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The Implications of FedEx’s Proposed 2016 Rate Hikes


Last week, FedEx formally reported its financial results that essentially missed Wall Street expectations. However, what is of more importance for supply chain teams anchored in online commerce is FedEx’s intention to raise rates on oversized packages related to B2B/B2C online commerce.

For the August-ending quarter, FedEx posted an operating profit of $692 million compared to $653 million in the prior year quarter. Operating margin improved from 9.1 percent in 2015 to 9.3 percent. Yet in today’s often volatile investment environment, this was perceived as a disappointment. The global parcel carrier primarily blamed weaker demand for its transportation services and increased costs for its FedEx Ground operating unit for the shortfall in expectations. That was in addition to missing expectations for its June-ending quarter as well.

Regarding its latest reporting, CEO Fred Smith was quick to point out that without the need to have to boost self-insurance reserves, the carrier would have met expectations. However, self-insuring is a cost of doing business, especially as FedEx places more emphasis on both its Ground segments, eliminating its last mile Smart Post dependency with the U.S. Postal Service, and in expanding 3PL services via acquisitions.

As we have noted in prior Supply Chain Matters commentaries, FedEx has been more exposed than its competitors to declining parcel air freight volumes emanating from China and other parts of Asia. However, operating income for the FedEx Express division improved nearly 45 percent in the latest quarter, a reflection that right sizing and modernization efforts direct at air assets has begun to provide positive results.

While global providers DHL, FedEx and UPS are all quick to point out that the exploding growth of online and Omni-channel commerce have changed the dynamics of transportation, they continue to exercise strategies to leverage additional revenues from these trends. The argument is that higher volume with lower average shipment value equates to added network and labor costs.

Of more importance was the announcement that FedEx Express, FedEx Ground and FedEx Freight will increase shipping rates an average of 4.9 percent effective January 4, 2016. FedEx is additionally increasing surcharges for shipments that exceed the published maximum dimensions (“unauthorized packages”) in the FedEx Ground network and updating certain fuel surcharge tables at FedEx Express and FedEx Ground effective November 2, 2015. Supply Chain Matters has thus far heard from an informed source that the unauthorized package surcharge is quite significant. According to the FedEx announcement: “The changes related to fuel and unauthorized surcharges are in response to changing industry demand dynamics, including increases in average package size and weight and increased residential deliveries.”

FedEx was the first global parcel provider to announce dimensional priced pricing starting this year. The argument was that higher cubed packages require added handling, logistics and transportation expense which FedEx was not being compensated for. Rival UPS quickly followed in announcing dimensional based pricing. Earnings announcements thus far from both carriers point to positive benefits from these rate increases.

The announced rate increases from FedEx will surely be similarly announced by UPS and perhaps other package carriers.

Last year, we noted that dimensional pricing implied a major revisit of packaging and transportation practices for bulky items as well as policies related to free shipping, the lifeblood of online commerce. Once more, while larger online firms such as Amazon and Wal-Mart have the scale and influence to push back on such rate increases, smaller firms or online consumers themselves have little leverage.

Survey data related to online consumers continually indicates that online shopping carts are often abandoned when shipping costs are deemed too expensive or free shipping is not offered. Once more, as the volume of online commerce continues to grow, it will involve the selling of even more bulky items.

To no surprise, many online consumers now opt to pick-up their online orders at local retail outlets, since this option often results in free shipping. The U.S. Postal Service has become a major beneficiary of added business from online retailers and that trend will continue until pressure for USPS profitability reignites on Capital Hill.

The most significant takeaway for industry supply chain teams is that there remains a discernible set of strategies on the part of logistics providers, carriers and transportation service providers to constrain available capacity while layering on additional pricing to boost individual balance sheets. Some providers will argue that rate increases are justified in order to make more expensive capacity and technology investments. Shippers and online providers will have to be the best judge and jury to the merits of such arguments. Meanwhile, a whole new wave of major acquisitions involving 3PL providers continues in the prize is increasingly locking-up capacity and customer logistics fulfillment contracts. The most controversial to-date has been the XPO Logistics acquisition of 3PL provider Con-Way Inc..

In the wake of the current environment, software technology and service providers who provide the added intelligence to help online firms, retailers and shippers discern the most cost-efficient transport channel option, along with recommending best packaging methods, will likely thrive.

During the holiday surge two years ago, UPS served as the butt of criticism for a last-minute breakdown in its delivery network. Last year, U.S. West Coast ports and longshoremen were widely cited for significantly impacting holiday business. In the coming months we may well observe a prominent online retailer as the headline victim of a far more expensive and capacity constrained package delivery transport network.

Bob Ferrari


Alibaba’s Cainiao to Ink Shipping Deal with the United States Postal Service


In the fall of 2014, Supply Chain Matters began to call reader attention to the notion that the U.S. Postal Service could well change the dynamics of B2C/B2B parcel shipping and online fulfillment strategies. The headline of 2014 was that the agency was aggressively cutting shipping rates and improving customer service in order to capture more of the shipping volume and package delivery revenues associated with online commerce. The agency was put to the test in the holiday surge of 2014, and again in 2015, and seems to have fared very well.

The agency has now formed a close relationship with Amazon as both have partnered to provide Sunday and same-day delivery along with finding more cost-efficient means for transporting packages to customer destinations. Amazon has deployed a network of package pre-sortation facilities which are then trucked to regional and local post offices for last-mile delivery.  More of these Amazon pre-sort facilities will be deployed this year. When both FedEx and UPS instituted dimensional-based package pricing at the beginning of this year, the USPS became an important alternative for package shipping requirements.

In August, Bloomberg BusinessWeek featured an article reflecting on the ongoing USPS strategy under its new postmaster Megan Brennan and disclosed an estimate from Bernstein Research indicating that the agency handled 40 percent of Amazon’s fulfillment needs in 2014 amounting to nearly 150 million items. That compares to a Bernstein estimate of 15-20 percent of amazon volume handled by FedEx and 20-25 percent handled by UPS.

This week, China’s dominant online fulfillment provider Alibaba has also reached out to the USPS. A posting in Venture Beat indicates that the Alibaba logistics unit, Cainiao has signed a Memorandum of Understanding with the agency to “develop new international shipping solutions, and enhance the logistics service experience for both sellers and buyers involved in cross-border commerce.” The report indicates that Cainiao and the USPS have agreed to work together to speed delivery of merchandise sold through AliExpress and destined for online customers in the United States, and to help delivery networks globally, especially in Latin America. Such an agreement obviously opens the door for online Chinese companies to sell and fulfill orders directly with U.S. based customers.

The announcement is yet another opportunity for the USPS to become both a broader domestic and international player in the logistics and fulfillment of B2C/B2B online commerce and will probably lead to other efforts to insure online providers control shipping costs while continuing to innovate in last-mile delivery.

Amazon Developing Online Fulfillment Programs to Save on Transportation Costs


In April, Supply Chain Matters highlighted a PwC Omni-channel fulfillment survey that highlighted among other findings that 67 percent of CEO’s believe that the cost to fulfill orders across channels is increasing, and that a near total consensus cited transportation and logistics as a fulfillment capability that needs the most attention.

Even Amazon, an icon in online B2C fulfillment is not immune to such transportation cost realities. Transportation costs in its latest fiscal quarter increased 29 percent to a reported $2.34 billion.

Financial and business media have recently reported that Amazon is testing a new program currently termed Ship by Region. The program would allow certain site sellers to designate where they are willing to ship goods in two days or less for Amazon Prime members. If a Prime customer’s ship-to address is outside the specified region, shipping my take longer since it will be likely routed via a less costly segment.  Previously all online merchants distributing via Amazon had to ship their goods to Amazon customer fulfillment centers in order to participate in the Prime program.

According to a published report from The Wall Street Journal, Amazon is currently limiting the Ship by Region option to a select group of sellers, including when goods are stored in non-Amazon customer fulfillment centers. The report indicates that the program aims to expand the number of items showing up in search results for Prime.  However, some items may not be subject to two-day free shipping since Amazon will not guarantee such fulfillment based on distance traveled. As an example, a small appliance or power tool warehoused on the U.S. West Coast, many not qualify for two-day shipping for a Prime customer located in the Northeastern U.S…  However, if the same item is stocked on the U.S. east coast, if may be eligible.

Separately, the WSJ reports that Amazon may introduce a further program, Amazon Day that combines particular customers’ orders in fewer boxes and ships on fewer days of the week. For customers, the program aims to for predictability, receiving all Amazon shipments on a specific day.  For Amazon, it could turn out to be a means to save on overall transportation costs.

A Bernstein Research analyst recently indicated to Bloomberg BusinessWeek that the United States Postal Service may have accounted for 40 percent of Amazon’s hipping volume in 2014, more than either FedEx or UPS. In turn Amazon, performs much of the pre-processing sortation prior to handover to the USPS, and secures an attractive last-mile package delivery rate in doing so.

The rising costs of online and Omni-channel related transportation and logistics has indeed become a high-level concern, and industry icon Amazon is developing more innovative programs to buffer such costs.  Others will do so, as well, and the need to fully understand and contrast all aspects of transportation costs by fulfillment channel are going to be critical table stakes.

The Renaissance of Available-to-Promise Capability to Support Retail and Online Omni-Channel Fulfillment

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Supply Chin Matters has featured prior commentaries exploring the supply chain impacts of Omni-channel and online customer fulfillment for retail supply chains. Such impacts are many, but one of the more important relates to the needs for efficient overall inventory management while exceeding more demanding customer fulfillment and satisfaction needs.

In B2C retail, and in online B2B, inventory investment has a major impact on margin and profitability, and Omni-channel strategies that allow customers different fulfillment options can cause havoc with the proper balance of inventory.

Consumers increasingly prefer to buy online, and at the same time, seek flexibility to either have their orders ship direct, or pick-up or return in a local retail store or outlet. This new paradigm is why so many Omni-channel retailers are seriously re-visiting inventory management strategies. Some are building dedicated online customer fulfillment centers to directly support online order volumes while allocating separate inventory to support brick and mortar retail needs. Other Omni-channel retailers have rightfully determined that the same inventory has to be efficiently managed to support fulfillment needs across all channels. This changes the role of the brick and mortar store to be an added node within the fulfillment network with the ability to support in-store pick and pack.

Within this increased retail business challenge, available-to-promise capability (ATP) has taken on a new significance as a key capability to assist in more efficient and responsive inventory management. As Supply Chain Matters sponsor JDA Software describes it, ATP is experiencing a new renaissance.

Last week, The Wall Street Journal provided further evidence of the business importance of efficient inventory management. In the article, Retailers See Gains in Serving E-Commerce Supply Chains (Paid subscription or free metered view), the WSJ reports that while retailers view online shopping as a boon to sales, it can provide a drag on profits especially in the light of parallel delivery networks. Some retailers, however, may be on the way toward figuring out the logistics and profitability potential of Omni-channel. Examples cited was that Home Depot which grew online sales 25 percent in the second quarter while improving overall logistics, including higher efficiencies in its distribution network. Target, grew online sales 30 percent and reported a small increase in margins.

Last week, Supply Chain Matters contrasted the financial results and supply chain strategies of Wal-Mart and Target. Wal-Mart’s financial results were perceived by Wall Street as disappointing. To address Omni-channel, the global retailer is currently implementing a new inventory management system. That strategy includes shifting inventory to regional and dedicated customer fulfillment centers, rather than from the retail store backrooms. That would allow the flexibility to meet both online and in-store demand from a distribution center centric inventory strategy. The downside is a de-emphasis of the retail store as a fulfillment node and a greater potential for stock-outs at retail store locations as online orders consume available inventory.

Target on the other hand, has recently demonstrated improving financial results, but at the same time has been candid to Wall Street that balancing inventory across its network and leveraging resources at store level are an integral part of strategy. Senior management candidly admitted that in-stocks within physical stores have been unacceptable so far this year, but a newly appointed role of Chief Operations Officer will have as an initial priority, beefing up the capabilities and responsiveness of the supply chain. Target’s strategy includes the retail store as a direct fulfillment node. Thus far the retailer’s is shipping online orders direct from 140 stores with plans to enable 450 ship-from locations by the end of this year. Target senior management further noted that an important enablement of ship-from-store will be will be testing and deployment of a new ATP system that provides specific online customer delivery commitments.

On JDA Software’s Supply Chain Nation blog, Kelly Thomas writes on the renaissance of: Order Promising and Demand Shaping in a Segmented, Omni-Channel World. Thomas observes that ATP married with demand shaping provides an increasing number of fulfillment options as well a means to determine profitability profiles for fulfillment channels. It provides a basis in making the most informed decision on the source of inventory for a given customer order line and the pick-up or delivery location of the online customer.

Rightfully noted is that nearly 20 years ago, elements of what is today JDA Software (i2 Technologies) pioneered and patented allocated-driven ATP functionality for discrete manufacturing and other industry supply chain environments. Today’s JDA Order Promiser application is now being applied to the evolving needs of Omni-channel retailers for facilitating more responsive online fulfillment as well as improved inventory investment and bottom-line profitability.

The technology has come a long way and has found new meaning in more efficiently managing inventory in a B2C and B2B Omni-channel world.

Bob Ferrari

Disclosure: JDA Software is one of other current sponsors of the Supply Chain Matters blog.

Contrasting Financial Results and Supply Chain Strategies: Wal-Mart and Target

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This week, two major U.S. based retailers, Target and Wal-Mart, each reported financial results that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers point to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains.  The approaches, however, are different.

Wal-Mart’s second quarter net income declined 15 percent as a result of increased competition and added costs. The retailer has been forced to add staffing and has increased wages to improve customer service and overall merchandising.  The retailer further pointed to currency fluctuations, lower than expected reimbursements for its pharmacy business and an increase in goods stolen or lost as weighing on profit performance. The latter related to “shrink” of inventory has to be especially troubling. The retailer is currently implementing a new inventory management system.

If our readers have had the opportunity to visit a U.S. based Wal-Mart store over the past 3-6 months, you would have witnessed the results of prior cutbacks in staffing and an ill-planned merchandizing strategy.  Stores appeared messy, shelves were not stocked adequately and store and checkout clerks seemed to be in short supply.

On a positive note, Wal-Mart has finally been able to stem the lack of sales growth among its U.S. stores.  Same stores sales across the U.S. actually increased 1.5 percent within the latest quarter, the fourth quarterly increase after rather long multi-quarter declines. Online sales rose 16 percent in the second quarter.

Wal-Mart has been heavily investing in its online and Omni-channel customer fulfillment capabilities which have obviously impacted profits in the short-term. In this week’s financial performance announcements, the retailer actually lowered its profitability targets for the current quarter and the remainder of its current fiscal year. The notion of Wal-Mart has been one of supply chain scale in distribution, warehousing and dedicated fulfillment.

In prior commentaries, Supply Chain Matters has highlighted reports indicating that Wal-Mart again focused on its suppliers for sharing the burden of needed higher margins. In April a front page published article by The Wall Street Journal reported on Wal-Mart’s increased pressures on North America based suppliers to squeeze costs. The retailer informed suppliers involved in a wide range of purchased categories to forgo any additional investments in joint marketing and focus the savings on lower prices to Wal-Mart.  In July, Reuters reported efforts to impose added fees affecting upwards of 10,000 U.S. suppliers.  Contract renegotiation letters were mailed to respective suppliers that included amended contract terms along with added fees to warehouse products at Wal-Mart DC’s. A Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low.

In its reporting of Wal-Mart’s results, the WSJ noted Wal-Mart’s CEO Doug McMillon acknowledgement that the company was in a period of change.  He further cited a 1996 magazine article hanging on the wall in his office titled: “Can Wal-Mart Get Back the Magic”, while quipping that the retailer has rebounded before.

In contrast, we reflect on Target.

For its second quarter, the retailer reported a 2.4 percent increase in same-store sales and elected to raise its outlook for the second time. A concerted strategy on improved in-store and online merchandising has caught the positive attention of Wall Street, especially in light of the prior 2013 massive credit-card breach that significantly impacted sales growth.

Sales of termed signature merchandise categories were reported as growing at 7 percent, three times faster. Online sales increased 30 percent contributing .6 percentage points to comparable sales growth while more than 80 percent of online sales growth was driven by Home and Apparel categories. Overall net income nearly doubled in the second quarter.

In its earnings briefing, Target CEO Brain Cornell specifically addressed five strategic priorities, many of which have supply chain connotations.  The first is to become a leader in digital, including direct from store capabilities.  Thus far the retailer’s is shipping direct from 140 stores with plans to enable 450 ship-from locations by the end of this year. Target’s current online fulfillment is supported by six dedicated fulfillment centers, regional distribution centers and direct ship from store.

Most important from this author’s lens, was Cornell’s acknowledgement that balancing inventory across the network and leveraging resources at store level are an integral part of strategy.  Target will be testing a new available-to-promise system that provides specific customer delivery commitments, later this year.

There was also refreshing candor.  CEO Cornell indicated:

Retail is changing rapidly today than any time in my career and we need to ensure that core operations keep pace with the new ways we’re serving our guests.  Over time, Target has developed an incredibly complex supply chain, built to serve an outdated linear model in which product flows from vendors through distribution centers to stores. To serve guests today, we are becoming much more flexible in the way we fulfill demand for products and services.  And this is stretching our supply chain well beyond its core capabilities.”

To add more credence to candor, Cornell acknowledged to Wall Street analysts that in-stocks within physical stores have been unacceptable so far this year.  He has tasked a newly appointed Chief Operations Officer, John Mulligan, to have as his initial priority the improvement of overall supply chain capabilities.

As readers may be aware, Target recently had to make a very painful decision to close all of its Canada retail outlets.  A part of that problem related to merchandising and significant challenges in maintaining in-stock inventories.

From our lens, such articulation from senior management, reflecting the importance of integrating both merchandising and end-to-end supply chain capabilities is a very important and noteworthy change in retail. Later in follow-on Q&A with analysts, Cornell articulated the value of collaborative efforts among various suppliers to bring more innovative products to market.

Wal-Mart and Target provide different contrasts but yet reflect the common challenges impacting retail industry.  Retail supply chains are undergoing significant and groundbreaking change, far different than the last decade. Online and in-store marketing, merchandising, supply chain customer fulfillment and supplier management are all interrelated and must be addressed in a singular umbrella strategy and supporting action plans. Emphasizing one as the expense of the other often leads to sub-optimal business results.

Bob Ferrari


This Week’s Revelations of the Bruising Internal Culture of Amazon


This past weekend’s New York Times published article that reveals the inner workings of Amazon’s corporate culture has lit-up social media.  According to the Times, the article itself garnered the most direct feedback responses ever recorded in a published NYT report, now in excess of 5000 direct comments.  The newspaper indicated that it had interviewed more than 100 current and former employees to prepare this article.

The article itself, Inside Amazon: Wrestling Big Ideas in a Bruising Workplace, describes a cruel, unforgiving culture where workers are expected to work long hours and weekends. It cites former employees as indicating that 80 hour week work contributions can sometimes be viewed as a weakness.  It further describes a literal back-stabbing inner culture where workers are encouraged to brutally tear apart one another’s ideas and where direct feedback on any employee’s behaviors can be submitted anonymously to a person’s direct supervisor, often without the knowledge of the employee in question. A former top human resources executive describes Amazon’s corporate culture as: “Purposeful Darwinism.”

If any of our readers have read either The Everything Store, by Brad Stone, or The Amazon Way, by John Rossman, the culture described in the Times article would not be such a surprise.  Both books observe that Amazon’s corporate culture is rooted in the values of its Founder and CEO, Jeff Bezos, whose strong beliefs include an uncompromising attitude and the notion that harmony of the workforce is often overvalued and can stifle honest critique and brutal direct feedback.  Both books describe the scariest aspect of Amazon as receiving a direct email or phone call from Bezos himself along with his tendencies to be very direct and unforgiving.

However, the real story this week focuses on the reaction and response from Mr. Bezos to the Times article.  He deplored what he termed as the Times profile of: “a soulless, dystopian workplace where no fun is had and no laughter heard” and further stated: “I don’t think any company adopting the approach portrayed could survive, much less thrive, in today’s highly competitive tech hiring market.”

In a direct letter to his employees, he communicated: “I don’t recognize this Amazon and I very much hope you don’t, either.” His letter urges all employees to give the Times article “a careful read” but opines that “it doesn’t describe the Amazon I know or the caring Amazonians I work with every day.” He encourages employees who know of any of the stories reported to escalate such developments directly to HR or email him directly.

Bezos most compelling statement to all Amazon employees was the following:

I strongly believe that anyone working in a company that is really like the one described in the NYT would be crazy to stay.  I know I would leave such a company.

The irony of that statement is that it describes what the Times article concluded, namely that a culture of “Purposeful Darwinism ” motivates managers to cull out many employees on an annual basis or motivates employees themselves to leave Amazon after relatively short tenures.  One wonders if Bezos is insulated from the effects of the culture that he has architected.

From a supply chain and customer fulfilment lens, the Times authors describe how employees at Amazon warehouses are monitored by sophisticated electronic surveillance systems to ensure that productivity is maintained to high standards.

The dialogue and visibility to Amazon’s unique and unforgiving corporate culture will likely continue. Some would argue that Amazon’s culture is no different than other market disruptor’s, especially those rooted in leveraging groundbreaking technology.  In fact, many of today’s leading technology innovators demonstrate similar hard-charging business cultures.

Then there is the reality of Amazon, a company that has literally re-written the norms of retail and online fulfillment as well as supply chain management.

The New York Times is no stranger to exposing the inner corporate culture of iconic companies. Readers may recall the 2012 Times expose of the internal culture of Apple and its biases for sourcing the majority of production within Asia which prompted a direct response from the Apple’s CEO.

Amazon continues to be a juggernaut of ongoing disruption of traditional markets whether one agrees or disagrees with its approach to culture and human relations norms. Perhaps the real question focuses on who is reaping the financial benefits.

Bob Ferrari

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