During the times of 1970’s, an entrepreneur named Fredrick Smith, having a graduate degree from Yale University and having a budding experience from Marine Corp. started a package delivery system based on the business model that he had presented for his paper in University. FedEx (Federal Express) Corporation, placing itself among the top companies we see today, had thunderclouds ahead in the path it was heading towards. With such bleak conditions in its inception time, it becomes very interesting to have a look how it managed to not only survive but also managed to stand as a strong competitor to the present day courier companies in the United States.
The era of 1900’s was craving for a substantial solution to a very sluggish problem of courier services. In those days, a major drawback of the delivery system was that most of the goods were transported using roadways which made it painfully slow to deliver packages to other cities, the alternative to this was to load the packages in the passenger aircrafts, ideally, this was the model major courier companies were working with back then. The solution to this problem was available with the young Fredrick included in an economic paper he wrote in Yale university, but couldn’t score more than a C grade. However, this did not stand as a barrier for Fredrick in putting his idea on practical terms.
The brainwork behind his idea was that there should be an overnight delivery of the package, along with it, adopting a central hub which paves the way for most of the deliveries taking place in a shorter time. He went on to adopt the Hub and Spoke business model. This business model elaborates that, there is a centralized hub, all the goods or (packages) in this case are allocated to these strategically placed centralized hubs. Now, with the placement of the centralized hub, goods are then delivered to their respective cities and if required, they still go on to adopt this similar business model which further bifurcates the distribution. This can be well understood with the example of a cartwheel. A cartwheel has a central place in the wheel called hub and following it, the spokes which are extended till the rim of the wheel manage the wheel to brace for the additional weight of the occupant or the load. This might not sound profound but this business model assures a guaranteed savior of the additional costs which would have otherwise incurred if the Point to Point distribution model had been implemented. Point to Point distribution model delivers the goods from point A to point B, hence creating numerous routes and also incurring hefty costs.
(A cartwheel illustration of the Hub and Spoke model)
FedEX in its initial years never made much profit but still was floating due to the funds it started with, Fred had introduced $4 Million through heritage and another $80 Million through loan and equities, these fathomless pockets of FedEX were soon going to be depleted with the rising fuel costs. FedEX was operating 8 planes and had burnt all their funds on staging their company. They were in shortage of funds to the extent where pilots were expected to pay for the operational costs of the aircraft they are flying. Fredrick was in dire need of funds since the death of their organization was inevitable. He supposedly spread his hands in front of General Dynamics; an American Defense Contractor to bail FedEX, the proposal was declined because FedEX had only left with US $5000. This was the darkest time for young FedEX which had barely started operating.
Fredrick was returning to the airport for his flight to his hometown after an ugly rejection from General Dynamics, allegedly, at the airport, since he had nothing to lose other than the organization he found, he left the flight which was taking him to his hometown and rather boarded a flight to Las Vegas. He took the biggest risk of putting $5000 in Casino and, luckily, converted it into $27000. This was enough for FedEX to fend for the operational costs of the aircraft for another week. Slowly and gradually since then, FedEX picked up pace and never looked back. With gradual progression, FedEx was able to take another borrowing which stabilized it like never before.
(Cargo Hub of FedEX at Memphis, Tennessee)
FedEX currently has a fleet of 691 aircrafts operating. This fleet is more than Europe’s largest commercial airliner. The financial statements have also revealed a 30% profit from previous years and have been a strong competitor for United Parcel Service [UPS] and Purolator.
By Aryan Manwani