FedEx Restructuring – Technology and People Challenges

FedEx has embarked on a $1.5 billion company-wide restructuring. The Tennessee-based transportation and logistics giant announced last year that it would combine its Express and Ground delivery units into one business model. The move unsettled insiders because separate operating structures have long been a legacy of founder Fred Smith. However, market forces indicated that a change was needed.

As e-commerce grows, companies like FedEx are adapting to new, non-business-to-business business models. The merger of Ground and Express now more closely resembles the structure of FedEx’s main competitor, United Parcel Service. However, a key difference between the two is that UPS has a union workforce, while FedEx relies on contractors to perform Ground deliveries.

New members of FedEx’s board have pushed for a restructuring, but technology and productivity challenges have bogged down the effort. Ground and Express have operated as separate units for decades. In some communities, it’s common for Ground and Express trucks to deliver packages to the same homes within a short time. Ground, which had five times the operating profit of Express last year, employs contractors to deliver packages along local routes. Express uses jets, trucks and full-time employees to deliver packages.

The restructuring resulted in layoffs, grounded planes and cumbersome package pickup and delivery chaos. FedEx warned that “OpCo pride” (also known as operating company pride) was hindering progress in some cases. In a company as large as FedEx, people are used to doing things the way they’ve always been done, and such a big shift is an unpleasant push into the unknown. The changes in the way the two entities work will be implemented first in smaller distribution centers such as Starkville, Mississippi and Bozeman, Montana, and will be rolled out to larger hubs later.

Ground contractors are taking over Express’s freight volumes in nearly every state except Alaska and Hawaii. So far, the company has cut about 22,000 jobs, retired 32 jets and closed a dozen buildings. CEO Raj Subramaniam is convinced that the growth of e-commerce will bring more trucks and reduce the need for excess equipment and facilities.

Thankfully for FedEx, the restructuring hasn’t impacted the customer experience. On-time delivery rates for express packages have ranged from 94.5% to 98.2% since mid-2022. From a personnel perspective, the most notable changes are to ground contractors, many of whom employ drivers and operate trucks in certain areas. These roughly 6,000 people use scanners and route-planning tools that are very different from those used by FedEx employees. Technological transformation is still necessary, but change isn’t easy.