FedEx has announced that starting soon, some but not all, 2-day deferred residential Express shipments, to include delivery to businesses operating from a home, will move via the FedEx Ground network, if the Ground network can support 2-day delivery for the shipment.
This makes a lot of sense for many reasons, especially from a cost savings and efficiency standpoint. However, the implications of such a change are numerous;
Impact on FedEx
- FedEx will realize significant savings in many ways to include:
1. Having the Ground network transport and deliver select Ground shipments via the lower cost, contractor, service provider model.
2. Reduce in size or possibly eliminate over time, the Express model that provides line-haul service, on the Ground, for these deferred Express shipments.
3. There will be less work for Express operations employees so paid hours will be reduced. While I doubt that FedEx Express will lay people off, they will be able to reduce costly overtime and maybe even push some employees down to the 35-hour weekly minimum, for full-time employees.
4. Over time, FedEx Express will realize facility savings as they move into smaller Express terminals to more efficiently process less volume.
- There will be minimal impact on Express air operations as most of the 2-day deferred Express shipments were moving on the Ground within the Express network.
- Express Operations employees will be paid less for fewer hours worked so this could drive increased employee dissatisfaction and possibly have a negative impact on Express service.
- FedEx Express will be contracting with FedEx Ground, to provide transport and residential delivery service. However, by directly commingling Express and Ground shipments, the government could act to reclassify FedEx Express under the National Labor Relations Act as a Ground carrier, which would make it much easier for employees to unionize by individual location. Currently under the Railway Labor Act, FedEx Express employees can only be unionized via craft and on a national basis.
- Independent FedEx Ground Service providers are the big winners as more shipments will be driven through their territories, improving scale and profitability. In addition to the added Express volume for FedEx Ground, FedEx has started to redirect, what will ultimately be about 2 million daily packages, away from the USPS and to FedEx Ground for delivery. Also, don’t be surprised to see FedEx Express move deferred B2B Express shipments to FedEx Ground, in the future.
This change at FedEx will also have a significant impact on UPS as FedEx will be driving more packages through the lower cost FedEx Ground network, which will allow them to charge less for deferred Express services. This could force UPS to negotiate concessions from the Teamsters union as they will have to reduce their labour cost, the highest in the industry, to remain competitive with the lower cost, FedEx Ground model.
The impact on the customer should be manageable but will impose some minor disruption on the shipper and recipients. The cumbersome, two separate pick-ups model, will not go away and it’s not exactly clear if shippers will need to tender impacted Express shipments to the Ground driver, which would create some level of confusion. Additionally, recipients may start receiving their Express deliveries at a different time of day. The dual op-co model and resulting in separate pick-ups, drives what I call FedEx Friction and FedEx will have to be very careful not to make these processes more complicated than they already are. Also, many deferred Express deliveries destined for a residence are excluded, so FedEx will still be delivering e-commerce shipments via two separate delivery companies, in most residential neighbourhoods.
Finally, these changes at FedEx could have a negative and disruptive impact on FedEx Express, so the company would only be doing this to secure the long-term viability of the overall enterprise. The dual operating company model is not efficient nor is it viable over the long-term. The question is, how much more of the remaining Express company business does FedEx fold into the lower cost Ground company, over time? This initiative could very well be a test-bed for something much bigger, in the future.
Dean Maciuba is the Director of Consulting Services at Logistics Trends & Insights LLC and he is an expert on last-mile delivery, Amazon, e-commerce, and the design/implementation of speciality distribution solutions.