The express business boom in the eighties was propelled by the growth in the documents courier business. Today, the double-edged sword of fax/e-mail is expected to wipe that away. And should that happen, where the big-bucks will come from? Shouldnt the express companies be worried?
Moreover, at a time when most businesses are moving towards outsourcing, the buzzword in express world is integrators. What is driving this trend?
To get a fix on these issues, The Strategist met Hamdi A Osman, managing director, Middle East/Indian sub-continent, Federal Express, a world leader with revenues of $10.3 billion in 1996. Osman was in India to announce the entry of FedEx into Indian international express market thr-ough under a new agreement with Blue Dart.
Once a professional soccer player in Germany and the US, Osman has risen through the ranks from being a truck washer to managing director. Osman had a major role in the development and expansion of FedExs operations in the Middle East market.
Excerpts from the interview:
Q. In what ways have the sweeping advances in communications technology affected the express business?
A. The way we see it is that it has generated more business for the express industry than ever before. Today, internet generates more business with people being able to buy products across the countries. As a result, if you buy something today, you dont want to wait for a month for it to arrive. You want to have it tomorrow. Thats where express business comes in.
It was thought that a lot of business will be lost to e-mail but at the end of the day every contract has to have fresh signatures on it. Also, a lot of presentations are made these days. For this, the stuff has to be shipped quickly and safely. We see that this business is also growing. The Indian business too is growing at over 30 per cent year over the year.
Q. But has there been a shift in the customer profile or categories?
A. We see a lot of smaller businesses cannot afford the housing, for their logistics. So the just-in-time inventory starts playing a big role. So in order to work with a small inventory they make the order when they need it. As a result of the saving from not using the warehousing, they can afford to use the money to pay the premium price and ship it overnight through express rather than shipping it by air or sea.
Bigger customers have also found that you rather invest in other areas, instead of big infrastructure for warehousing, and use companies like ours to fill their logistics need. Sample shipping has also emerged as big business, outside India.
Q. How have the courier companies adapted/modified their business model to adapt to the changed environment?
A. We believe that the technology advantage for any express company would be aviation background. Without the aviation strength, the technology to track and trace and without the custodial control that gives the peace of the mind to the customer (because of that security) you cant get very far. In the past you had to rely on the commercial lift in which you were limited by the weight of the package. Today if you have your own aviation (Blue Dart has domestic aviation while Fed-Ex has international aviation) you have that control. Aviation gives you the flexibility to serve various needs.
Q. One of the emerging areas in courier business is that logistics is increasingly being outsourced? How is FedEx approaching this opportunity?
A. We have 20 locations in different parts of the world where we have our logistics network. We started FLS (FedEx Logistics Service), and since last year because of the electronic commerce taking off, we changed the name to LEC&C (Logistics Electronic Commerce & Catalogue). Basically those locations (for example the nearest one from India would be Dubai) which offer warehousing along with transportation are offered to our clients. This way we can help the customers operate with just-in-time inventory.
One customer I can talk about is Johnson & Johnson. Their main business is pharmaceuticals. Its not logistics. We handle everything for them and this way they can leverage our logistics network to strengthen their supply chain. So, we are doing all the inventory for them. That way they can focus more on sales, more on service to the customer.
Q. What about companies other than MNCs? Have they evinced the same interest in outsourcing their logistics requirements?
A. They are looking at that possibility but I dont think that any Indian operator is giving 100 percent logistical support service. Companies abroad are, of course, doing it. Blue Dart has a service division, Blue Dart Logistics Service (BLS) that is providing some of the services. It will gradually be expanded.
Q. What about the mindset? Isnt there a resistance to outsourcing such a critical part of business?
A. What you have to see is that earlier the business was not so complicated as it today is. Also, the customer did not have the choice. Today you have the choice, whether you want to sea, or by air, or by express mode. The last one gives you benefit of quicker delivery. Plus, you can track and trace.
Moreover, business has become complicated. Earlier most companies did everything in-house. One pair of eye-glasses has some five-six components coming from five-six suppliers. You are going to rely on transportation a lot now. So they decided to outsource it. Every big company does it from AT&T to Microsoft.
IT has developed so much that you can be sitting in India and managing your inventory in Ghana. With the sort of investments made in IT by companies like FedEx you can track your consignment, no matter where it.
Q. Traditionally, courier and express companies have differentiated themselves in the market on operational performance. With rapid changes in technology, operational edge is hard to sustain. How are express companies redefining their value propositions?
A. We are looking at whats going to happen in the year 2005. So we dont manufacture things for todays needs. And I think thats the strength FedEx has. The aviation, the technology leadership has put us several years ahead of the competition. We started what we called DADS (Data Active Despatch System) unit, which is a system installed in a vehicle. When a customer calls our call centre, the agent would take the information in the system, which goes into a despatch which automatically transfers the information by air/satellite into the vehicle. The driver instantly knows where the next pick-up is. That advantage was given to us five year ahead of anybody could think of it. By the time they get there we are already on something else. Now we have what we call the Supertracker which speeds up the sorting and eliminates the possibility of the package getting misplaced due to human error. We are very-very committed to invest more and more every year into IT.
Q. Increasingly, companies are having to operate in an networked environment. In what ways is this manifested in the express industry? What changes in the organisational mind-set are required to operate in the co-opetitive mode?
A. That is exactly why we generated the LEC&C. We have all the large catalogue business in the US as our clients. We had done a survey couple of years ago, which showed that todays consumer wants delivery within two-three days. Out of total packages delivered within two weeks, only 10 percent are returned. Over two weeks, the figure shoots up to 50 per cent. So it is in the companys best interest there is an order today, then it is delivered today or tomorrow. At least within three days. Why? Because the returns on that were just three per cent. Now, keep that in mind. Will those companies look for cheaper way of delivering the product or pay a premium but get there on time.
This thing started 10 years ago. And as a result this catalogue business has become huge. A lot of companies which do not have a frontage, front office or a showroom they are all run by catalogue and internet. FedEx has become the backbone for that business today.
Q. The business, to a great extent is dependent on IT. With FedEx operating in so many countries, with different levels of development as far as telecom infrastructure goes, as well as different standards. How does FedEx integrate across the borders?
A. Unlike our competitors, everything is based in our headquarters at Memphis, Tennessee. And we have the technology centre at Colorado Springs in Denver. That is where all our IT programming and all the IT ideas are being generated. The whole system is shut down for an hour every Sunday, for updating technology, conversions etc. Thats all done from our HQ in Memphis. So you dont have to it at different places. All the 210 countries are connected to the same system through standard software.
Also, the connectivity has improved world-wide. If you dont have fibre optics, you have satellite connectivity or through sea or cable. Infrastructure was a problem even two-years back. Not so much now.
Q. How are companies looking at this whole issue of backward/forward integration especially as the trend in all other industries is towards outsourcing? What makes the industry peculiar in this regard?
A. The word that you hear about in express business is integrators. The survivors, in the express business, would be integrators. An integrator is the company that will be able to do everything within our business. We have the aviation, we have the freight forwarding, we have the courier, the logistics. On the other hand, you have companies that have leadership in aviation, or there are those in passenger airline, with the result that they have both passenger and cargo business. So they have to focus on two different things. When it comes to our business, the one to survive will be the one who keeps the focus on the main thing. Our bread and butter is the pick-up and delivery. Its never going to be sectored out to someone.
But what we have is what we call the Global Service Products (GSP). When we come to India who knows India better than an Indian. As a result we have been doing business with Blue Dart in India for the last 13 years. We benefit from each other. We set the standards and ensure that they are adhered to. Its never that we leave it out for them. We work side-by-side with them.
I see a different future within our business. In airline business there are lots of interline agreements, code sharing etc. and thats all very well. In our business its different. The custodial control is very important to give the customer the peace of mind that his package is safe etc. Thats why we need to have control over all the links in the chain.
IT has developed so much that you can be sitting in India and managing your inventory in Ghana. Besides, you can track your consignment, no matter where it.