Supply Chain Matters highlights latest reports indicating that global parcel carrier FedEx is planning a major restructuring of ground and air last mile delivery networks.

 

Background

In prior Supply Chain Matters postings, we have updated readers on global parcel transportation and logistics carrier FedEx’s ongoing business restructuring efforts.

After shocking the carrier’s investors In September of 2022 with an unanticipated revenue and profitability shortfall, efforts continue to significantly reduce costs and operating margins while shedding staff. Reportedly as of February, 12,000 FedEx positions have been eliminated including a 10 percent reduction in corporate staff.

The established goal is to save $4 billion in costs fiscal 2025, and a cumulative $6 billion in costs by 2027.

Bloomberg for one, has labeled this FedEx business transformation effort as “the most sweeping restructuring in its 50-year history” and further, “ripping up founder Fred Smith’s well-worn playbook as it rethinks virtually the entire business.”

Business and industry media is now honing-in on more specific plans to merge the carrier’s air express and lower cost ground operations units. The former utilizes hired uniformed workers and the latter leverages independent contract uniformed drivers and FedEx bannered delivery vehicles, somewhat akin to the Amazon independent contractor network.

The backdrop is that rival UPS has delivered a consistent track record of higher operating margins utilizing a singular unionized driver workforce for multiple air or ground last mile delivery needs. Now, with lower online order volumes after pandemic related volume peaks, FedEx’s cost and network structure, even with multiple years’ worth of parcel rate hikes and added surcharges, lags in operating profitability and in some cases, overall network efficiency.

As Supply Chain Matters has noted in our FedEx commentaries of late, CEO Raj Subramaniam, who assumed this carrier’s leadership role from Fred Smith, is obviously placed the company’s prime focus on investor returns. His plans are reportedly garnering rave reviews from Wall Street.

But companies often find that there can be dichotomy of needs between satisfying investors and key customers. FedEx employees often cite the company’s longstanding “blue promise” namely that the carrier must strive to meet customer commitments first and foremost.

What FedEx is trying to achieve is no slam dunk and comes with its own set of unique operational, process and augmented technology challenges.

 

Merging Last Mile Delivery Operations

FedEx recognized several years ago that both the Express and Ground division last-mile delivery operations overlapped with a similar address receiving multiple separate deliveries while cost structures were duplicated. Both organizations obviously are measured to differing transport service requirements. Last year, efforts were undertaken to allow the independent Ground delivery units to deliver Express packages.

Bloomberg points out that the delivery of packages by independent contractors does not fall under the U.S. Railway Act, which governs unionized workers in areas such as railroads and air operations.

As an example, workers within FedEx’s Air Express operations are categorized as falling under this act, thus their ability to strike over labor grievances is limited by federal oversight.  The company’s Express unit pilots have been without a labor contract since 2021, and this week are taking up a vote to strike. Under the U.S. Railway Act, workers cannot legally strike until it is demonstrated that negotiations have not reached a satisfactory conclusion. After a one-month ‘cooling off’ period, a strike can take place.

If FedEx elected to consolidate ground deliveries into the Express unit, it reportedly could risk the carrier being subject to a labor unionization effort, hence the leaning toward the independent contractor model, doing away with staffed drivers over time.

But the move to consolidate toward an independent contractor model is fraught with added challenges which FedEx management is all too likely aware of. The relationship among the nationwide network of independent contractor fleets has had its challenges in terms of service, compensation and reimbursement needs. During the three plus years of Covid-19, FedEx and UPS workers were deemed essential in the movement of goods and hence were required to work longer hours and overcome added challenges.

Already, some equity analysts have cautioned that this transformation will take time to execute and could provide added vulnerabilities to service reliability disruptions, not to mention liability and potential regulatory exposures. U.S. courts continue to field lawsuits that challenge the differences and liability exposures between a full-time worker vs. an independent driver contractor.

 

UPS and the Teamsters Labor Union

This week, labor contract negotiations kicked off between parcel carrier UPS and the Brotherhood of Teamsters labor union. This effort is characterized as the largest collective bargaining agreement in the U.S. involving upwards of 330,000 unionized employees. At stake is renewal of a five-year contract that will extend to 2028 and reportedly, a key focus for upcoming talks are a two-tiered wage system involving part-time and weekend workers.

In an interview with The Wall Street Journal, Teamsters President Sean O’Brien indicated that the upcoming negotiations would serve as a roadmap for the success of the labor movement moving forward. He further stated: “Every contract we negotiate is a template for nonunion industries, doing similar work.”

We do not sense coincidence from that statement, rather a message that the stakes for transportation workers and transportation carriers are becoming much higher.

For shippers and importers the takeaway is to pay close attention to these ongoing FedEx operational restructuring efforts as to their short and longer-term implications for service levels and cost. This is likely a multi-year transformation with likely added developments in the months to come.

 

Bob Ferrari

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