A Conversation with Douglas G. Duncan
President and Chief Executive Officer of FedEx Freight
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The second of a two-part series
LQ: Can you share with us what FedEx is doing to mitigate the impact of the rise of fuel prices and what can your shippers do? (Nick Seiersen)
Doug Duncan: There's very little I can do regarding the price of fuel. Its price is set on the world market, based on supply and demand, and, unfortunately, the problem of dealing with a cartel is that it operates much like a monopoly and makes the price of fuel very unpredictable. However, what I can do is manage how much fuel we use. We are working with two manufacturers on a Class A hybrid truck that shows promise. We've also been operating some test tractors for several years that use liquified natural gas. We're in the process of converting nearly all of our forklifts from propane to batteries. We implemented the new EPA engine in '02 and we are implementing the '07 engine this spring, in our normal replacement cycle. We work with the engine manufacturers to find the exact optimum engine settings in order to maximize fuel efficiency. Today, a diesel engine is run by a microcomputer, so you can do a lot of adjusting to ensure we have good fuel efficiency.
The other thing is to use technology to make both our pickup and delivery functions more efficient. We use technology to facilitate direct loading, and deliver more freight over fewer miles by running a more efficient network.
I've been outspoken about the need to make better use of our highways. In the 16 Western states we operate triple trailers, which we can operate with nearly the same fuel consumption compared to two trailers. This is easier on the environment. There are lots more examples we can use for more productive trucks on our highways. In fact, Canada is an excellent example of this. There is better use of more productive equipment on Canada's highways compared to the U.S. It is a political battle that we fight constantly, which will make us more efficient. It can result in lower fuel usage and lessen EPA concerns.
LQ: It sounds as if you are bringing the speed and predictability of FTL to the LTL market. Have you worked out how this is beneficial to your customers? Can you show how it is worthwhile to pay your premium rates over the low-bidding other carrier?
Doug Duncan: We certainly can, but it needs to be done in consultation with the customer. The customer establishes the inventory velocity that they require in order to take inventory out of the system. Logistics professionals have been very successful at reducing inventory-to-sales ratios, which have consistently dropped for the last 20 years. Logistics cost as a percent of GDP has also dropped over this period and the bulk of that has been due to taking inventory out of the system.
Customers are running leaner networks and their supply chains have less inventory. So while they are paying a little more for better, more reliable transportation, their savings in carrying costs is offsetting that expense. We participate with the customer in making those calculations. However, in many cases the logistics professionals who are designing these supply chains have conducted these calculations and they know they require a transportation company that can absolutely, positively deliver on time.
In these lean networks a misdelivery is not an inconvenience. It's not an asterisk on a service report at the end of the month; it's a lost sale, an empty shelf, and it's a customer who had a part that didn't get installed on his car and has to wait an extra day. Where you find the cost is in the inventory. Logistics professionals have done a marvelous job quantifying all of these costs and savings and I think that's why they've had such great success in taking inventory out of the cost of business.
LQ: One of the bigger risks in scheduled service in LTL for the carrier is unpredictable volumes on any given lane. Of course, FedEx has dealt with this in the parcel business from the creation of the business. How do you manage this for LTL? What are the "aha!"s of LTL with respect to other businesses you are in? (Nick Seiersen)
Doug Duncan: This is an issue that we have dealt with for a long time with differing volumes day to day. The majority of our pickups are called in. We also have regular stops, but a lot of people call us each day and tell us what they've got for pickup. There can be wild swings, one way or the other, in demand.
Earlier visibility has helped us. All of our drivers operate with handheld computers, which they use in their deliveries. So our delivery records are updated immediately, which enables us to better manage these inventory systems with that kind of visibility. We also capture information on pickup that tells us what's being picked up and where it's destined. This enables us to plan the line-haul network every night. And, of course, having that advanced information also helps us know where we can build direct load and bypass hubs and use our flexible network. I can add drivers where I need them. This visibility makes the planning much better.
Now another area where we are unique is that we operate for the most part with an apprentice workforce. The dockworker that comes to work for us who is 18 or 19 years old and shows a good work ethic and can deal well with the technology usually can be trained by the time he or she is 21 to become a driver. Often, the way these people garner experience is we use them off the dock on particularly heavy days of pickups to do additional pickups and supplementary pickups. It really has been a wonderful way to develop these people and it cuts down on our turnover.
You're right about the comparison to the parcel business because if you look at the scheduled network we operate, it is very similar to FedEx Express; the real difference is the handling unit. They deal with these beautiful boxes and we deal with every shape and size in the world. As a result our operation is a more labor-intensive handling unit. But there are synergies in the planning and the information systems and the technology and the efficiencies of the network to use technology. Plus the line-haul network is very similar.
LQ: How seamless has the FedEx assortment of services become - both in terms of operational seamlessness as well as providing a single face to customers that span the FedEx businesses? (Thomas J. Goldsby, Ph.D.)
Doug Duncan: We operate separate networks and that won't change. The reason is very similar to why we have a long-haul network and a regional network; you compromise each of these networks if you try to put them together. We have FedEx Express, offering overnight in the air delivery around the world; a ground parcel unit that provides a great alternative in the package delivery network; and FedEx Freight, which deals with the heavy weight freight that doesn't require the conveyance and the freight-handling system that express and ground provide.
Customers can go to one website and conduct all of their business across all of those companies. We have a lot of efforts cross-selling so that the sales person you've become comfortable with at Freight can help you be introduced to the alternative package and express. The FedEx Freight sales people, have for over a year now, been selling the FedEx Express Air Freight products because what we found is the decision-makers for air freight are generally the same decision-makers for LTL freight. If you go to FedEx Freight customer service they can probably answer 70-80 percent of potential package questions. More complicated questions should go to FedEx Express or ground customer service. But we've been cross-training people and putting in systems that give visibility across the network. It has been a long-term process, not an easy one and it's not one where there will be a light switch you can flick to make it complete. We have done a lot of work to that to make it easy for customers today and there's a lot more to be completed in the months and years ahead.
LQ: How close is FedEx to becoming that global "one-stop shop" for logistics services that many companies have sought for so long now? (Thomas J. Goldsby, Ph.D.)
Doug Duncan: We get closer everyday. If you looked at all of the services we offer, I think that we have the most comprehensive offering around the world. However, there are still some pieces that we want to do better in and provide opportunities for us to develop.
LQ: Freight capacity seems to be an "accordion" issue with the industry struggling to match supply to demand. What strategies has FedEx Freight employed to provide this match in the most efficient way? (Thomas J. Goldsby, Ph.D.)
Doug Duncan: I think that's a secret weapon for the success we've had. We've taken a very long-term view on our infrastructure planning to meet our growth goal that we have today and for the future. The problem with being the largest LTL trucking company is there are very few existing facilities big enough to serve our future needs. We make predictions on demographic growth and industrial production growth by each region of the country and look at three to five years ahead when we work on identifying where the potential choke points are. We are working on real estate projects today that we may not begin using until three to four years from now. This kind of planning is essential to comply with the various zoning issues and other matters involving the sizable properties that we require. Investing in the business for the long term helps us to drive our efficiencies and makes us a carrier of choice.
LQ: What do you see as the major issues for North American logistics service providers in the next three to five years? (Thomas J. Goldsby, Ph.D.)
Doug Duncan: It's certainly speed and certainty. The border issues are a big concern. They're getting better. But not fast enough. If we're going to achieve the real advantages of operating as a North American economic unit, we've got to move much faster on the borders. I think we must do a much better job of investing in our infrastructure. I am not only referring to the highways; I am thinking of the highways, rails, ports and all the infrastructure that are required. Logistics professionals have done a marvelous job of reducing inventories and reducing logistics costs. If we don't begin to address these infrastructure issues, I think that's a trend that's going to start to reverse and make our companies in the U.S., Canada and Mexico less competitive worldwide. Sometimes people have a difficult time seeing this correlation, but I'm absolutely convinced that that's true.
LQ: How much influence does Wall Street have on the everyday operations of your company? If substantial, how does this influence force you to operate differently than competitors that may not operate under the same guise of the analysts as well as demanding shareholders? (Thomas J. Goldsby, Ph.D.)
Doug Duncan: We're a large, public corporation and have an obligation to our shareowners to produce good returns on their investment, but I certainly don't see this as an inhibiting factor. If we were privately owned, we would have private shareowners that also expect to have good returns on their investment. I don't see that as any different. This is part of my job. It's what I am accountable for. I am held accountable to the shareowners, the customers and the employees. I think that's true whether I am part of a public or a private company.
LQ: Thank you, Doug. We've completed the questions that we had lined up by the gentlefolk on LQ's board.
Doug Duncan: I've been grilled by John Langley before. He asks very good questions and he's a pleasure to work with.