As a supply chain management community, we turn to reliable sources to gather information specifically related to supply chain forecasting or prediction activity. Two of those sources of forecasting information have consistently been FedEx and UPS. Both have staffed themselves with very talented economists and forecasters of business and supply chain activity with lots of reliable data gathered over the years.
Thus, our readers should take particular note to this week’s news regarding FedEx CEO Fred Smith’s prediction that a fundamental change in global freight business in underway and could well change assumptions regarding transportation lead times and service levels. In our quarterly coverage and observations of global transportation trending, Supply Chain Matters has also noted these same shifts.
In essence FedEx is confirming that the airport-to-airport transport model is in decline, that suppliers, manufacturers and retailers are opting for less costly methods of transportation for movement of components and finished goods. So much so that FedEx experienced a 1.4 percent decline in its fiscal fourth quarter profit, in spite of the fact that FedEx is a highly diversified transportation and services provider. Volume in its international priority airfreight business declined 3 percent in fiscal Q4, on top of a 1 percent decline in the previous quarter. U.S. domestic express volume declined 5 percent in the third quarter, following a 4 percent decline in the previous quarter.
On the other hand, what is clear is that other forms of less costly transportation are on the rise. The FedEx Ground business experienced an average daily package volume increase of 3 percent, driven by more consumers ordering goods online. FedEx Freight segment reported a 4 percent quarterly increase in daily LTL (less-than-truckload) shipment volume. Readers might recall that LTL was not so long ago described as a declining business. Broader transportation industry data also reinforces a shift toward ground, rail and ocean container transportation options.
These trends are prompting FedEx to reevaluate its operating business models with further announcements expected in the fall. The company has already removed air freight capacity on certain international routes and will likely make additional adjustments.
In the broader lens, trends occurring across the global economy also reflect shifts in trade activity. Pressures to reduce overall supply chain costs remain unabated, compounded by increased inbound raw-material costs. Current levels of uncertainty and the reality of a significant, multiyear recession affecting portions of Europe are motivating shippers to seek less costly methods to move goods. China’s export manufacturing activity has started to slowly decline and Supply Chain Matters has viewed recent talks from two separate economists that indicate that China will begin to shift to a manufacturing model more focused on supporting China’s internal consumption needs. As noted in many of our commentaries, the ocean container carriers are awash in excess ships, which can take-up any shifts in international shipping patterns.
The takeaway from the FedEx announcement is that sales and operations planning, procurement, along with transportation and logistics teams will have to factor more reasonable transportation lead times in the planning of supply and goods replenishment, and we could well experience a capacity-constrained air freight transport environment in some select routes in the coming years.
There will certainly also be a need for time-sensitive transportation options, for instance medicines, perishables, but the days of limitless air freight capacity options may be on the wane.