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Changing How the World Does BusinessFedEx's Incredible Journey to Success—The Inside Story
By ROGER FROCK
Berrett-Koehler Publishers, Inc.Copyright © 2006 Roger J. Frock
All right reserved.
Chapter OneThe Trail of Inspiration
FedEx originated the modern integrated priority package express industry, the first small-package airline to maintain direct control of shipments with a self-contained transportation system from pickup to delivery. Millions of people rely on FedEx every day for their most important business and personal deliveries whenever and wherever they must have overnight and time-definite service. The delivery service is so much a part of our lives that we can barely recall living without it.
It seems that FedEx has always been there, ready to respond to our most urgent needs, yet few people know how it was first conceived. When its efficient hub-and-spokes network was originally proposed, the concept was ridiculed as impractical. Existing regulations prohibited this form of nationwide delivery service, experts considered it a financial impossibility, and airline executives forecast its demise.
To understand the mountainous road to success, we must look back more than 40 years to glimpse the early dreams that inspired and motivated Frederick Wallace Smith, the Mississippi-born founder of the company.
THE YALE PAPER
Legend has it that the inspiration for Federal Express came from a paper Fred hurriedly wrote in the mid-1960s near the end of his sophomore year at Yale University. Fred was an avid reader with an interest in a wide variety of subjects, a student of military and aviation history, and a creative and imaginative thinker. Already an accomplished flyer with a keen interest in aviation, Fred had reestablished the Yale Flying Club, first organized in the 1930s by Juan Trippe, the founder of Pan American World Airways.
Fred recalls submitting a term paper that pointed out problems associated with moving airfreight on passenger planes, concluding that airfreight would become economical only with a system designed specifically for that purpose. It is tantalizing to speculate that the paper contained an early version of a commercial aviation venture utilizing the hub-and-spokes concept, similar to the service operated for a short time by the Indian Post Office in the late 1940s. This pioneering system, according to R. E. G. Davies in his book Airlines of Asia since 1920, connected Bombay, Calcutta, Delhi, and Madras through a hub at Nagpur, providing overnight airmail service between the four major cities of India.
In the 1960s, the airlines were trying to figure out how to profit from the unused cargo compartments, but none of their schemes succeeded. Perhaps Fred envisioned some new approach to the future role for airfreight, but since his paper is lost to us and he has no clear recollection of the details, we can only surmise its contents. Nevertheless, this young upstart would take just over a decade to solve "the airfreight problem."
In the fall of 1969, following his Marine Corps tour of duty in Vietnam, Fred joined his stepfather, retired air force colonel Fred Hook at Arkansas Aviation Sales, a struggling operation located at Adams Field, Little Rock's municipal airport. Arkansas Aviation provided fuel and hangar services for local and itinerant general aviation aircraft, usually small propeller-driven planes operated by independent owners.
Using funds bequeathed to him from his father's estate, Fred bought control of the business. He assembled a network of reliable suppliers, acquired a large inventory of commonly used parts, and built a reputation as a fast-response, low-cost corporate jet equipment and maintenance center.
Fred next decided to purchase corporate jets for resale. His ability to consistently provide critical parts for his corporate jet customers and his unique approach to jet aircraft brokerage transformed Arkansas Aviation Sales into a profitable entity within two years.
Behind the scenes of this smooth-running operation, however, lingered the frustrations associated with obtaining parts needed on a rush basis. The existing airfreight system was inconsistent and at times downright unreliable. It was difficult to get a clear picture of where the delays were occurring, and each entity in the supply transportation chain blamed others for slow service. A "rush" air shipment might arrive in two days or in four, or might take as long as a week—expensive and irritating delays when a corporate executive was kept waiting or had to take a commercial flight instead of traveling in his or her accustomed luxury.
Fred's experience exposed the shortcomings of the airfreight system that relied on passenger airlines and independent ground handling companies: there were too many links in the chain. In short, there was no single entity responsible for the expedited movement of goods from shipper to customer.
THE FEDERAL RESERVE
Fred was growing disenchanted with the aircraft brokerage business and the day-to-day operation of Arkansas Aviation. The business had always had a reputation for being full of unscrupulous characters who sometimes ignored ethical standards to complete a sale, and Fred was uncomfortable dealing with some of these people. It was time to seek another occupation, something more compatible with his father's challenge to him to make wise use of his inheritance.
One of Fred's early ideas was to establish a flight courier service for transporting bonds. The concept was of interest to at least one Little Rock bond house, but Fred couldn't get adequate insurance to cover the losses that might be encountered if the plane were to crash or if a pilot decided to make off with a sack of bearer bonds.
Next, Fred adapted his idea for the Federal Reserve. The process for clearing checks between banks, particularly those located in the more remote sections of the nation, was inefficient and slow, sometimes taking up to ten days, at a float estimated to be nearly $3 million a day. By examining the logistics required to move bundles of checks between the thirty-six district banks, Fred realized that the hub-and-spokes model was the only system that could accomplish the transfers within a reasonable time frame and with a manageable number of aircraft.
He conceived a plan for a business that every night would pick up checks and documents from each Federal Reserve branch bank, fly them to a central hub for processing by Federal Reserve employees, and deliver the sorted bundles to the appropriate member banks early the next morning. The Federal Reserve would benefit from the system, and he would have an interesting aviation-oriented business to manage. Because the Federal Reserve would be his only client, he proposed to call his fledgling company Federal Express.
The system would need fast, reliable aircraft to cover the distances involved in a national network; in fact, the same type of corporate jets that Arkansas Aviation was successfully brokering would be ideal candidates for the service. Fred was attracted to the French-built Dassault Falcon 20 Fan Jet. The French Air Force had used these planes during paratrooper training exercises, with the doors removed, which indicated that the design incorporated an unusually strong fuselage. Avion Marcel Dassault, the manufacturer of the Falcon had designed the aircraft as a compact, ten-passenger business jet with a range of up to 2,000 miles and a speed of up to 550 miles per hour. Pan American Airways was distributing the Falcons in the United States through their Business Jet division, and a softening market for corporate aircraft had forced Pan Am to store its twenty-five unsold planes in the Arizona desert, awaiting an upturn in the economy.
When Fred presented his idea to the Federal Reserve Board, the initial response was favorable. Confident he would have his new business and a rewarding career built around his love of flying, Fred invited his two sisters to join him in the new venture. They formed a company with a capitalization of $500,000, half from Fred personally and the rest from the Frederick Smith Enterprise Company, a $14 million trust fund set up by Fred's father in the early 1940s for Fred and his two sisters. Then Fred convinced the directors of the trust fund to guarantee a loan of $3.6 million to purchase and modify two Falcons from Pan Am. Federal Express was incorporated in Delaware on June 18, 1971.
But the positive response was not forthcoming: the independent Federal Reserve directors were unwilling to modify their schedules to accommodate the proposed service. That left the shell company with two new Falcons and a debt of $3.6 million.
THE MATURE CONCEPT
In truth, the mature plan for the Federal Express service, as with most creative ideas, did not spring forth fully conceptualized. It was in fact inspired by a series of events that over time contributed to the concept's evolution.
Fred's love of airplanes, the Yale term paper, and the frustrations associated with obtaining critical parts at Arkansas Aviation Sales all pointed to the need for a transportation system that could provide consistent, reliable, and expedited movement of critical, time-sensitive goods. Perhaps the greatest contribution to the evolution of the fully developed concept for Federal Express occurred while Fred was working out the logistics for the transportation of Federal Reserve checks and documents. By expanding upon his concept for the Federal Reserve, Fred formulated a nationwide operating system responsive to the needs of time-sensitive shippers and, as a bonus, found an intriguing way of using those beautiful corporate jets to expedite shipments.
There had been great progress in transportation since the days when the Hudson's Bay Company had promised to deliver goods to the Yukon Territory within 14 months of receipt of an order, but Smith knew the industry was ready to make a quantum leap, and he was determined to make that happen.
Although the industry seemed wary and even hostile at times, Fred would heed the advice of author, poet, and philosopher Ralph Waldo Emerson: "It is a lesson which all history teaches wise men; To put trust in ideas and not circumstances."
Chapter TwoChecking with the Experts
I first met Fred Smith in December 1971. My twelve-year-long business career up to that time had been spent entirely with the consulting firm of A. T. Kearney and Company, first in Chicago and then in New York City. I worked primarily in the fields of transportation and physical distribution and, at the time, was the principal responsible for that part of the firm's practice on the East Coast.
Kearney was a very professional organization and a great place to work. Its clients included most of the major airlines, railroads, and trucking companies in America. The Kearney approach involved conducting a thorough analysis of the client's needs, development of programs specifically tailored to the client's situation, and in later years, assisting the client to implement the recommended changes. This approach demanded the maximum level of creativity from those of us working day to day, with the client's senior management. It was a challenging environment, one that guaranteed the rapid development of a consultant's management and communication skills.
One day, as I was completing a report for one of our transportation clients, our receptionist interrupted my concentration.
"Mr. Frock, there is a Mr. Fred Smith from Federal Express in Arkansas on the phone who wants to talk about a project concerned with air cargo," she said. "Can you take the call?"
"Sure," I responded, "are you certain he said 'Federal Express'? I've never heard of them. See if you can find any information about the company while I talk with him."
"OK, I'll transfer him to your line now."
This phone call was my first contact with Federal Express. Fred, after briefly introducing himself, requested a meeting for the following day to discuss a consulting assignment of some urgency relating to his plans for a new business venture.
When Fred arrived at our office, he brought with him a few of his associates, whom he neglected to introduce, and proceeded to unfold his plans. Fred had already done a great deal of homework. He appeared to understand what it would take to convert a private jet into a cargo carrier and the potential difficulties of obtaining an operating certificate needed to carry out his plans. As this erudite 27-year-old continued to describe his plan, I listened with a mix of skepticism and growing admiration. The concept, at least on the surface, was interesting.
However, Fred had no real in-depth understanding of the potential market for an overnight small-package service, the difficulty of overcoming entrenched competitors, and the genuine complexity of setting up an organization to carry out the program. In addition, there were the questions of whether funds were available to launch the enterprise and whether the venture would be profitable.
I already knew most major airlines treated cargo as an afterthought, operated as a stepchild to the more lucrative passenger side of the airline. I was certain of one thing from our past consulting work: airplanes were expensive to buy, modify, and operate. It was not clear to me at the time that an opportunity existed for a system operated with small, expensive jets to produce a profit, even though I suspected that there was a latent market need for the service. However, Fred's enthusiastic and optimistic description of the planned venture carried the day. I promised to give the matter of Kearney's involvement further consideration.
As a first step, I checked out some of his references and learned that Fred was a serious, highly respected member of the Little Rock community. His bank confirmed that, indeed, Fred possessed the financial capability to carry out his intentions, at least as far as our study was concerned. After discussing the concept with some of our senior staff members, I called a few of the more progressive transportation and distribution managers with whom we maintained an ongoing relationship. I began to get excited about Fred's concept when these independent sources related at length the frustrations they were experiencing with delayed or lost shipments.
My next job was to prepare a proposal that outlined the work to be accomplished and the approach that we would take either to aid Fred in his remarkable quest or, as I explained to my project team, to at least attempt to dissuade him from wasting his financial resources on an impossible dream. I had no inkling of what I had just agreed to do, or what a dramatic effect it would have on the rest of my life.
OUR STUDY OBJECTIVES
On December 20, 1971, I completed our proposal that outlined the approach we would take in conducting the study. We had the following initial study objectives:
1. Identify the prospective market potential by market segment
2. Identify likely users of the service by industry and geographic location 3. Identify the likely products for the service and their characteristics
4. Evaluate potential customer attitudes about the service features
The proposed venture was dauntingly complex, and our approach reflected this. Fred agreed that we should maintain close liaison with his organization throughout. If we determined the market to be viable, we would evaluate the financial potential of his concept. If the results were still positive, we would outline the service's operational requirements, relying on Fred to sketch out the air operations and related flight costs. If at any stage we became convinced that the concept was not viable, we would conclude our study and document the reasons for our decision.
Chapter ThreeFeeling More Comfortable
The priority airfreight market in the early 1970s was dominated by REA-Air Express (the Railway Express Agency), a company already on the decline, and Emery Airfreight, the first certified airfreight forwarder in the United States. Emery and some eight hundred other airfreight forwarders performed the ground service and consolidated shipments for transport by the certificated airlines. The airlines themselves also offered air cargo services, using for the ground portion of the movement Air Cargo, Inc., a company owned by twenty-six airlines. UPS (United Parcel Service), through its Blue Label Service, consolidated small packages for transport by the airlines, but did not provide a true priority service. The Post Office offered a "Priority" mail service that amounted to only a small fraction of the total airfreight market.
Excerpted from Changing How the World Does Business by ROGER FROCK Copyright © 2006 by Roger J. Frock. Excerpted by permission of Berrett-Koehler Publishers, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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