A Conversation with Douglas G. Duncan
President and Chief Executive Officer of FedEx Freight
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The first of a two-part series
LQ: In what ways (if any) are the FedEx Freight service offerings broadening out from a basic core of less-than-truckload service offerings? What do you see for this in the future? (C. John Langley Jr., Ph.D.)
Doug Duncan: When we went through the acquisition of Watkins we added a long-haul carrier to the regional next and- second day network that we had. We were delighted to finally get a Canadian footprint so that we can now operate direct in Canada, through what is now FedEx Freight Canada. These have been two huge additions that we've taken on since September. We have been working feverishly to get the integration completed, including the integration of IT systems to ensure we have visibility throughout the supply chain. These are the two huge opportunities we're working on at the moment.
LQ: What do you think that shippers feel about the concept of "one-stop shopping" as it pertains to transportation services? Do you see them embracing this concept, or exhibiting some reluctance to want a single provider to take responsibility for a potentially broad range of transportation services and solutions? (C. John Langley Jr., Ph.D.)
Doug Duncan: Basically, FedEx Freight's expansion is in response to what customers have requested, and that's both anecdotal and documented by the research that we conducted.
When we formed FedEx Freight, the service we really wanted to offer was next-and-second-day, to serve what we call the fast-cycle logistics market. This includes those people who are doing rapid replenishment and fulfillment to take inventory out of the supply chain. This continues to be a growing market and it was the one we were most focused on when we formed FedEx Freight.
As we grew to become the largest LTL carrier in the U.S., more customers were asking for services to manage the long haul segments of their business. They would note we didn't cover a particular area, except with our expedited network. This call to increase the scope of our services began as sort of a soft whisper and later grew rather loud. I think the piece we had missed, from the customer's perspective, is there are also supply chains that require less inventory velocity and require certainty, or reliability; they want to know it'll be delivered on the date it's promised, not early, not late. These supply chains require a planned delivery, which may have lower costs associated with them. Once we recognized what was needed, the hard part was determining how to provide this service. The easy solution that we looked at was to add that capability into our existing network. We gave up on that idea quickly because if you add planned delivery to the speed delivery service, you will probably compromise both networks. Granted, you can try to have one network to service both masters. But you tend to slow down the fast network and add cost to the low-cost network. You can never give the customer really what they want if you apply this model. We knew we had to have a separate network to achieve our objectives and we started looking for companies that could meet that need and would fit our company in terms of corporate culture. Watkins turned out to be a perfect fit. LQ: Congratulations. What are some of the synergies that are experienced by FedEx Freight in its role as a subsidiary organization of Federal Express Corporation? (C. John Langley Jr., Ph.D.)
Doug Duncan: The bigger question is how does the freight organization participate in the synergies of the broader FedEx Corporation? While we run separate networks, probably the biggest benefit encompasses information technology support. One of our core strategies is to leverage off the great work that FedEx Express has done in that area. In many areas, especially in procurement, there are benefits and efficiencies to be realized, including fuel, trucks, trailers and global licenses for IT software. There are lots of synergies between the two corporations, between all of our operating companies, even though we run separate operating company networks.
LQ: What factors do you feel will be most influential on the future of the motor carrier industry in the U.S., and the LTL sector specifically? (C. John Langley Jr., Ph.D.)
Doug Duncan: From the customers' standpoint, they want us to get faster and longer. Today, in our fast-cycle regional network, we deliver up to 600 miles next day and we deliver up to 1,800 miles second-day service. These fast-cycle customers want the product delivered the next day. The only reason they settle for second day is because nobody's figured out a way to give it to them yet. However, there are a lot of ways we can do that; we can run this service through a huge hub-and spoke network every night. As we gain density and grow, we can also use technology to help us divert direct loads and deliver them terminal-to-terminal, instead of going through a hub. This gives us another four hours of reach, if you will, to push the envelope on that 600 mile next-day service. With the density developing in this network, we can reach farther to achieve this with lower unit costs by reducing the handling of goods. That's why we operate a fleet of 26-foot trailers. It gives us the ability to direct-load to another terminal with 24-25 feet of freight versus a 53-foot trailer.
In addition, there is that long-haul segment that wants planned delivery, which means delivery cannot be early, or late. So you can't just add days to the transit, hoping you'll get there that day or earlier. For fast-cycle networks early delivery is just as bad as a late delivery. We run a scheduled network to give the customer exactly what they require. This can be a challenge in the long-haul sector. The bigger, more global challenge, is the infrastructure for us to achieve this objective. The United States has done a poor job of investing in highway maintenance and precious little has been done in regard to their expansion. The research shows that in 20 years we will have twice as many cars and trucks on the highways, and basically the same number of highways, which is going to create gridlock. This could harm our ability to give customers the reach and reliability that they want in these fast-cycle networks.
LQ: We had an article recently prepared about this problem. It is a pressing matter.
Doug Duncan: It is, but everybody is talking about it now. There's also lots of research to make this case. I'm the eternal optimist. I believe we will respond to this need, but it's going to take a lot of work and investment.
LQ: What challenges does FedEx Freight anticipate as you enter the Canadian LTL market? (Michael D. Snedden)
Doug Duncan: We acquired a small carrier in Canada with the growth plans that we think we can achieve. We've got a lot of infrastructure expansion planned in Canada. I think we need to learn more about marketing in Canada. Canada and the United States share many commonalities, but I've spent enough time in Canada to recognize the importance of differences between our nations. This is one of the advantages we have gained by acquiring a Canadian company. I believe this approach will help us get down the road much quicker. Naturally, we would like the borders to be more open and seamless, not only in Canada but also in regard to Mexico. We've must make these borders far more seamless to enable us to act as a single economic unit across North America. I think this has huge advantages for all three of our countries.
LQ: What opportunities does entering the Canadian LTL market bring to FedEx in terms of operational efficiencies? (Michael D. Snedden)
Doug Duncan: It's a huge market and we have been fortunate to have an LTL relationship in Canada for many years. But we really were never going to achieve the kind of market share internationally between the U.S. and Canada that we have enjoyed in the United States as a single unit. Today, we can market under the FedEx brand, offering door-to-door service from the U.S. to Canada, via FedEx Freight; the customer knows that we offer total responsibility, total visibility - and all of the attributes that you're used to with FedEx you now have with our Canadian LTL unit. I think there are lots of opportunities for us to work together with our express company and our ground company in these cross-border initiatives.
LQ: Who do you see as your largest Canadian competitor? (Michael D. Snedden)
Doug Duncan: We have many competitors in Canada and in the U.S. Our U.S. freight business, the LTL business, makes us the largest LTL carrier in the U.S., with shipments picked up and delivered as the primary criterion. However, this gets us only 12-14% market share in the U.S. We have lots of competition in both countries, which isn't the case with our big unit, FedEx Express; they really only have one big competitor. We don't focus on an individual competitor, or competitors. Instead, we focus on the customer, as we have in the U.S., and try to meet their supply chain requirements.
That's where we find our success. I get asked this question a lot: What's going to happen to LTL trucking in the future? The best way to answer this question is to look at the supply chains that logistics professionals are developing. They are doing a marvelous job of making these supply chains shorter, tighter and more efficient and taking inventory of out of them. This is where you'll see the picture of the future for transportation.
The second part of this article will appear in the next issue.