years during which the applicant had to state exactly what it was going to do. Existing certificated airlines could, and regularly did, oppose the introduction of any new service simply by maintaining it was not needed. Furthermore, the CAB had never granted any airline the broad authority we were seeking. The certification route was not a viable alternative.

Our only option was to seek a change in the regulations. Fortunately, there had been some promising activity in that direction. In January 1972 the CAB had proposed a new exemption for air taxi operators based on the number of passenger seats and cargo payload capacity. Several aircraft manufacturers, about a dozen air taxi passenger carriers, Federal Express, and a number of small communities filed comments in support of the proposed change, and as expected, several larger airlines and the Airline Pilots Association (ALPA) filed comments in opposition.

 

10. The Humble House Gang

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As we started to look at the enormous task of establishing the ground pickup and delivery operations, Fred began thinking about ways to shortcut the process. One alternative was to form a joint venture with United Parcel Service. Basch contacted UPS and set up an appointment with Jim McLaughlin, the chief executive officer.

“What are you guys doing here?” McLaughlin asked.

Basch responded, “We have an appointment.”

McLaughlin said he didn’t have the meeting on his calendar, but graciously invited our delegation to the conference room. Fred described what he had in mind and the role he would like UPS to play. McLaughlin abruptly said, “No, we’re not interested in doing that.”

McLaughlin’s indifference turned out to be a “save” for us. If UPS had agreed to become the ground distribution arm of Federal Express, it would have controlled the customer base and, most likely, the priority package business. Federal Express, if it survived at all, would probably have become just the air portion of UPS.

 

11. Good-bye, Little Rock—Hello, Memphis

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While Mike was conducting the Florida meeting, he and Ted Sartoian talked about the heady days of expanding UPS’s service areas and the sales blitz teams that had been so successful. Mike decided to duplicate that approach for opening the new cities at Federal Express. Ted suggested hiring an experienced high-level manager to take responsibility for the field operation. He recommended Mike Fitzgerald, then vice president of operations for the D. H. Overmeyer Company in New York, the largest public warehousing and warehouse leasing company in the nation. Ted knew Fitz very well and said, “This is the guy you need to get on board.”

Mike contacted me several times,” Fitz recalls, “but frankly, after UPS I had enough of small packages to last me the rest of my life. The business was horrible around Christmas and other holidays. I told Mike there was no way I was going to move to Little Rock. My wife, Joan, and I were living with our two children in a beautiful home in Ridgefield, Connecticut, on an idyllic two-acre setting with a stream, wonderful neighbors, and excellent schools. I was content with my job at Overmeyer and I wasn’t going to leave all of that.”

 

12. The Company Lodestar

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Federal Express has always valued its people; it is the proper and equitable thing to do, and from a business perspective, good employees, vendors, and customers are valuable assets, not easily replaced. Debra Howse is typical of the high caliber of the people who contributed to the company’s success. The story of how she came to be a part of this exciting venture is a tale of compassion and caring, excitement and anticipation, and another of the amazing “coincidences” that seemed to surround the building of the core group at Federal Express.

Shortly after Debra settled into her new job at the Adams Field ticket counter, a new customer handed her his air travel card. It read “Fred Smith, Federal Express.” Debra reasoned that with a common name like Smith, he was just a regular employee with an ordinary job. She had seen the colorful planes during lunch. Thinking she might buy some stock, she asked Mr. Smith if he knew anybody at Federal Express to help her.

“Mr. Smith seemed puzzled at first,” Debra remembers, “but he was polite and then with a smile replied, ‘Well, I know a few people. Here’s my card. Call me when I get back from New York, and I will introduce you to some people who can help you, but the first people to have stock in Federal Express will be the employees.’ I took the card, shoved it in the pocket of my uniform, and never looked at it because I was writing his ticket— I knew his name.”

 

13. More Obstacles

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The commitment to take the remaining Falcons from Pan Am was just two weeks away, but Federal Express was running out of funds and facing a financial crisis. We had fallen behind on the payments to Little Rock Airmotive for the earlier conversions, and the modification center was holding back on the parts stored for the conversion of the remaining planes. Two important suppliers were threatening to close the door on the company, and numerous others were sending menacing messages about past-due bills.

We’d underestimated the capital required for the launch, thanks to the following surprises:

Fred had come up with the initial startup funds. He had done a remarkable job in Washington, convincing the regulators to modify the outdated air taxi restrictions. His charisma and enthusiasm had inspired nearly a hundred associates to pursue his dream. The company would be ready to begin small-package operations in just a few weeks. This was not the time to fold the cards and leave the table. This was the time to ignore the problems and charge ahead!

 

14. Let’s Call it a System Test!

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Our major concern on launch day—March 12, 1973 —was the limited capacity of our small fleet. The discounted reports from the sales staff still indicated that we could expect between 300 and 450 packages. Fred was especially worried that we wouldn’t have enough capacity to handle all the packages and that we would disappoint the customers. In addition, the White, Weld and Company principals were coming to Memphis to observe the first night’s operations. The private placement offering was taking much longer than expected, and any hint of service failures would be disastrous.

At least we had a contingency plan: If we had a higher volume than expected, we could do a double run to our originating cities. The mail planes, after completing their runs, could be ferried to Memphis to carry additional packages to destination cities. We were not going to leave a single package behind; in fact, we were ready to give more than we promised. Our team would deliver every single package before noon the next day.

 

15. The Marine Corps Boot Camp Mode

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The “system test” network generated so few packages that we decided to cancel the flight schedule and place the packages on commercial airlines. We did not fly planes in the package system again until the next startup. It was a matter of reducing our operating expenses and conserving our dwindling supply of funds.

The daily volume from the five original cities averaged only about ten to twelve packages. Later we developed sophisticated analytical tools and ran the program to understand more about the test network. We discovered that the expected volume between all ten original cities was only forty packages per day for the penetration level we anticipated. The analysis also showed that each new city added to the network raised the volume levels geometrically. We were facing the classic chicken-and-egg dilemma: Federal Express needed an expanded network to reach higher volume levels, and an infusion of funds to expand the system to a level of sustainability.

In March, Charles Brandon joined us as our vice president of operations research. With his wrinkled corduroy jacket, worn blue jeans, and long rumpled hair, Charles was our technical wizard, the stereotypical absent-minded professor. Our management structure was constantly in flux throughout the early years; flexibility and fluidity were its main characteristics. There was no hierarchy, just a partnership of equals.

 

16. An Inauspicious Beginning

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We needed to show our potential customers that we were very different from any other shipping service. We tried to keep things simple by providing representatives with a sales talker, a Dick and Jane story: These are our planes, these are our trucks, this is our system, here is our sorting facility. Our system was so simple, so unique, and so new that it required explaining. Our sales group put up posters of the Federal Express planes in each prospect’s shipping area as a reminder of our closed-loop system, but that still wasn’t enough.

In the early days, people had a difficult time understanding the concept of shipping through the hub. Diane, one of our customer service agents doing telemarketing at the time, was explaining to a prospect that our central sorting hub was the reason we were so reliable.

The prospect said, “You mean that if I ship a package from Milwaukee to Chicago, it has to go through Memphis?”

Diane responded, “Look, sir, if you don’t tell your customer, we won’t. It just will be there by noon tomorrow. Will that work?”

 

17. Rescue at the Edge of a Precipice

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The crunch of April 1973 was particularly severe and nearly overwhelmed our infant organization. To borrow Charles Dickens’s famous opening in A Tale of Two Cities, “It was the best of times; it was the worst of times.”

By now, the financial crisis grew more menacing every day. On several occasions, the company had no funds to pay its debts. Airports threatened to impound planes for nonpayment of landing fees, creditors threatened to stop supplying materials, lending banks threatened to ground the entire fleet until payments were made, and we stopped reimbursing management’s expenses.

When our limited finances forced us to curtail our geographical expansion, we were in the troubling position of having more pilots than we needed for flight operations. However, we wanted to continue employing most of the qualified graduates from our flight school, knowing we would need them in the future. Our solution was to retrain the excess pilots for our customer sales staff or for station management until the package volumes grew to justify their return to flight operations.

 

18. Light at the End of the Tunnel

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The loan guarantee from General Dynamics raised our hopes and increased our spirits, but also increased the pressure to finalize the private placement. We continued to be in desperate financial trouble, particularly with our suppliers. The most demanding suppliers when it came to payments were the oil companies. Every Monday, they required Federal Express to prepay for the anticipated weekly usage of jet fuel. By mid-July our funds were so meager that on Friday we were down to about $5,000 in the checking account, while we needed $24,000 for the jet fuel payment. I was still commuting to Connecticut on the weekends and really did not know what was going to transpire on my return.

However, when I arrived back in Memphis on Monday morning, much to my surprise, the bank balance stood at nearly $32,000. I asked Fred where the funds had come from, and he responded, “The meeting with the General Dynamics board was a bust and I knew we needed money for Monday, so I took a plane to Las Vegas and won $27,000.” I said, “You mean you took our last $5,000—how could you do that?” He shrugged his shoulders and said, “What difference did it make? Without the funds for the fuel companies, we couldn’t have flown anyway.” Fred’s luck held again. It was not much but it came at a critical time and kept us in business for another week.

 

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